Armand C. Hale
20 cents? Big deal!
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By Armand C. Hale
June 26, 2012

Right now the talk of summer is how much gasoline prices have dropped. By some estimates it's up to 20 cents a gallon. People are thinking it's the greatest thing since the chosen one was elected illegally. Let me jog your memory on a few things as why I don't share everyone's jubilant enthusiasm. (JMJ).

In 1969 gasoline was only $0.35 a gallon. By 1976 it had risen to $0.60 per gallon. And by 1980–81 we were shocked as gas prices rose above $1.00 for the first time. In only 12 years gasoline had risen a full dollar from $0.35 to $1.35. That is an increase of 286% in 12 years!

According to Pacific Business News June 21, 2012 Hawaii motorists pay the highest gas prices in the nation at $4.37 a gallon. That is not paradise!

I find many people get confused is that they assume oil companies are producing all the oil that goes into their own refineries — and therefore can control gas prices by controlling the supply chain. That's not the case.

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 — almost three times more oil than was produced in the U.S. That means U.S. refiners, like ExxonMobil, have to purchase millions of barrels of crude oil — at market prices — to produce gasoline and other products for American consumers. For example, in 2010, ExxonMobil spent $198 billion purchasing oil around the world for its refining operations.

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 product.

The refining portion of a gallon of gasoline has, on average, accounted for about 11 percent of the price in 2011, according to the EIA data through December. That means a little less than 40 cents per gallon would be due to refiners' costs — wages, equipment, financing and others — plus their profits.

In December, the data indicate that 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. In other words, 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.

Products then have to get from the manufacturing site to the retail site. When gasoline leaves the refinery, it is shipped largely via pipelines to local terminals. There, distributors load their trucks and transport the gasoline to a service station. Naturally, each step in the distribution chain includes labor, capital equipment and other expenses that must be recovered by operators. Of course, these operators must also compete to sustain their profitability while also paying taxes.

Retailers then set the price at the pump, based on recovering these costs of getting gasoline to the service station and the costs of marketing it to consumers. They also have to generate enough money to pay their taxes and make a profit to keep their business running. And on top of that, they have to collect mandatory state and federal gasoline taxes from the consumer (which we'll break down in the next section).

So who are the retailers setting the prices? When consumers pull into an Exxon or Mobil station, they assume it's ExxonMobil. But we own only about 5 percent of the stations with our name on them. About 95 percent of the stations carrying the Exxon or Mobil brand are actually owned by network retailers or local business owners — not ExxonMobil.

In this example, retailers collected state and federal gasoline taxes of 39 cents per gallon on average. Total gas taxes per gallon range by state — from lows of less than 30 cents per gallon to highs of more than 60 cents per gallon in places like New York and California.

How does this compare to what a company like ExxonMobil makes on a gallon of gasoline? As we saw earlier, sometimes a company or an operation may lose money. Other times, it may make money. A competitive market just provides an opportunity, not a guaranteed profit. In the first two quarters of 2011, for example, ExxonMobil made 7 cents and 8 cents a gallon , respectively, on the gasoline, diesel and other petroleum products it refined and sold in the United States.

Again, let's go back to the economics of supply and demand that govern the crude oil market, since it's the largest determinant of the price at the pump.

There are many global factors that affect the crude oil market. But adding more supplies of crude oil to the global marketplace can help put downward pressure on the price of a barrel of oil. 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 (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.

But first, the oil needs to get to market. There, we've often seen economics trumped by politics — even as the U.S. economy remains weak. The recent 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.

So what do this mean? When gasoline drops $2.00 a gallon and not .20 cents than I can celebrate! Maybe Obama can make oil drilling legal in the U.S. like he made "illegal aliens" legal by a stroke of a pen! That would be a kick in the head!

Sources

http://www.inflationdata.com/inflation/inflation_rate/Gasoline_Inflation.asp

http://www.consumerenergyreport.com/2012/03/21/what-makes-up-the-cost-of-a-gallon-of-gasoline/

© Armand C. Hale

 

The views expressed by RenewAmerica columnists are their own and do not necessarily reflect the position of RenewAmerica or its affiliates.
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Armand C. Hale

MSgt Armand C. Hale retired from the U.S. Air Force serving his country for over 23 years. His many tours of duty included the Republic of Korea, the Kingdom of Saudi Arabia, and the State of Qatar. He has a Bachelors degree in business & management and has written a book on his experiences in the country of Qatar. You can purchase his book at amazon.com and Lulu Books. jmjpbpb@gmail.com

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