View Comments |
Print This Post
|
by Rachel Alexander |
May 2nd, 2006
The reason gas prices are increasing is not the fault of the oil companies, but because of several factors outside of their control, most notably the cost of crude oil.
Gas prices are soaring again, and are expected to surpass last September's high of $3.07 a gallon after Hurricane Katrina. Yet this time, there is no Hurricane Katrina to provide an obvious reason why. Both Republicans and Democrats are blaming the oil companies. Bush and Congressional Democrats are calling for a repeal of tax breaks to oil companies. Politically, attacking the oil companies while gas prices are high is fairly safe, because many people already view them as faceless corporate entities that trash the environment while emptying their pocketbooks.
In reality, this criticism is shortsighted because the oil companies are not raising the cost of gas in order to earn higher profits. Punishing the oil companies will not fix the problem. In fact, it will cause additional problems, as ensued in the 1970's when the government set price controls on gas, resulting in long lines and shortages.
Nor will the problem be resolved by giving everyone a onetime $100 rebate, a short term solution proposed by Congressional Republicans, or by temporarily repealing gas taxes, an equally short-sighted solution proposed by the Democrats. The Bush administration is contemplating a relaxation of clean-air rules in order to reduce the costs involved in producing gas. This would also be a temporary fix, since eventually environmentalists would force the regulations back into place. Instead of addressing the problem honestly, Bush and Congress are scrambling for a quick fix in order to ease voters' concerns about the cost of gas before the 2006 fall elections.
The reason gas prices are increasing is not the fault of the oil companies, but because of several factors outside of their control, most notably the cost of crude oil.
There are several costs that go into producing and delivering a gallon of gas. These include the cost of the crude oil to refiners, refining costs and profits, distribution and marketing costs, and federal and state taxes. Generally, the cost of the crude oil hovers close to 50% of the cost of a gallon of gas, taxes comprise about 25%, and the remaining costs average almost 30%.
The current increase in gas prices is mainly due to an increase in the cost of crude oil, which has doubled over the past two years to more than $70 a barrel. This is the first of four underlying reasons why the cost of gas has increased. OPEC manipulates the price of crude oil. OPEC member countries hold about 2/3 of the world's crude oil reserves, and provide about 40% of the world's crude oil. OPEC sets limits on the amount of crude oil its members may produce in order to keep the price of oil at a target level.
The cost of crude oil is also affected by conflict in oil-exporting countries, such as the Arab oil embargo of 1973. This most recent spike is caused by supply disruptions in the Gulf of Mexico and Nigeria. A correlating effect is caused by oil futures speculators who bid up the price of a barrel of oil whenever relations with oil-exporting countries sour , such as the current dispute with Iran over uranium enrichment and our increasingly poor relationship with Venezuela.
A second reason why gas prices have increased, which is the most important factor for the long-term, is that demand for oil has been gradually increasing around the world. Demand for new cars has risen in China and India. As those countries purchase more oil from OPEC countries, the U.S. is forced to turn to other oil-exporting countries at higher cost. Even if the U.S. chose not to buy any oil from OPEC countries, it would still be affected by OPEC's changes in price or supply, since the countries that continued to purchase from OPEC would be affected by those swings and so would purchase more oil from non-OPEC countries, raising the cost of oil sold by those countries to the U.S. During the first quarter this year new car sales grew by 4.8 percent in the U.S. People in the U.S. continue to buy SUVs, which consume more gas than regular cars, while living increasingly farther away from their work in suburbs outside of the ever-growing megacities.
Third, environmental policies in the U.S. have kept costs associated with production, refining, formulas, transportation and storage of oil high. U.S. crude oil production dropped as reserves ran out, and environmentalists have prohibited new drilling in Alaska's ANWAR. Because of the influence of Iowa farmers, many refineries are still in the process of switching from the additive MTBE to ethanol , at dubious value and excessive cost. Some areas of the country, like California, experience higher gas prices than the rest of the country due to even more stringent gas formula requirements, as well as their distance from the Gulf of Mexico pipelines. U.S. oil refineries are operating at maximum capacity, because liberals and environmentalists have prevented any additional refineries from being built for decades. Gas prices skyrocketed after Hurricane Katrina took out 10-15% of oil refineries in the U.S. and interrupted pipelines from the Gulf of Mexico that fed the Midwest and the East Coast. Without additional refineries to take up the slack, any time there is a disruption affecting refineries, gas prices soar.
