Archive for the ‘Oil’ Category

Cost of Gas: Where the Money Goes

Wednesday, February 20th, 2008

gas pumpI think it’s safe to say that every person who owns a car has sat at the pump, watched the total purchase price climb faster than Apple stock the day they announced the Iphone, and asked yourself the question: “where is all this money going?”.

With the cost of a gallon of gas over $3.00 per gallon throughout the U.S., everyone wants to know who’s getting all that money.

Breaking Down the Cost of Gas

The money received at the pump for a gallon of gasoline will be split between at least 4 parties:

  1. Crude Oil (Drilling, research, investment)
  2. Refining (making gasoline out of crude oil)
  3. Taxes (Federal and State)
  4. Distribution & Marketing (Includes wholesaler and Retailer or gas station)

Using several sources to determine how to breakdown the cost of a gallon of gasoline, including the Department of Energy, we found that the cost for crude oil accounts for about 55%, refining accounts for about 22%, taxes accounts for about 19%, and cost of gasdistribution and marketing accounts for about 4%.

So for example, if a gallon of gas costs $3.00, then $1.65 would go to the oil companies, $0.66 would go to the companies that refine the oil, $0.57 would go to the government for taxes, and $0.12 would go to the gas station and the wholesaler who sold the gasoline to the gas station.

Who Benefits the Most?

When you understand that 3 of the 4 entities that receive a cut are receiving basically a fixed amount, then it becomes clear that the fourth entity (crude oil companies) is profiting the most from the price increases. You see, gasoline taxes are set amounts and, depending on the state (see state gasoline taxes), will be about $0.57 per gallon. So if a gallon of gas cost $2.00, then the government still receive around $0.57, the refining company would still get about $0.66, $0.12 would still go to distribution and marketing, but the crude oil company would only get about $0.65 instead of $1.65. So it is the so called “Big Oil Companies” that are profiting the most from the price increase.

Who Sets the Prices?

If it’s the oil companies that are reaping all of the profits from the price hikes, then naturally we can assume that they are the ones setting the prices. Well, not really. If the oil companies set the prices then they never would have let the price for a barrel of crude oil, currently $100, drop to $10 as it did in the late 90’s. The real culprit is actually the global markets. And the global markets set their prices based on what people are willing to pay i.e. DEMAND.

There can be many factors that can effect demand one way or another. Since the Iraq War began, that countries oil production has been down. The oil consumption of countries with huge populations, such as India and China, have been rapidly increasing. Instability in other oil producing countries. Then add to that mix the fact that oil refineries in the U.S. have not completely recovered from previous hurricane seasons. What’s left is a perfect recipe for high gasoline prices.

Will Prices Come Back Down?

This is the question that everyone really wants the answer to. We now know why the price of gasoline is so high. Will it ever come back down? You can either increase production or reduce demand.

We can increase production by developing new oil fields and building new refineries. Some politicians have tried to open new oil fields for drilling, such as the Arctic National Wildlife Refuge (ANWR) in Alaska. But, so far, animal rights organizations have been able to stymie such efforts.

The other approach is to reduce demand by developing new technologies (hybrid or electric cars) or by developing alternative fuels (ethanol, etc.). This approach has been slow going and late to the party. But at least they are on there way.