July 24, 2008

Why Is Gasoline So High?

Earlier this week, I wrote a blog for my company called "Who Is to Blame for Gas Prices?". I received a number of e-mails about it, so I thought I would share it with you.

With gas prices at the pump hitting $4 a gallon, and crude oil prices hitting $130+ (down from $145), where does your $4 per gallon go?

The quick response would be the big oil companies of course. That is the favorite target of everyone, but are they really reaping the rewards? No. According to an April 2008 study from the U.S. Energy Information Administration, the overwhelming cost of each gallon of gas you buy comes from crude oil.
The chart above illustrates exactly what the study reported. The lion's share of the costs are from crude oil with taxes, refining costs, and distribution and marketing making up the balance. Let's breakdown each individual piece.

Crude oil is just that. This is the oil straight from the ground. This is what those OPEC meetings and oil drillers are talking about. The largest oil companies (ExxonMobil, Chevron, etc.) have large oil exploration branches of their companies, and this is where the current profits are being produced.

Taxes account for around 11% (federal and state average) of every dollar you spend at the pump. California's 63.9 cents of tax is the nation's highest, Alaska's 26.4 cents the lowest. The way each state uses the money varies, but the federal government's portion is used to build and maintain highways and bridges.

Refining takes oil from its most basic form and alters it to produce everything from gasoline and diesel to heating oil. The actual dollar cost of that refining per gallon changes little based on what the price of oil is. The percentage will change based on the price per gallon, but the actual costs is relatively constant. The profit margins here are thin based on the study. FYI - it costs $0.05 less this year to refine that one gallon of gas than it did in 2004.

Distribution and marketing - Distribution costs cover the pipelines and trucks that do the actual transporting, while marketing is for the pretty little commercials all those oil companies have to tell you how great the product or company is.

What about your local gas station? Well, they have about 20 cents gross margin after paying all of the above, but that is gross. Take out credit card fees (every swipe gets a percentage), labor costs, and rent, and they will probably just break even. So where do they make money? Repair shops, mini-marts (beer, soda, chips), lottery (5-7% commission in Georgia), etc. They have a better chance of making money there versus anything with gasoline.

In the end, it is the countries and companies that are taking the oil from the ground with the profits. The other parts of the system are just cogs in the machine.

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