Finally, gas prices in the U.S. have not kept up with the cost of inflation. A McDonald's hamburger cost 28 cents in 1963, about the same price as a gallon of gas. That hamburger today (now called a double hamburger) costs about $3.00. Gas prices in European countries are twice as high as they are in the U.S.
What no one wants to admit is that gas prices are not meant to be as low as they have been. Any attempts to keep the price of gas down go counter to the free market law of supply and demand. Is that where we are at today, insisting on government controls simply to keep one particular commodity at a price we prefer? Even if we were to accede to socialist price controls for gas, permitting us to continue using gas at ever-escalating levels that exceed the laws of supply and demand, it will ensure that global oil reserves eventually run out.
The solution is to allow the market to determine the price of gas, which will force the auto and oil industries to look at alternative modes of energy as people find ways to use less gas. It is already happening. Columnist Thomas Brewton points out that ExxonMobil invested 68% of its net income over the past five years into finding and developing new energy sources, even though its profits were far less than the media has hyped them up to be. ExxonMobil's profits compared to a company like Microsoft are miniscule; its net income to sales ratio peaked at 10% last year, which is paltry compared to Microsoft's average of 25% to 41% ratio over the past decade. Punishing the oil companies will only take away marginal profits which they were using to invest in new energy sources.
So when you hear politicians criticizing oil companies and gas stations, remember it is because there is an election coming up.
rachel@intellectualconservative.com
Visit their website at: http://www.intellectualconservative.com/rachel-alexander-archives/
Responses to "The Real Reason Why Gas Prices are Increasing"
Sorry, the comment form is closed at this time.
When Oil was $20 - 30, there was no incentive to develope, produce and market a product that would be more expensive, harder to find, and with no better performance results than Gasoline. Now that oil is $70, perhaps we can put our industrial, technological and scientific communities to work in developing products to be able to kick the oil addiction. I am not saying that I like paying $3.00 per gallon of Gas, but because of national security reasons alone kicking that habbit must to be a priority. Darrell
Comment by Darrell | May 1, 2006
The Real Reason Why Gas Prices are Increasing …
…
Trackback by Morning Coffee | May 1, 2006
In one paragraph you wrote:"The current increase in gas prices is mainly due to an increase in the cost of crude oil…." then you go on to describe OPEC and reserves. In this paragraph you imply that OPEC is the problem and has taken stesp to raise the price of oil to $70 barrel. From what I have read, OPEC is almost at full production and there is little capacity left. While the oil may be in the ground, it cannot be removed today by current pumping capacity. Do I have that right? Also, your article fails to describe how retail gasoline prices are set. Is this not important to the price of gasoline? And third, your article fails to mention that the bulk of our oil comes from Canada and Mexico. Saudi Arabia is third followed by Venezuela. After that we turn to some African countries for oil. You imply that the US is being forced to buy more oil from non-OPEC countries. Have we not been doing that all along? Thanks for your article.
Comment by Dale | May 2, 2006
That does not explain how the oil companies are, all of a sudden, posting record profits. If the companies are just keeping up with the cost of production, how is it that the profit margin increases as well?
Comment by Mike | May 2, 2006
if you read any business report on the subject, the profit margins are not up that much, not anymore than other major industries but its the amount of oil sold by these companies that is up, which helps them to record profits. You can make profits by raising profit margins, price over cost for biz owner or by sheer volume of sales going up current situation. Also, reducing consumption may be fine for those in NE cities all huddled close together w/ mass transit but the rest of us out west, farming or in construction or having to travel 20 miles or more btw several small towns are screwed. We don't have a choice Mr Bush. I have to go to work and use a truck to haul my equipment or run equipment. I am one of 20 or 30 million not just 11 million. We deserve what we have gotten ourselves into, the Not in my backyard idiocy of even normally consevative people, especially out west (I mean what does NV have to offer anyone other than space to build a few refineries?) Ca and Fl have proven reserves off their coastlines but don't allow drilling, well tax those populations a little extra to pay for their selfishness. Tax the Kennedy's and Crankites (nitwit buffoon of a talking head) opposing even windmills off their precious coastline compounds. So we did it to ourselves sorta and get what we as Americans deserve as far as energy and social issues. Vote libertarian or write ins this fall. Send both parties a message for once, we are sick and tired of their mamby pampy pandering to certain groups instead of the majority of us.
