Economics - Commodities And Politics Also Play A Role In The Overall Cost
As you're pulling up to the gas pumps next time, pause to think about what it is that determines the price you're paying for that gasoline. It may surprise you who is profiting the most from your fill up.
Demand For Gasoline
This is an easy answer: The number of people who are using fuel for transportation primarily sets change in the demand for gasoline. As the number of people driving grows, so will the demand and a predictable impact on the gas prices.
Demand For Crude Oil In The US And Abroad
The raw material for gasoline is crude oil. It is traditionally measured in barrels, and 1 barrel equals 42 gallons. The United States has abundant supplies of oil, from the deep-water regions of the Gulf of Mexico to the tight oil resources throughout North Dakota and Montana. Combined with Canada's oil resources which is one of the largest in the world, North America has enormous potential to add new reliable supplies to the market. And, the U.S. has one of the largest and most advanced refinery systems in the world.
If you've ever read anything about the Middle East, then you certainly know that it is the center of the world's oil supply. That region sits on top of what is known as liquid gold. Expert's estimate the region holds more than 700 billion barrels of oil in its various fields and reserves, or roughly 56% of all the world's resources.
Another large supplier of oil to the US is Venezuela. The Energy Information Administration's most recent reports in 2012, shows that the United States has been importing an average of 869 thousand barrels a day of oil from OPEC member Venezuela just during the first 6 months of this year. (Which has some critics claiming Obama policy is aiding Hugo Chavez's OPEC Regime)
Cost For Crude Oil Production
Global markets set the actual price of crude oil, where buyers and sellers constantly react to supply and demand factors. Crude oil is by far the largest factor in the price of a gallon of gasoline. It accounts for 64 percent of the $3.85 average current retail price per gallon of regular gasoline according the US Energy Information Industry. To put that in perspective, about $2.46 of the average gallon of gas is due before the refinery touches the crude oil.
Also, people have a misconception that companies can control the cost of gasoline by controlling the supply chain, and that is just not the case. According to reports, U.S. crude oil production in 2010 was 5.5 million barrels per day. But U.S. refineries processed 15.2 million barrels of oil per day, which is almost three times more oil than was produced in the U.S. That means our refineries have to purchase millions of barrels of crude oil at market prices from outside the US just to produce gasoline and other products for American consumers.
Example, in 2010, ExxonMobil alone spent $198 billion purchasing oil around the world for its refining operations.
Refining & Cost To Produce Gasoline
The viscosity of oil ranges from light to heavy grades and by the amount of impurities it contains. The price for oil that is widely quoted is for light/sweet crude. This type of oil is in high demand because it contains fewer impurities and takes less time for refineries to process into gasoline. As oil gets thicker, or "heavier," it contains more impurities and requires more processing to refine into gasoline.
According to Ken Cohen, vice president of public and government affairs for ExxonMobil Corporation, refining oil works in an easy way. First, crude oil is put into a boiler and turned into a vapor, from there, the vapor moves into a distillation chamber where it is turned back into a liquid. Different types of oil are formed depending upon the temperature they were distilled at. Gasoline, for example, is distilled at cooler temperatures than residual oils that are used to make products, such as asphalt and tar.
Like any product, there are costs to manufacture it, so the manufacturer tries to recover those costs, plus make a profit when it goes to sell the finished product. The refining portion of a gallon of gasoline has, on average, accounted for about 11 percent of the price per gallon in 2011, according to EIA data. That means that a little less than 40 cents per gallon would be due to refiners' costs, wages, equipment, financing, plus their profits.
Now in August 2012, its up to 18 percent of the price per gallon or roughly $.69 cents a gallon owed to refiners.
Cohen states that during that same period in 2011, the U.S. market price for gasoline coming out of refineries was on average about 7 cents per gallon (-2 percent) below the refiners' cost of crude oil alone, and before accounting for their costs of upgrading the crude into gasoline. So, they were taking a loss before starting out and refineries faced a market where domestic gasoline prices were very weak relative to global crude prices.
