Why are Gas Prices STILL so High?

Crude Oil is way down why are gas prices still up?

Gas prices are still very high compared to the cost of crude oil. As of today (depending on when you read this the Absolute Price may not matter, but the concepts will) crude oil has dropped to $80.51 per barrel with a USA Average of $3.556 per gallon retail at the pump. For Oil a barrel is 42 us gallons which yields a crude oil cost of $1.92 per gallon.

But here is a major catch. Most people think of companies like Exxon as the producers of the oil... and in some regard they are... but they do not produce near enough crude to match their demand for refined petroleum. This means they are not just producers but CONSUMERS... they must buy the difference at the market rate. I'll get to that a bit later...

For now consider the cost of Gas in the State of California

In addition to the higher cost of this cleaner fuel, there is a State sales tax of 2.25% on top of an 18.4 cent-per-gallon Federal excise tax and an 35.30 cent-per-gallon State excise tax.

The Federal and State Government are the big "winners" in the Profit made from Gas. They do not produce the product but ad an astronomical "cost" to the finished price in the forms of taxes and fees (Hello Regulations) which can add up to an astounding amount... nearing 1/3rd!

Note: This information is publicly available online at the Federal Governments US Energy Administration Website: http://www.eia.gov/energyexplained/index.cfm?page=gasoline_regional I am choosing not to "hardlink" to the page as Government Websites tend to change a lot over time and I do not want a broken link... this information is easily to find in any search engine..

The Government Role in the Price of Gasoline

  1. Taxes - Federal and state governments each place excise taxes on gasoline. There may also be some additional taxes, such as applicable state sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees. Add that to the state excise taxes. Federal Gasoline Tax is currently 18.4%
  2. Environmental Programs Add to Cost of Production, Storage, and Distribution. Some areas of the country are required to use special “reformulated” gasoline with additives to help reduce carbon monoxide, smog, and toxic air pollutants that result when gasoline is burned or when gasoline evaporates during fueling. Other environmental programs put restrictions on fuel transportation and storage. These programs tend to add to the cost of producing, storing, and distributing gasoline. About a third of the gasoline sold in the United States is reformulated. Each oil company prepares its own formulation to meet Federal emission standards.

At the current retail price of Gasoline at the time of this writing $3.556 x 18.4% = 65.4 cents per gallon PURE profit to the Federal Government alone.

Back to the Oil Company Costs - According to the same EIA

  • 74% - Cost of Crude to the refiners bottom line
  • 11% - Taxes
  • 10% - Refining
  • 5% - Marketing and Distribution

Even though many oil companies are reporting record profits, many people forget just how expensive it is for energy companies to engage in the oil business. The average net profit margin for the S&P Energy sector, according to figures from Thomson Baseline, is 9.7%. The average for the S&P 500 is 8.5%. So yes, energy companies are more profitable than many others...but not by an inordinate amount. - CNN Money

What about Other Industries Profits?

Most people would be surprised to learn that Oil Industry profits are only average compared to other industry.

Highest Net Profit Industry

Forbes Magazine July 2011
Forbes Magazine July 2011

The Rest of the Profit goes to...

Retail Gas Stations

They have to make their markup of course but everyone already knows this.

Transportation and Distribution

The Gasoline has got to get to the Station and this incurs a cost of course.

Speculators

Ah the most profitable industry in the USA the Financial Services drive the price up through their own speculation.

Summary what was the Point of this Article

The point was to help people to understand that the Big Bad Oil companies are not to blame for record high prices. There are many factors that play into the cost of Gasoline. Sure the Oil Companies make a profit and on the surface it may seem unbelievable that someone like Exxon Mobile can make $9 Billion in a single quarter. But when you take into account the massive volume of product sold and the net profit margins it's good, but it's not that great.

The Federal Deficit was about 1.5 Trillion (And for those who do not know what a deficit is... it's the amount of money spent above and beyond what is taken in.. for example if the US Budget was $4.5 Trillion and they only took in $3 Trillion there would be a Deficit of $1.5 Trillion which gets added to the National Debt.). So in perspective the USA Borrowed about 35 times more money last year than all of Exxon-Mobiles profits. And Exxon is the biggest oil company profit wise!

The Government is the BIG WINNER in the Oil Industry. They have ZERO INCENTIVE to do anything to lower the price of Gasoline because they collect so much tax from it. Citizens be damned, the people running the Country do not care about you and do not care that record high gas prices are killing the Economy (One of many things) because money spent on Energy can not be spent anywhere else... and the Government does not count Energy Costs in the core inflation index. That is messed up.

So as to not turn this into a ramble about inept Government or a Defense of Oil Industry Profits... I'll end this now. If you learn anything from this short article... it's to think of a problem as a whole and not be a BANDWAGONER who demonizes American Business because they turn a profit. Where would we be without the Oil Industry?

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Comments 2 comments

A M Lehrer profile image

A M Lehrer 5 years ago from Southern United States

This was a very informative hub. This is not my usual subject but you made it clear and easy to understand. It is wise to see how these industries work together. We should be more knowledgeable on such topics especially if we're going to complain about them! Thanks for the info!


Pamela99 profile image

Pamela99 5 years ago from United States

Very informative hub. I knew percentage wise the oil companies weren't making what people thought but I think most people don't have a clue about the other costs involved.

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