Want Lower Gas Prices?

With the passing of the Memorial Day holiday and the beginning of June, the country is now officially in the summer driving season. Just like years previous, gas prices have surpassed the $3.00 a gallon mark at the outset of the summer. Predictably the media, as well as politicians from both parties, have begun to rail against price gouging on the part of "Big Oil." The successful oil companies are an easy target, especially when the public is uninformed as to how and why the price of gasoline fluctuates.

Higher prices at the pump today are a matter of simple economics. American refiners can bring 17 million barrels of gasoline to the market every day, but demand in the summer is around 22 million barrels per day. To make up the 5 million barrel difference, America imports gasoline from foreign refiners. Since the demand is greater than the supply, pump prices are controlled by the foreign governments that set the import prices. Put another way, if foreign supply is squeezed, then part of the 5 million barrel difference will be unavailable, thus increasing prices. When import prices increase, Big Oil simply raises prices to retain their profit margin (profits minus expenses).

And what is that profit margin? Data from the U.S. Energy Information Administration (EIA) indicates that when the average price of unleaded regular peaked at about $3 a gallon in the middle of 2006, major companies make a profit of about 10 cents a gallon. So when you buy 10 gallons of gas at the pump the oil company that is selling it to you makes one dollar. That seems more than reasonable when you consider that in order to bring the gasoline to market, the company (or someone else) must find oil in the ground, drill for it, extract it, transport it to a refinery, refine it into gasoline, and finally ship it to the gas station.

Now compare how much the government taxes you for every gallon. The gasoline federal tax alone is 18.4 cents per gallon, while state and local taxes vary from 8 cents in Alaska to nearly 50 cents per gallon in New York, California, Nevada and Hawaii. In Texas the state gas tax is 20 cents per gallon. So the federal and state governments take in between 2 and 7 times what the oil companies themselves take in. That money is pure profit to them because they did not have to do anything to bring it to market. So if Big Oil is price gouging, what is our government doing?
The U.S. government has investigated gasoline prices about 30 times over the last 20 years but oil companies were never found to have “fixed” prices. Most recently, in 2006, the Federal Trade Commission (FTC) completed an exhaustive study of alleged market manipulation to increase gasoline prices and could not find one instance of price gouging.

The fact is that today there is plenty of crude oil in the world's pipelines, but a scarcity of gasoline and America has not built a new refinery in 20 years. All the oil in the world is irrelevant if it cannot be converted into gasoline. Environmental regulations have made it simply unprofitable to refine oil into gasoline. If you do not want to pay so much at the pump then direct you anger where it belongs, at the hypocritical politicians and the environmentalists who refuse to allow America’s refining capacity to expand.

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~ The Conservative Guy