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SEIFFE:  Gas Prices 

Wednesday, May 16, 2007

By Ralf Seiffe

Recent trips to the gas station have been painful enough for me to wonder if a mere mortal could understand gasoline prices by looking at the petroleum industry’s publicly-available statistics.  The news media seems unable to make the situation understandable and Congressional blathering, particularly that of the senior Senator from New York, are simply increasing the planet’s carbon dioxide burden.  These latter-day William Jennings Bryans are convinced we’re being crucified on a barrel of oil and they intend to profit from exposing the wickedness only a Congressional subpoena can reveal. 

One way to get a grasp on the oil situation is to understand some basic numbers.  The universal measure of oil is a “barrel” which consists of 42 gallons of petroleum.  This unit is a holdover from the mid-19th Century Pennsylvania when oil was shipped in wooden barrels.  John D. Rockefeller became one of the world’s wealthiest men by developing larger conveyances and pipelines to move the product more efficiently making barrels obsolete nearly 140 years ago. 

Despite the anachronism of the barrels, The United States consumes about 20 million of them every day.  We import six out of ten or about 12 million barrels per day, making the United States the world’s largest consumer.  At $60 per barrel, we print and export about three-quarters of a billion dollars to a market dominated by friends like Hugo Chavez, Vladimir Putin and the benefactors of the madrassas who produce terrorist graduates. 

This analysis gets more interesting and relevant when these tank car numbers are translated into units that compare with those with which consumers deal.  This means barrels to gallons and dollars.  Since a barrel of crude oil costs around $60, the cost of a gallon of crude is about $1.43.  From each barrel, refining extracts about 19 gallons of gasoline, 10.5 gallons of Diesel fuel and about 4.1 gallons of jet fuel according to the Energy Information Agency.  Assuming the remainder of the barrel’s yield can be sold for the same price as these liquid fuels--say $3.00--the gross profit on a gallon is about $1.57. 

There are costs associated with refining, transporting and marketing the product.  If that takes 30 cents per gallon, the operating profit falls to $1.27. Taxes, at the pump, include 18 cents due the federal government and, in Illinois 37 cents fuel tax and at least 15 cents in sales taxes further reduce the profits to 57 cents.  Transportation and station operator’s costs including the lease of the gas station itself may take another 30 cents leaving a 27 cent pretax profit which comports to the industry’s estimate that they make 9% on sales. 

All this parsed, what I want to know is this:  How much should the retail price rise when the cost of crude rises or falls?  Assuming there are no frictions in the market (and we know that environmental regulations are a huge disruptor) should there be, nevertheless, a logical connection between crude costs and pump prices?

Let’s give the oil industry the benefit of the doubt and let them allocate all price increases to the fuels.  If that fraction of the barrel’s yield is 33.5 gallons, more or less, then each one dollar rise--or fall--in the price of crude should translate into a 3 cent change in costs.  In other words, if a barrel of oil rises from $60 to $70, crude oil’s cost component should rise to $1.73 from the $1.43 we calculated earlier. 

Over the last month, Illinois pump prices have risen about 40 cents, from $3.19 in late March to $3.59 now.  If all other things remained stable, that would mean oil prices had risen about $13.33 in the period that reflects petroleum’s resident time in the system.  I cannot find a change of that magnitude in the last several months. Another notion is that oil companies raise prices promiscuously and lower them judiciously so there is always a bias towards pump prices that are higher than crude costs would dictate. This makes a logical connection even more elusive with this data.      

My first job as a 16 year old was at Bud Hernett’s Texaco station on Oakland Avenue in suburban Milwaukee.  I distinctly remember gas wars with the station across the street; if those guys lowered their price we did, too.  We were free to lower the price a nickel to 24.9 cents from the standard price of 29.9 cents.  If it went lower, we had to call Texaco for price support. They always granted it, one time driving the price down to 18.9 cents.  So, even with the up-to-date information the government publishes and the evident conclusions that result, I am unwilling jettison that lesson from childhood and to believe that this commodity market is no longer driven by the fundamental laws of supply and demand.  Moreover, I cannot believe that the managers of the oil companies are not still compelled by greed and that they do understand that a slightly lower price would grab inordinate market share--and profits. 

The most logical answer is that the world’s demand is raising prices and the continuing devaluation of the dollar is coming home in the form of higher prices. But, even if the conspiracy theorists in the Senate could find one, it’s the nature of price fixers to cheat and that means cartels almost always unravel.  So Senator Schumer, if you want to investigate something, don’t look for why a merchant prefers higher prices.  Instead, support your charges by telling us why the managers of these oil companies are no longer affected by the immutable laws of economics.

© 2007 Ralf Seiffe

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.

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