24 May 2008

Simply: Why Is Gasoline So Expensive?

Everyone loves to blame greed. It's a respectable party line and it sounds mildly educated and in tune.

It’s those greedy oil companies,” or “It’s those fat greedy oil company executives” and sure, theres no question that greed is a problem in today’s world, however not having a way to quantify greed, nor even to verify its existence in an individual, makes this a less-than-satisfying answer. And so excluding unforeseen events such as another bad hurricane season why is gas $4.00+ a gallon in New York City as of 24 May 2008? (The overall national average at $3.83, analysts believe $4 gas could spread nationwide this summer. Regardless, the price of gasoline is 61 cents higher than it was this time last year.)

Many will point to unrest in places such as Nigeria which lead to supply concerns - which is most certainly a short-term factor, while others will point to emerging markets like India and China, but has their consumption increased so much since 2003 to constitute a five-fold increase in the price of oil, while it had mild fluctuations for over a decade previous? Hmmm.

The problem is not demand eclipsing supply. We have lots of oil. We have lots of gasoline. We have lots of people lining up for buckets of it.

The problem begins with the sharply higher price of crude oil (around $135 a barrel as of this writing)

In a gallon of unleaded gasoline, crude oil accounts for approximately $2.75 of today's average price of $4.00 at the pump.

Next is the cost of refining that crude oil, which is about a dollar of the gallon's price.

Next is transporting gas to the pump. That costs about 10-15 cents a gallon.

And then of course there's taxes. 25-30 cents for the federal government and 20-30 cents for state governments. Taxes used to represent as much as 40 to 50% of the price you paid at the pump. These days it's a much lower figure than that because they haven't changed much in a dozen or so years.

OK, so what about profits and that whole "greed" thing?

The big evil oil scary companies make money at every step of the process because not only do they take the oil out of the ground, they refine it and then they sell it and so Exxon-Mobil's one-stop-shop profit is a good 35% of every gallon guzzled.

Yet another major factor is the ever-decreasing value of the dollar. Because oil is imported (and for the most part traded for dollars) the less the dollar is worth the more expensive oil becomes to us because we have to spend more dollars to buy the same amount of oil. Precious metals reached a near five-week high. Soaring oil prices raised concerns about inflation, encouraging investors to buy gold, which is widely regarded as a good store of value... as is "black gold".

The pain is likely to continue, if history is any indicator. Typically, gas prices climb in the days before Memorial Day as demand picks up and refineries switch to a cleaner and more expensive fuel blend for summer. Thanks, fellas! Prices usually continue to rise through July 4, hold steady for a time and then drop around Labor Day.

Crude is driving the market and hands the baton to diesel and between the two, they've been sustaining these high prices. If we see crude back off from its historic highs and we get a correction down to the $100 a barrel level, gas prices will certainly follow.

But don't hold your breath. We're much more likely to see crude hit $150 a barrel before we see it drop back down to $100.

OK so let's break down for that ass.

Why Is Gasoline So Expensive?

#1 - The cost of oil: Two-thirds of the price of gas is linked to crude costs. Crude oil - a year ago selling for $63 a barrel - is now going for around $135 a barrel. Each $1 jump in the barrel price equals a 2 1/2-cent increase at the pump.

#2 - A bitch ass U.S. dollar: Weakened because of the national debt, the dollar has fallen 11% since September when Das Fed began cutting rates to stave off a recession. Investors' buying of oil commodities as a hedge against the currency's decline has boosted the cost of crude oil.

#3 - Muhfuckin' global demand, son: Contrary to what one may assume, there is no shortage of gas or oil. We gots it and people are lining up for seconds. The number of cars on the road is increasing in places like India and China. China's crude oil imports have risen nearly 12% from a year ago. It imports more than 3 1/2 million barrels a day, second only to the United States, which imports more than 12 million barrels.


Anonymous said...

I was just complaining that i couldn't figure out why gas was so expensive. Thank you Gotham City Insider for clearing this up for me. Now I'm angrier than ever.

Gotham City Insider said...

Ahhh, another satisfied customer.

Thank YOU, Rachel.

Anonymous said...

What about the decreasing of competitive markets for selling the Gas to the End user ?

IE 20 years ago, there were a great deal of "mum/pa stores" that sold gas, Now it seems that there are only two "Basic" places where you can buy your gas ?

1-The Oil Firms Gas Stations

When was the last time you saw a "Price War" between these two ? ( might that have been when there was More Competition ? )

It just seems like that a Price War only makes the companies loose money ( to the benefit of the end user ? )

We now have a saturated market ( and closed ) market ??