How does that happen? Refiners are "price takers" that operate on relatively low profit margins that are highly dependent on the market demand for petroleum products. That means at times, the value of a petroleum product coming out of the refinery isn't enough to cover the costs of obtaining and refining the crude oil.
Distributing And Marketing Gasoline
After the crude oil is refined into gasoline, the distribution process begins. First, the gasoline leaves the refinery largely by way of pipelines to local terminals. Distributors then load their trucks and transport the gasoline to a service station outlet. Each step in the distribution chain includes its own labor, capital equipment and other expenses that must be recovered by operators. These operators must also compete to sustain their profitability while also paying taxes and overhead costs.
The current average cost added to a gallon of gasoline in the US for distribution & marketing is $.38 cents.
Based on recovering these costs of getting gasoline to the service station and the costs of marketing it to consumers. Retailors generally set their pump prices within their competitors prices. And on top of all that, they have to collect mandatory state and federal gasoline taxes from the consumer. The majority of stations are now independents or are owned by either local business owners or network retailers. Only a very small percent are owned by their logo brand corporate office.
State & Federal Taxes
So how much does the government collect in tax revenue on a gallon of gas? You will be surprised; it is the second largest contributing cost to a gallon of gasoline. In January 2011, the American Petroleum Institute Tax Table combined state and federal taxes which shows a combined average of $.43 cents per gallon nationwide. California charges the most with $.66 cents per gallon, while Alaska is the least at $.26 cents.
Other notable states for high taxes are New York, ($.65) West Virginia, ($.50) Washington ($.55) and Indiana ($.61.)
Lower taxed states on gasoline include, Wyoming, ($.32) South Carolina, ($.35) Arizona & New Mexico, ($.37) and Oklahoma. ($.35)
Economics And Politics
Global factors affect the crude oil market. Adding more supplies of crude oil to the marketplace can help put downward pressure on the price of a barrel of oil. But first, the oil needs to get to market.
This is where economics are overshadowed by politics even as the U.S. economy remains weak. The moratorium in the Gulf of Mexico, as well as the decision to deny the permit for the Keystone XL pipeline from Canada to U.S. refineries, are just two examples of U.S. political decisions that serve to keep supplies out of the market.
The "Big Oil" industry has also (unfortunately) made it into the current election arena by Obama himself, in the form of TV ad campaigns for reelection and as a topic in last week's presidential debate. While addressing the deficit on national TV, Obama claimed some oil companies are receiving "corporate welfare" because of tax breaks they are eligible for under section 199 of the tax code, which he feels some don't deserve. Obama also has at least one TV ad promising that he will "eliminate oil subsidies" if reelected. He has been criticizing the oil and gas industry for taking "billions a year in taxpayer subsidies."
These legal tax breaks are one of the saving graces the US oil industry has to fall back on for their overall losses in costs for production, distribution and mere existence. It is safe to say, if Obama or any other president were to do away with these subsidies, the price we pay for gas would skyrocket even more.
Oil is one of the world's most important commodities according to Investopedia, and as a result, the nations that control the bulk of the world's supply have a great deal of power over its availability. The supply of oil in the world market has an impact on its price, and the fluctuations are passed on to consumers, especially in nations that use a lot of oil, such as the U.S. Oil prices are also determined by quality and ease of refining.
Investors have the option of investing in oil futures, which they have an influence on the price of oil that is reported in the media. All in all, the oil market is quite complex, and a better understanding of how the oil gets from the ground to you, in all its forms, will hopefully help you to understand and deal with fluctuating prices. It should also be noted that there is no solid market for companies to make money. A competitive market just provides the opportunity, not a guaranteed profit.
Bottom line, the economics behind a gallon of gas are pretty straightforward. It's the policies behind access to U.S. energy resources that are less certain, but critical to our energy future.
I am the publisher of an online news website and blog covering local, state and national news since 2007. Author of 4 cold-case murder books in the "Who Killed?" series published by Rooftop Publishing Company. Retired from mainstream media in 2007 (more...)
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