Saturday, April 22, 2006

Beyond Gas Companies: A Fuller Picture of the Price of Gas

As a follow up to Shrimp Boat's last post and to the comments thereto, Lt. Dan got curious as to what all goes into the price of a gallon of gas. After some minimal research here is what I found:

According to, last September 39.7 cents per gallon could be attributed to gas taxes (this was the most current data I could find; table here). Also in the price of gas is the price of the current MTBE (an additive that pollutes ground water) phaseout for ethanol.

Additionally, the price of refining goes into a gallon of gasoline. While this seems like a routine cost, environmental regulations in the US have insured that there have been no new oil refineries in the US in the last 29 years. Somehow I think that the demand for gas has increased since 1977 (by 45% according to one news story) and that new refineries could probably have helped with gas prices. Furthermore, according to an article on a new refinery that is supposed to open by 2009, it took the owner of the refinery 15 years to get the requisite permits and permission slips worked out, and will cost $3 billion. (Story here; another story on same topic here). One of the story reports that the prince of Saudi Arabia could ship more oil here but it wouldn't matter because US refineries couldn't process it. Hmmm...sounds like that could influence oil prices.

There is also the old supply and demand fact that when demand goes up in the summer months, so do prices as supplies are squeezed.
We also get our gas from the most volatile region in the world (I have heard arguments that general unrest around Iran and Iraq adds $10 dollars to the price of a barrel of oil) and from companies who conspire to manipulate the price of crude oil barrels so they can make a killing. Just notice the next time OPEC meets to determine how much oil they will supply a day: they will justify their decision by saying something like "Because we want oil to be X dollars, we are increasing/decreasing supply." Most of the time their actions will translate into oil prices being about what they want them to be.

I don't want to sound like I am giving the oil companies a free pass because I am not. They may very well have raised prices more than they should and genuinely screwed everyone who has to buy gas. At the same time, however, I do note that there are a ton of variables that contribute to the price of gas. From government cartels to regulatory restrictions and taxation, gasoline companies have a lot less influence on the price of gasoline than the public and politicians want to give them credit for. They are not non-profit corporations either: they exist to make money and, when the price of crude oil goes up, it follows that they are going to make more money than when oil prices are low.

I am just as ticked off about gas prices as the next guy: I think gas should be under $2 a gallon. At the same time, to exclusively blame gasoline companies for high gas prices is to leave out huge parts of the true equation.


Blogger Lt. Dan said...

Almost forgot to add Hurricane Katrina to the mix. Refineries in the gulf have still not fully recovered from that, reducing the U.S.'s already small refining capacity.

4:59 PM  
Blogger Shrimp Boat said...

Another thing to keep in mind is that gas is still much less expensive in the US than it is in the rest of the world. For example, the cost per gallon in Amsterdam is over seven dollars. All of Europe would kill to pay $3 a gallon & that is one of the reasons why they have developed an effective railway system to help combat the need to drive everywhere.

I also have a question for you Dan. Why do you think "gas should be under $2 a gallon"?

6:02 PM  
Blogger Ping-Pong Paddle said...

I agree that I would like gas to be under $2 a gallon but Shrimp has a point about other countries. Another thing that I always find quite ironic is that until recently milk cost more than gas. With all the aformentioned cost factors with gasoline, maybe it is really the cows that are screwing us.

7:05 PM  
Blogger Lt. Dan said...

Most of Europe also has nearly double digit unemployment, economies that grow between 1 and 2 percent a year and riots over whether corporations can fire people. To say the least Europe believes strongly in socialism and a strongly government influenced economy. Somehow I don't believe comparisons with Europe, which imposes purposefully punitive taxes on gas are apt. As a German exchange student explained to me last year, Germany charges $100's of dollars for people to get drivers licenses and thinks that the government does you a favor by letting you drive at all. While I think that driving tests here could be a little harder to root out more of the bad drivers on the road, I don't think it should cost $100's of dollars to get a license nor do I think that the government should put punitive gas taxes on anything. Europe may whoop our butt on railroad development but when you look at their economies currently and their economic future forecasts, somehow I like America better (we could be French unemployed and rioting to stay unemployed instead of going to law school to try to get a job).
As for why I think gas should be less than $2: if the free market were able to function I don't think there would be any doubt it would be that cheap or cheaper. Take away the blatant and self-serving manipulation of oil supplies by OPEC and other countries, there would be more than enough oil at much less per barrel. Relax some (notice I say some and not all environmental regulation in the US; I think much of it is necessary) environmental regulation and allow more refineries then we would much more capacity to refine oil and at cheaper prices. This is why I think gas should be less than $2 a gallon.

7:38 PM  
Blogger Bubba said...

I'll grant that we do not have the most expensive gas in the world—but I would like to point out that it costs 12 American cents per gallon in Venezuela (I guess that is the one silver lining to Hugo Chavez's dictatorship...).

My prediction for when gas prices will fall—the same day that a viable and marketable alternative hits the US market. Once there is a rational choice, the oil companies will suppress the prices to hold onto their share of the energy market. Until then, the cats will just keep getting fatter...

7:46 PM  
Blogger Shrimp Boat said...

Thanks for your answer Lieutenant. I wish the general public could make the same distinction that you do between "I'd like gas to be cheaper" & "Gas should be cheaper" because they are completly seperate points.

7:03 AM  
Blogger Shrimp Boat said...

Also, looking to gas prices in other countries helps to give us perspective on our own situation. Though there are obviously different economic factors at work that would make any absolute comparison between Europe & the US tenuous,since many of the arguments made in the media are founded on the morality behind the oil company's decisisons to raise gas prices (i.e. they should cut prices, not take as much profit, & help out the American citizens) it is apt to look to a broader perspective & see how other countries are dealing w/ the issue.

7:20 AM  
Blogger Lt. Dan said...

I agree with both Shrimp Boat and Bubba's final comments. An alternative energy source will inject the free market back into the equation and prevent dictators from shamelessly exploiting supply. The media does the public a huge disservice by its constant villification of corporations and capitalism because without them America would not be what it is.
I am really just writing this to point out to Shrimp Boat that this post has replaced his prior em-dash post as the most controversial and commented on one yet. You are going to have to dig deep in your Blue Book to out do this one Boat!

12:11 PM  
Blogger Shrimp Boat said...


I take great pleasure at the success of your post, as it indicates that our blog is maturing nicely. We're all equal here at Gump's Law, some are just more equal than others.

12:27 PM  

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