Why Are Gas Prices So High - Part 2

on Tuesday, July 8, 2008

This is part 2 of a 3-part series on high gas prices. Before continuing, be sure to read part 1 which can be found here. Part 3 coming soon.


My previous post on gas prices elaborated on the specific reasons your government is mostly to blame for high gas prices. And yet, many people still have a nagging feeling that somehow the oil companies themselves are taking advantage of the situation. In order to address this effectively, let’s discuss all of the other reasons gas prices are high and why the oil companies are NOT to blame:

Behold a well-known fact that many people, whether intentionally or not, choose to ignore – oil company profits are only 8%. That means that for every dollar of gas you put in your tank, the oil companies will only see a few pennies of that dollar as profit. The rest goes to pay for the crude product itself, the refining costs, shipping, and, of course, government taxes which currently clock in at an unwelcome 18.4 cents a gallon. And when you add state taxes to that, people in some states are paying upwards of 70 cents a gallon just in taxes alone!

In order to put that 8% into perspective, let’s compare that figure to the profit margins of other companies whose products you use on a regular basis:

Microsoft: 28.3
Google: 24.9
Merck and Pfizer: 20.1
Bank of America: 20.0

Oil: 8.4

I can already hear you saying, “But Mike, we don’t “need” to use products from companies like Microsoft and Google, but we have no choice when it comes to using the oil companies’ product. We need oil!”

Really? Compare how much time you spent on a computer today to how much time you spent in your car. Bet you’ll be surprised. And if you still aren’t convinced, try going a month without using the internet, a computer, or even having a bank float your mortgage. Then come back and talk to me about how you don’t “need” to use those companies’ products. Face it, we need oil equally as much as we need the products made by companies whose profits are quadruple what the oil companies make. But you never hear Barack Obama calling for a windfall profits tax on Bill Gates now, do you? This, to me, is further evidence that your government would rather demagogue this oil crisis for political expediency than fix it.

Nevertheless, politicians, news anchors, and uninformed citizens alike continue to use words like “gouge”, “dishonest”, or “obscene” when talking about oil company profits. To this ignorance I ask: Since when is a few pennies considered gouging? And to the state and federal politicians I pose this legitimate question: If only a few pennies of profit is “obscene”, then what do you call the 70 cents per gallon of pure profit you receive?

Face it folks, the only “gouging” that may be occurring is coming from none other than your own government. In fact, over 30 investigations have been done into oil companies’ profits from all across the board. Groups ranging from independent think tanks, auditing firms, the IRS, and even the United States Supreme Court have all concluded the same thing – oil companies are NOT gouging. So leave it be.

But if the oil companies aren’t jacking up the price for fun, then what factors are contributing to the high costs of oil? Well let’s take a look at a handful of reasons:

1) As previously addressed in the prior post, your government is doing everything it can to block exploration, drilling, and refining capabilities. In fact, the only solutions they’ve offered to the problem are an emissions-rationing system and a windfall-profits tax, both if which increase the cost of gas instead of driving it down. These shameful, ignorant performances from the government are kneecapping us all in ways that are only going to get worse before they get better. (If you haven’t already, click here to see my first post on gas prices for a more detailed analysis of Washington’s lack of efforts to help American’s wallets in this matter.)

2) The economies of India and China are booming rapidly. As such, they are consuming larger and larger amounts of oil. In fact, if China were to continue its pace in growth, in 10 years China alone would consume about 85 million barrels of oil a day – which is our current daily worldwide production amount! So in other words, in 10 years China would need to use every drop of the world’s oil leaving none for the rest of us. You can see how drilling and producing more oil more vital now than ever.

3) Oil is traded on a futures market. Oil that is bought on Wall Street today hasn’t even been pumped out of the ground yet and won’t even make it to the pumps for 8 months. Tensions in the Middle East, threats of war in foreign countries that don’t even involve America, and widespread natural disasters can easily sway oil futures prices – which drive up the price of a barrel which, again, constitutes for roughly 80% of what you pay at the pump.

4) On a similar note, oil production is severely slowed during times of natural disasters. Hurricanes Rita and Katrina are perfect examples of this. Many refineries were damaged due to the aforementioned hurricanes which slowed and even halted oil production in the affected region. When you add to this the fact that, since several different states often require their own specific, yet unnecessary blends of gasoline, the ability to ship reserves in times of emergency becomes impossible. Slowed oil production from disasters combined with the inability to ship reserves during a crisis is a horrible recipe when trying to keep gasoline prices down.

5) Our dollar is weaker. Keep in mind that while the price oil has tripled as far as the raw dollar value is concerned; it has only doubled in price in Euros. Since oil is bought and traded with dollars, the falling value of the dollar has been a key contributor to the high costs of oil. It now takes more dollars to buy the same thing you bought for fewer dollars months earlier.

6) Speculation is becoming more and more of a problem in the oil markets. In fact, some estimates state that oil speculation is to account for up to 60% of today’s price of oil! Speculators from large trade banks and hedge funds are buying more and more oil hoping that the price goes up so that they can sell it and make a quick profit. This oil isn’t even being purchased for its intended purpose, but is instead being bought only so a few hedge funds can make a quick dollar. These speculators are all abusing the free market system by intentionally accumulating oil, (which drives up the price for you) so that they can profit from it – and all at your ultimate expense.

Concerning speculative oil buyers, my brother writes to add: “Deferred contract months are selling for big premiums over spot or nearby contracts. Normally that would not be the case in situations of tight supply, as so many say we are in. This tidal wave of speculative buying is fostering the artificial hoarding of oil. It is dangerous, and it should be stopped.”


Other factors contribute to worldwide and domestic oil prices, but those listed above are the primary reasons. So the next time you hear someone talk about how the oil companies are solely to blame for high oil prices, you can immediately flag them as uninformed and hopelessly uneducated on the matter.

As a solution to many of the problems listed above, many are calling for alternative and renewable sources of energy, which I discuss in my third and final post concerning oil prices. Stay tuned.

2 comments:

Anonymous said...

Interestingly enough, Obama’s website doesn’t even state the high oil prices as an issue. His only concern is The Environment.
http://www.barackobama.com/issues/energy

Who cares about the environment when I’m paying $4.50 for a damn gallon!!



http://welovebush.blogspot.com/2008/06/democrats-empty-rhetoric-on-oil-prices.html

Thomas Nehren said...

A 42-U.S. gallon barrel of crude oil provides, when refined, slightly more than 44 gallons of petroleum products including about 20 gallons (19.6) of finished motor gasoline, 7 gallons of diesel, as well as other petroleum products.

This morning, crude futures on the NYMEX are trading at $136.98. Do some simple math, and we'll see that $3.11 of the costs of every gallon of refined petroleum product is directly due to the cost of crude.

I filled up this morning for $4.03 a gallon. On average, Utah charges 42.9 cents per gallon for state taxes. That leaves Chevron with 49 cents to ship the barrels of crude to a refinery, refine the product, add special blends, cover additional costs of overhead and operation, transport it again to a local station, and make a profit. Normally gas is first sold to a distributor who in turn needs to make a profit and cover similar costs of operation.

And we are supposed to be upset that the oil companies are to blame?

For some interesting thoughts on the speculative world of oil futures trading, watch this video from Fortune Magazine.