Comment by Dean | May 2, 2006
Thanks for the great article. The reaction from most people shows just how far we have removed oureselves from taking responsibity for anything. The greens want gas prices to go sky high so we will be forced to convert to alternative fuels. They got their way with recycling and now we use more energy to recycle than to make new. This of course was an unintended result but true none the less. The environmental wack jobs stopped all new refineries for the last 40 years. Now we have unregulated refineries around the world outgassing more toxic gas than had we done it ourself. Thanks guys, did they ever consider that we share the air on this planet. Then we have the two party system. One side wants to tax gas to death and the other side has their head buried in the sand and won't do anything. One has to wonder how we made it for 200 years.
Comment by Frank Baginski | May 3, 2006
[...] Rachel Alexander: The Real Reason Why Gas Prices are Increasing [...]
Pingback by BlogWonks » intellectualconservative.com | May 3, 2006
"Socialist price controls" will not supply all the oil we want. Price controls below market level always have and always will result in shortages. To Mike: If you sell 294,000,000 gallons of gasoline a day (US consumption of gasoline is about 7 million barrels/day with 42 gallons/barrel) at $2/gallon, your sales revenue is $588,000,000. If you get 8% profit on your sales, profit is $47,000,000. At $3/gallon, revenue is $882,000,000 and 8% profit is $70,560,000. That's where the record profits come from. Exxon-Mobil is the largest corporation in the US (and in the world). If their profits are not the largest also, they will soon cease to be the largest corporation. For the last 10 years Exxon has invested more money in exploring for oil and gas and in modernizing its refineries than it got in profits. It can't keep doing that for long. ABC News pointed out most of the price increase goes to oil producers: Saudi Arabia, Kuwait, UAE, Venezula, etc. But Exxon-Mobil, Royal DUTCH Shell, BRITISH Petroleum, TOTAL (French), AGIP (Italian), etc. are also making a profit. I find that most companies make a profit, or they go out of business.
Comment by Ron Brooks | May 3, 2006
Hmmmm….the price of a barrel of crude was about $15 in 1970 and gas cost about 32 cents a gallon. Now the price of crude is about $60, so the price of gas should be about 4 times as much as it was…about $1.28 a gallon. Can you explain why it is not?
Comment by Stan | May 3, 2006
You have to look at profit margins, not total profits, to make a valid assessment. Obviously as oil consumption increases monotonically from year to year, revenue is going to increase as well.According to hxxp://www.conocophillips.com/newsroom/other_resources/energyanswers/oil_profits.htm, average earnings for all industries combined between 2000-2005 was 5.5 cents per dollar, while oil companies made 5.8 cents. In fact, one also finds that their earnings are hardly unreasonable when compared to other industries (e.g. banks, which on average earn 18 cents per dollar).
Comment by Antiriad | May 3, 2006
Hmmmm….the price of a barrel of crude was about $15 in 1970 and gas cost about 32 cents a gallon. Now the price of crude is about $60, so the price of gas should be about 4 times as much as it was…about $1.28 a gallon. Can you explain why it is not? The dollar doesn't have nearly the same buying power today as it had in 1970, for one. Then there's increased worldwide demand, limits to oil production, oil availability, etc. In 1970, the average car cost around $3,600 (which in today's money is around $17,000).
Comment by Antiriad | May 3, 2006
Exxon-Mobile is the result of a merger of two large companies. This even larger company had larger sales and, thus, larger profits. The profits are a record simply because the company is twice a big as any previous companies.
Comment by Jason | May 3, 2006
Stan, Not enough elements in your equation. In 1970, 1) Most gas sold was leaded. 2) Less taxes per gallon at pump. 3) Less environmental regulation 4) Supply was higher than demand 5) After adjusting for inflation, gas is less expensive per gallon now than back then. Instead of complaining about greedy oil companies who make about 9 cents per gallon sold, why not complain about the government's cut of 18 cents per gallon? And government does absolutely nothing to earn it.
