Friday, April 29, 2011

What's up with these gas prices?

Today, Ohioans were shocked to see gas spike to a record $4.15/gallon across most of the state.  The previous day's average was around $3.80.  Apparently we're not done yet.  Some stations are now in $4.25/gallon territory.  My husband has an 80 mile round-trip commute to work each day, so this is not a good development for our family. has a great tool to generate charts showing the historical gas prices both nation wide and by state.  Here are some charts showing the prices for Ohio over the last month, 6 months, 12 months, 24 months, and 72 months.  It's quite shocking to see it in black and white (and blue). 


Sitting at a Smithville High School baseball game today I overheard a parent blaming "Big Oil." He said that Exxon made huge profits last year - "millions and billions and trillions of dollars."  I'm sure Exxon would like to know where those "trillions" disappeared to!  While it's true that Exxon has reported billions in profits this week,  that's not the whole story.  According to ExxonMobil:
"ExxonMobil’s earnings are from operations in more than 100 countries around the world. The part of the business that refines and sells gasoline and diesel in the United States represents less than 3 percent – or 3 cents on the dollar – of our total earnings. For every gallon of gasoline, diesel or finished products we manufactured and sold in the United States in the last three months of 2010, we earned a little more than 2 cents per gallon. That’s not a typo. Two cents."
It's clear from the chart below that ExxonMobil is a bit player among the Big Players in this game.  When we talk about BIG OIL, we need to be talking about the nationalized oil companies like the Saudis, the Iranians, and our friend from Venezuela, Hugo Chavez.  Note that Exxonmobil, Chevron, and BP are all investor owned companies. 

ExxonMobil also wants us to know that they think they are "paying their fair share":
"ExxonMobil is one of the largest taxpayers in the United StatesLast year, our total taxes and duties to the U.S. government topped $9.8 billion, which includes an income tax expense of $1.6 billion. Over the past five years, we incurred a total U.S. tax expense of almost $59 billion, which is $18 billion more than we earned in the United States during the same period. Critics often try to ignore these facts by saying the oil and gas industry receives “subsidies.” But what they really mean is that they want to increase our taxes by taking away long-standing deductions for our industry while leaving these same deductions in place for other sectors of the economy."

I admit I'm no tax expert and neither am I a business expert, but this doesn't seem like a very good deal for ExxonMobil.  Under these conditions, why would any company want to do business with our country?  

So who exactly is getting rich off these skyrocketing gas prices?  Here's where the money goes:

In Ohio, we pay 18.4 cents/gallon in federal taxes and 28 cents/gallon in state excise taxes.  The good news, I suppose, is that he percentage of taxes per gallon falls as the price of gas per gallon climbs, right?  The majority of the cost of a gallon of gas falls into the "crude oil" category.  CNN Money describes it this way:
"This is the most expensive part of a gallon of gas. Of every gallon of gas $2.07 from every gallon of gas goes to producers of crude like Chevron (CVX, Fortune 500), BP (BP), and smaller outfits like Anadarko (APC, Fortune 500) and Marathon (MRO, Fortune 500), or national oil companies controlled by countries like Saudi Arabia, Mexico or Venezuela.
Crude currently trades around $110 a barrel, but breaking down the money in that barrel of oil is tough. Exploration and production costs, royalty payments - all a big part of $110 a barrel oil - vary widely country by country and project by project."
In other words, there's a lot more that goes into a barrel of oil than oil.  Just like the drug companies, oil companies have significant costs for development, production costs and, increasingly,  significant costs related to environmental regulations. 

The same CNN Money article also dispels the myth that "speculators" are to blame:
"While often blamed for pushing up prices, traders don't necessarily benefit from the high price of crude or gasoline; they profit from how much the price changes. Traders can get rich - as long as they bet correctly on whether prices will rise or fall.
For example, an investment bank that makes a bet that the price of oil will rise makes money when oil prices go from $95 to $100 a barrel - or $100 to $95 if it bet the price will fall - not on the difference between production cost and trading price.
'If you wanna keep your job, you gotta be more right than wrong,' said John Kilduff, an energy analyst at the trading firm MF Global in New York, explaining how traders make their money."
So what can be done to bring the costs down?  The Heritage Foundation has some suggestions:

 1. Increase Drilling
First and foremost, drill. Yes, the petroleum market is a world market. No, “drill, baby, drill” is not a panacea. And it is true that the U.S. is not likely to eliminate all oil imports with even an aggressive drilling program. But more petroleum on the world market helps to hold prices in check.

2. Shelve “Low-Carbon Fuel Standards”
The concept of “low-carbon fuel standards” is driving opposition to a petroleum pipeline from Canada. With its oil sands, Canada has more proven petroleum reserves than any country other than Saudi Arabia. A consistent ally and long-time friendly neighbor, Canada is exactly the sort of supplier the U.S. should want to fill the gap in the petroleum it cannot produce on its own. But some policymakers want to put these vast reserves off limits to American consumers....

...The Keystone XL pipeline would bring the U.S. over a million barrels of petroleum each day—more than it imports from either Saudi Arabia or Venezuela (the U.S.’s two largest suppliers after Canada and Mexico). Along with the pipeline and petroleum would come increased energy security and a boost to the U.S. economy.

3. Stop EPA Abuse of the Clean Air Act
The EPA’s abuse of the Clean Air Act will drive up refining costs and, therefore, gasoline prices. Though the use of the act to regulate carbon dioxide (CO2) would create large problems in many places, the EPA recently started the process to regulate CO2 emissions from refineries. This regulation goes beyond the gasoline reformulation mandates that balkanize gasoline markets with higher-cost boutique fuels.

The new CO2 regulation puts an additional burden on refiners’ costs and subsequently raises prices of gasoline, diesel fuel, and home heating oil. Further, it will increase the amount of refined product the U.S. imports and reduce employment in an industry with wages that are more than 40 percent higher than the national average.

The Heritage Foundation concludes:
"When petroleum and gasoline prices shot up during the energy crisis of the 1970s, the experts and pundits predicted imminent resource exhaustion, skyrocketing prices, and energy poverty. Instead, markets responded by searching for, discovering, and producing enough oil to provide over two decades of low prices. For instance, in the U.S. alone, the number of drilling rigs more than tripled between September 1973 (before the Yom Kippur War and the subsequent Arab oil embargo) and December 1981.
Now, imminent oil depletion and the futility of drilling are again supposedly on the horizon. However, increased drilling activity follows increased petroleum prices. Blunting this natural market response will drive up energy prices and reduce national income. This, plus the Keystone XL pipeline and scaling back EPA expansion of the Clean Air Act, would do much to stabilize gas prices and energy costs in general."
Unfortunately, the Obama administration has given no indication that it will take any of these steps.  In fact, they are going in the complete opposite direction.  $4.15/gallon may just be the tip of the iceberg.  If this keeps up,  a transatlantic voyage on the Titanic would be cheaper than a trip to Cleveland in my PT Cruiser. 

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