I received some AFL CIO propaganda in the mail yesterday. This group calls itself Working America and they are spreading disinformation on gas prices. They are trying to pin the blame for high tax prices on the oil companies and get Congress to do something about. In fact, they are focusing in particular on my Congressman, Representative Tom DeLay. They are trying to say that gas prices have gone up 35% and oil company profits have gone up 35% as well.
So I asked myself what does a gallon of gas cost. I’m CPA who has a lot of cost accounting experience. That translates into tracking expenses on simple things like menu items to more complicated fabricated steel products. I should be able to get an idea what a gallon of gasoline costs.
So I went to the how stuff works website, a component of Money magazine and they had some good information. They break down the price of gas into 4 components:
Distribution & Marketing Costs and Profits 13%
Refining Costs & Profits 13%
Taxes 31%
Crude Oil 43%
Crude is the largest component of the cost of gas. The price of crude is determined by (Organization of Petroleum Exporting Countries) OPEC. OPEC determines the production of crude oil. Not all crude is created equal either. Some types of crude are easy to refine. The heavier crude requires retooling the refineries, which increases the costs of production. The lighter sweet crude’s supply has been running low in recent time. OPEC controls production of oil. If they see more oil being pumped than they desire, then they will decrease production and this impacts the price. The price of light crude today was $59.11 a barrel. A barrel of gas is 42 US gallons. That is $1.41 a gallon.
RefiningOil companies purchase the crude from the supplier and send it to a refinery. The US is currently limited in how much gasoline it can produce by the number of refineries the oil companies own. The oil companies have not built a new refinery since 1976. The oil companies do have to put money into maintaining these facilities, but is America hurting itself by not increasing its capacity. Over the last few decades many smaller refineries have been closed do to inefficiencies. More production would mean a greater supply, which could help decrease the price. Some parts of the country require different chemical mixtures in their gas, usually to cut down on pollution. These different mixes increase the cost of refining.
Now one gallon of crude oil does not enter the refinery and become one gallon of gasoline. When the crude is cooked it can make several different products in a process called fractional distillation. You cook the crude at a certain temperature and take vapor and allow it to condense. Different temperatures produce different components. Today there is chemical processing that allows certain products to be converted into a product that the gas company would rather produce. This is helpful when supplies in one product are low. Gasoline is about 40% of the crude oil. But with chemical processing the oil company can take some other components and convert them to gasoline as well. This chemical processing is also called cracking, because the process literal cracks large hydrocarbons into smaller versions.
Distribution and marketing is another cost component. When the oil companies buy crude overseas they have to ship it to the refinery. For oil pumped on American soil it has to move through a pipeline or a truck to the refinery. Once the gas is ready for the consumer it needs to take a ride again to the corner service station. The farther the state is from the oil refineries of the Gulf of Mexico, the more the cost will be. The cost of convincing the consumer to buy gas from the oil company, advertising, goes into this component as well.
Taxes are the second largest component of the gas price. Federal excise taxes are 18.4% on each gallon. State excise taxes average 20 cents per gallon. Overseas the taxes are much higher. England has a 78% tax on a $6 gallon of gas.
The service station tacks on a few cents per gallon. At some stations this may go as high as a dime.
Okay today a gallon of gas in my part of Texas is $2.09 for regular. So lets say we process the crude to make 60% of the barrel into gasoline. That’s 60% of $1.41 which gives us .84 cents or 40.4%. Lets tack on the taxes. $2.09 a gallon results in $.38 to the feds and Texas charges $.20 for each gallon. That is a total of $.58 to the gallon or 28.0%.
So right at the beginning we have a cost of $1.32 and I have not considered anything beyond crude and taxes. I could not find data that provides the refinery costs, I will use the 13% rate from the How Stuff Works site and do the same for marketing & distribution. That comes to $.27 each for both of those. Add both of them to the $1.32 and the cost of gas is 1.86. Give the station a nickel mark up and the margin is .18 cents or 8.6%.
So where is the gas companies’ 35% profit increase? That would mean they increased the price to capture $.06. That’s all that Working America has to gripe about. This is a pretty expensive looking mailer. It cost more than $.06 to mail and don’t forget the postage. I hope they save their money next time.
And one other thing Working America. I don’t want Congress telling any company how to price their product or service. That would be communism. If I allow Congress to fix the prices, then Congress is no better than a monopoly facilitator. I don’t want cartels fixing prices and I don’t want my government becomoming a cartel. Next thing you know they will come and tell me how to bill my clients. I like the free market myself. It works. Let it.