Stoltz just wrote a very good post about gas prices and oil company profits. Definitely well thought out and worth a read.
Update: I have mirrored the article below because Stoltz has Xanga lock enabled.
Are Gasoline Prices Too High?
by Stoltz13I understand the feeling that some have about having to pay more for fuel. Paying more for an essential item is never fun especially with limited finances. Because most of us would like to use that money for less essential items, like that vaction that keeps getting pushed back or a replacement for your weary desktop computer. Many see increasing prices as an issue of corporate greed, but I can’t help but see the issue from a different perspective. I hope my following points will help add some clarity to the real issue and some real ways to lower the price at the pump:
1) Gasoline is a commodity and prices are determined by market factors like supply and demand. Prices rise when demand is high, supply is low, or both demand is high and supply is low. With the steady rise of gasoline usage worldwide, the demand for gasoline is at an all time high and thus prices at the pump are also at an all time high and will likely remain high.
Crude oil commodity prices determine approximately 50% of the cost of fuel at the pump, so in order to reduce that cost you might be better off petitioning OPEC to increase output (not likely to happen), or lobby the government to allow more offshore drilling or in Anwar (more likely to work).
2) Gasoline production requires more than drilling a hole in the ground and raking in profits. Supplying the world with fuel is a logistical giant that requires a tremendously massive investment. Tons of money is spent for exploration, refining, marketing and distribution. Marketing and distribution costs make up approximately 10% of the price of a gallon of gasoline, refining costs and profits about 20%.
Since cost for exploration and distribution are linked to factors that are more difficult to control and every company is in buisness to make a profit, one realistic way to help reduce fuel prices at the pump would be to increase refining capacity. Due to environmental concerns and strict government regulation, new refineries haven’t been built in this country for many years and what that means is the current capacity is limited, thus supply is lower than demand, and therefore fuel prices are higher.
3) A whopping 19% of pump price is from federal and state taxes! Easy solution: demand that the government eliminate those taxes and you will save four or five dollars every fill up. Source of statistics: http://www.eia.doe.gov/bookshelf/brochures/gasolinepricesprimer/eia1_2005primerM.html
Certainly the petroleum industry is profitable and ExxonMobil’s 36 billion dollar profits in 2005 may seem obsene to most of us. But consider the following:
“Exxon’s profit margins are below-average compared with others that have triggered no outcry. Exxon’s first-quarter profit margin was 9.4%, meaning it kept 9.4 cents of every $1 in revenue. Microsoft kept 27.3 cents of every $1 in revenue in its most recent quarter; General Electric, 11.4 cents and McDonald’s, 12.3 cents. In fact, Exxon is below the 11-cent average of Standard & Poor’s 500 companies, says analyst Howard Silverblatt.” http://www.usatoday.com/money/industries/energy/2006-04-27-xom_x.htm
So in actuality, when compared to the averages of other corporations, Exxon’s profits per dollar are actually uncommonly low. Furthermore, the government’s profit off the same gallon are twice as much as Exxon! When you consider that the big five oil companies supply “178 million gallons” of gasoline a day and “65 billion (billion with a “b”) gallons of gasoline and diesel fuel each year,” it is entirely concievable that one company supplying such a valuable commodity is making 36 billion dollars profit.
While I hope that profit is being put to good use (developing more efficient production technique, enlarging capacity and exploring new sources of fuel), I do not begrudge a buisness for wanting to be profitable. In fact, I believe any corporation so critical to our survival should be profitable, because the opposite possibility could be catastrophic to our economy.
A helpful link explaining gasoline production costs: http://money.howstuffworks.com/gas-price.htm
So while myself also being a financially strapped college student I do verily understand the frustration of having to pay 20-30 dollars per fill up, I also comprehend the complexity of this issue. Yes, gasoline prices have risen constantly in recent years, but until recently gasoline prices were lower adjusted for inflation than they were in 1980: http://inflationdata.com/Inflation/images/charts/Oil/Gasoline_inflation_chart.htm So in reality, gasoline prices are finally catching up to inflating prices in all other parts of the economy. And unfortunately, the likelihood of the price of any good going down is very low whether it be toilet paper, frosted flakes or college tuition; Gasoline is no exception.
Complaining about the cost of gasoline or blaming evil corporations, while possibly being a good stress reliever, does absolutely nothing to decrease the price of fuel. Two immediately effective ways to lower prices: reduce government profit by petitioning the government to cut the 20% tax on gasoline, or lobby for measures that will increase production (like increased offshore drilling or drilling in Alaska, or eliminating the bottlenecks in refinery capacity) But the surest way to spend less at the pump is to simply buy less gasoline. And that end can be accomplished various ways: sell that oh so cool SUV and buy a Geo Metro, drive less, take the bus or join the Amish (which you might be disappointed when you find that hay and grain prices also increase with time). Good luck!
4 Responses
May 30th, 2007 at 7:49 am
I’m grateful to hear an explanation that isn’t throwing mud. It’s so easy just to have a bad attitude (esp. when the gas is always higher in our area).
June 5th, 2007 at 4:55 pm
Quote: Most people in the US have no choice when it comes to purchasing fuel. So how much they make on the dollar campared to the other companies makes no difference.
Exactly right. I could not agree with that statement any more. In fact, my head just fell off from the excessive nodding I just did. Hang on a sec…Ok, we’re good.
Oil is a different animal than any other product on the US market; we have to buy woil in order to live. I don’t have to buy Kool-Aid, or Kraft macaroni and cheese, or Campbell’s chunky soup in order to live. If I see that Kraft increased their prices by an average of 100% over the last 3 years, I can never buy another Kraft product, and still live an enjoyable 70 yrs on this planet. I am perfectly capable of going to my local greenhouse, buying some seeds, and planting my own garden in my own backyard, and raising my own food. Unfortuntely, God didn’t see it fit to give us each a method by which to raise oil. Point being, look at the overall amounts, in other words, the gross profits over the course of the year from oil companies. It is ridiculous! Insane! I agree, demand for oil is increasing due to expanding economies in China, India, etc. But there is no lack of oil in the ground; the lack of “supply” comes from the lack of oil refineries to refine the oil. The oil companies have not built a new refinery since the 70’s, and why should they? It would be terrible business! They would increase production, thus flooding the market with more oil, decreasing demand, and thus, cutting into their own profits. Something has to be done, and sooner rather than later, or our economy will soon be headed towards another recession.
June 26th, 2008 at 6:58 am
This America. Get off your butt and make more $ if you don’t like the prices. This is a free market!
There is opportunity everywhere for the ambitious go-getter who keeps his eyes open for it.
July 31st, 2008 at 9:10 am
Hustler and all- No way all Americans can get up off their butt and make more money. There are too few opportunities. Some opportunities are, and will be found, but to say that everyone who has to make the choice between petrol and food/medicine can just open his/her eyes and find opportunity is ludicrous. Too many people in low paying, or just got layed off from jobs. Gas companies are gouging, they could drop prices and make only 2 cents a gallon on gas, and still make billions.
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