Comment by Rich Sherlock | May 3, 2006
This is a strawman - the issue is *profits,* not price. People generally understand that gas pricing is influenced by the cost of oil. Profits, however, are not. Oil company profits go up because they increase the pump price of gas before the actual production and distribution costs can possibly flow through the system. To put it another way, the gas at a gas station was produced and distributed at a point in time when the price of oil was lower, but the pump price is increased nonetheless. Then, when gas prices go down, they never quite go down to where they were before, regardless of actual costs.
Comment by Mike | May 3, 2006
Great essay. It's nice to read straight ahead information. Record profits, 18 gazabillion dollars, people like Chuck Schumer popping up making another stupid demagogery comment, 'news' programs comparing cost per gallon for bottled water & olive oil, the cost in Eurpope (don't you have to add in for Americans the cost of health care and factor in the borderline-evil medical experience for Europeans to get a reasonable comparison?), and then finally I had to look up for myself what percentage of sales these record profits were - 9.something - not exactly 'record profits' for any industry. State tax where I live on a gallon of gas is about 53 cents - that's about DOUBLE the oil company profit. What does that add up to in a quarter?
Comment by Mike on LI | May 4, 2006
Mike's comments on the gas price going up before we actually start using the more expensive crude, and coming down way after the price of crude has dropped is spot on the money. The more the price of crude fluctuates, the more opportunities the oil companies / gas stations have of riding this wave. I work for an oil and gas company as a Systems Administrator. I don't know the 'ins and outs' of the whole trade, but one interesting thing that I have noticed is that when crude was between $10 and $15 a barrel in 2000 - 2001, the Unleaded futures price on the New York Merchantile Exchange, and the price at the pump differed by between 10 and 15 cents per gallon. The difference now, since prices started skyrocketing, is between 90 and 95 cents per gallon. To me, that is a HUGE difference, and smacks of profiteering somewhere along the line. I can understand the argument of profit percentages bringing in more per gallon as there are more dollars involved in that gallon, but the difference I have just pointed out defies explanation. To me it reeks of a ripoff! I would love to hear you explain THAT one away Ms. Alexander!
Comment by John | May 4, 2006
Gas is not expensive, it just costs more. It costs less than milk, and milk isn't extracted from the bottom of the ocean nor deep in the earth. It isn't refined or shipped around the world either. Why no protest against the price of milk?
Funny how people only complain about prices when they buy, not sell. I don't know a single seller, who sold their home during the housing boom, who turned around and offered a rebate to the buyer after closing because they felt they were gouging them.
The only reason we feel gas prices are high is becasue WE need it. It's pure selfcenteredness, and is the result of the same. Had we been willing to take more time to vote for decent candidates, to perhaps conserve, to allow refineries in our own backyard, to fight against the idiocy of a dozen different regional fuel mixtures, we might have averted some of the current pain. But we were too busy. Who's to blame for this mess? Us!
Comment by David Roney | May 8, 2006
In reality, the best anyone can do is theroize why gas prices are so high. Ms. Alexander is a lawyer. Oil markets are well outside of her expertise. Her therory may be right, partially correct or completely incorrect. Chances are, the truth is somewhere between her theroy and the theroy that we're being screwed by big oil.
That said, one thing is certain. We need to develop alternative energy sources. We will run out of oil someday. Oil finances, enables and propagates our problems in the Middle East. Cut off our need for their oil and we'll go a long way to solving the problems facing us.
I believe cheaper energy alternatives can be developed, but we have to demand that it happen. Playing the "conservate position" vs the "liberal position" solves nothing. That's a game that politicians play to keep the electorate blind and ignorant. Until we mature beyond the label game, we are screwed…not by big oil, or enviromentalists, but by the political machine itself.
Greg in NY
Comment by Greg in NY | May 9, 2006
Until someone is willing to say straight out that the ever rising price of oil/gasoline is a planned strategy to encourage people to cluster in cities, in apartments, close to jobs and to also empoverish them, no one will 'understand' the higher oil costs. Oil is the one commodity that raises the cost of food, clothing energy for homes and cars and housing. The fact that all levels of government tax it also adds to its ability to cluster wealth in the hands of the few while impoverishing the many.
Comment by Jack | July 20, 2006