Gas Profits

Murdoc has a post up that he claims shows where the real gouging is at the gas pump. His analysis shows $0.08 per gallon profit to the oil company, $0.01 per gallon profit to the gasoline station operator and $0.59 per gallon of taxes. His numbers come from this article at the New Media Journal via this post at Wizbang.

He goes on to ask "Why aren't we hearing this side of the story?"

Unfortunately, Murdoc has been snookered by a clever trick. The nutjobs at the New Media Journal waved their hands and decided to conveniently ignore the largest profit item in the oil business: exploration and extraction.

Here are the numbers Murdoc is working off of:

Notice how the profit he is discussing only includes the profit on refining and delivering gasoline to the customer. It completely ignores the profit associated with extracting crude oil from the ground and delivering it to refineries. The $1.71 of crude costs assumes $0 in profit. Because it is the cost of crude which is currently driving gasoline prices, of course one does not find excessive profits if one only focuses on the refining and delivery component of the equation.

Here's what the graph would look like if you included extraction profit. In these numbers I am assuming that the $1.71 for crude is based on $70 per barrel crude. Also that extraction costs are approximately $40 per barrel of crude — a number that both sounds about right and that I think I remember hearing on the radio. Considering recent historical per barrel prices, I sincerely doubt crude extraction costs any more than that. There's a lead time to developing oil fields and no one was assuming much above $50 per barrel prices a couple years ago. (What I mean by that is that no one would have green-lighted the development of an oil field where extraction would cost more than $40, so there are likely to be few, if any, fields where the costs are that high). So, bottom line, I am assuming $30 of profit for every barrel of oil, or approximately 43% of the cost of crude, resulting in $0.73 of profit for every gallon of gasoline.

So profits currently dwarf taxes. And, furthermore, taxes have not changed in years, so it is certainly not taxes that are driving the change in gasoline prices.

Update: I meant to address this comment by Murdoc, as well:

Big Oil puts out the money to make it all happen and reaps eight cents. Government does virtually nothing whatsoever and simply collects fifty-nine cents every time we pass 'Go'.

Government uses that money to build and maintain the transportation infrastructure. Hardly "nothing whatsoever".

Comments

[Murdoc]

Man, it must be "rip on Murdoc" day or something...LOL. (I did respond on my post, as well.)

You were completely right that I was totally missing your point. I totally was splitting the crude oil costs apart from the post-delivery costs. That was intentional and is exactly why I used a "split" pie chart on the left. I didn't originally mean to ignore those costs and profits, though, but I did.

I basically took the numbers from that New Media Journal piece on faith after a bit of basic checking seemed to make them sound 'about right', and I'll do the same with your numbers.

The total of 27.3% profit on a $3 gallon of gas certainly seems excessive at first glance, though I'd be curious to get similar "total profit" numbers on other stuff like milk, inkjet printer cartridges, and AA batteries for comparison.

I'd also be very curious to know the breakdown of the profit numbers for "oil companies". How much of their record profit is crude oil profit, how much is retail sales profit, how much is convenience store profit (which must be very substantial), and how much is profit from other various program and investments. This info is probably publicly available to those who are willing to dig at bit. (At one time I had supposed that if these numbers showed that oil profit wasn't as large of a chunk as most thought, we'd be hearing about it from the oil companies themselves. But then that might reveal just how badly we're being screwed when we buy a Coke or some chips when we fill up...)

Even compared to 27.3% profit, the 19.6% tax doesn't seem terribly out of line (though I might argue that it's also excessive).

How about if gas suddenly went back to $1.50, though? Virtually all of the price reduction would come from crude oil cost/profit reduction, so let's just say that the the oil companies' profit would be half current levels, around 13.5%. It would probably be lower, though I don't know by how much.

Taxes, however, would be 39.3% at $0.59 of $1.50. At least $3 gas makes the gas tax look acceptable. (In fact, I've argued before to actually RAISE the tax by fifty cents or so, 80% to fund "war for oil"-related programs and 20% to fund alternative energy programs.)

The price of crude oil is set on the open market, and the market currently says that $70 is right. There might be some collusion going on, and OPEC isn't helping much, but I don't think US gas consumption has really changed much, so $70 must not be too far off.

My intent isn't to slam taxes specifically, or to defend the oil companies. I've just long been unhappy with the fact that gas taxes are largely ignored in the gas price discussion, and being a supply-side free-market capitalist pig I don't necessarily think that oil companies are to evil simply for trying to make as much money as they can.

As for gas taxes paying for roads, etc, you're right. I don't actually have an issue with gas tax as a form of "user fee" for road use. I just don't want the taxes ignored while everyone vilifies the oil companies.

[Chuck]

Now we're posting comments on both our sites, so I think I posted to your site before I read this.

First, I do not disagree that 27.3% profit on a commodity seems high. The question becomes whether you believe it is good public policy to in some way regulate what is "reasonable profit" and what is "windfall profit". I certainly believe that is bad public policy (unless there is some sort of collusion going on, in which case we should crush them).

I doubt there is collusion going on in the crude market, beyond what OPEC is able to accomplish. Basically, I doubt there is illegal collusion by the public oil companies. Much more likely that you've got people speculating on and/or hedging against the future. There is concern in the market about continuing demand increases, violence in the Persian Gulf and potential OPEC tightening. Like any market, also, runups tend to overshoot the top as traders get excited about the runup but then cooler heads prevail over the subsequent weeks.

I'm all for raising gasoline taxes "some", although I haven't really thought much about the specific amount that would mean. In addition to the earmarks you indicate, I look at it that there are various externalities which gasoline consumers do not directly pay for. The tax covers road use, but should also cover a pollution tax ("we'll charge you a tax because otherwise you get to pollute for free") and a national security tax ("your gasoline demand contributes to the necessity for our costs of Middle East involvement, so you should pay a portion in gas tax").

Finally, like I said before, while the government does take a chunk in taxes, I think it is important to note that the taxes have not changed, so the taxes really haven't contributed to the change in prices. Considering prices aren't THAT high historically, if adjusted for inflation, it's the sudden change that is really the basis of all of the discussion. If gas was at $3.00, but had slowly risen slowly and regularly over the years, we probably wouldn't be talking about it.