Why Is Gasoline So Expensive? Price of Crude Oil Is Biggest Cost

ABC News ^ | April 15, 2006

[snowsislander]

April 15, 2006 — Just as Exxon Mobil broke the news this week that it was giving its CEO a nearly $400 million retirement package, the government announced the average price of a gallon of gas could rise this summer by more than 10 percent.

In just two months, the price of gasoline at the pump has jumped 40 cents a gallon (go to the end of this story for ways to shop for the lowest gas prices in your area).

It has lot of people telling tales of worry and hardship, and asking: Where is all the money going?

Nina and Gordon Erquiza own a small pipe-cleaning company in Los Angeles. Gasoline for their two trucks now costs as much as $800 a month.

"It is a choice that we make every day of our lives — whether or not to buy gas and go to work or to have health insurance," Nina Erquiza said. "It's an every day thought and an every day issue for us."

Gas Price Breakdown

Though the Erquizas live where gasoline taxes are among the highest in the country, their problem begins at the beginning, with the sharply higher price of crude oil. In a gallon of unleaded, crude accounts for $1.45 of today's average price of $2.68 at the pump.

Next is the cost of refining that oil — 55 cents of the gallon's price, a big jump in costs.

"They're normally about $5 to $10 a barrel," said Tom Kloza, an analyst. "Now, it's closer to $20 to $30. And that's because a lot of money is flowing in on the fear we won't have enough refining capacity this summer."

Next is transporting gas to the pump — just 5 cents a gallon.

And then, there's taxes — 18 cents for the federal government and 27 cents for state governments.

"Taxes used to represent as much as 40 to 50 percent of the price you paid at the pump," Kloza said. "Nowadays, it's a much lower figure than that because they haven't changed in 12 years."

What about profits? Big oil companies like Exxon-Mobil make money at every step of the process because they take the oil out of the ground, refine it and sell it. Exxon-Mobil's profit is estimated at a hefty 29 percent.

And the price of gas may continue to go up.

Even without unforeseen events such as another bad hurricane season, Kloza said, "We'll probably peak on gasoline very close to $3 national, with some states above that."

[snowsislander]

I am surprised to see that refining is now averaging 55 cents per gallon. If that is true, then that's historically a very high figure for refining.

I think we should build more refineries, but between the regulatory nightmare and the fact that I suspect that the current refiners very much like getting 55 cents per gallon at the current demand, there's really no economic incentive for anyone to build any more. The market will bear 55 cents with no apparent great decrease in demand, so charge 55 cents.

AAA's figures for average fuel prices over last 12 months

National Unleaded Average

Regular

Mid

Premium

Diesel

Current Avg.		$2.761	$2.932	$3.038	$2.782
Yesterday Avg.		$2.741	$2.910	$3.016	$2.764
Month Ago Avg.		$2.393	$2.541	$2.633	$2.629
Year Ago Avg.		$2.251	$2.389	$2.477	$2.370

*Prices are in US dollars per gallon

Source: AAA

[mewzilla]

"Taxes used to represent as much as 40 to 50 percent of the price you paid at the pump," Kloza said. "Nowadays, it's a much lower figure than that because they haven't changed in 12 years."

Is this true?

I thought that some locales use a percentage of the price to calculate taxes, so that while the percentage might not have gone up, the amount paid in taxes has.

[mtbopfuyn]

They saw Americans would pay any price after Katrina.

[raybbr]

Most taxes are fixed. Here is a table of taxes.

[Global2010]

Who cares about gas we need some warm Sunshine up here in the Artic North West.


Brrrrr...tired of being cold ping.

[TXBSAFH]

Bingo.

[mewzilla]

Thanks! According to that chart, some of the taxes have gone up, not to mention other fees and add-ons.

[raybbr]

Yes, they have gone up. Some states, like the tax-you-to-death state of CT, are planning a series of increases, too.

[johna61]

Most of the $2.50+ price is taxes-the US charges about 80-90% tax on gasoline

[mewzilla]

NYS's is a hoot. What a racket.

[Eric in the Ozarks]

If the producers are maxed out, what would another couple refineries do for us ?

[HankReardon]

Has there been an increase in American refining capacity? If not, since demand is steadily rising, why wouldn't the price of the product be higher?

If the CEO would not have gotten his huge retirement bonus how would this have increased refining capablities?

[harpu]

This is a great link to find 'least expensive' gas.

www.gasbuddy.com

[ClaireSolt]

The main factor is OPEC which is a price-fixing cartel of mainly state-owned petroleum companies. Recently, Chavez upped his demand to 60% for oil leases in Venezuela. Economies that rely mainly on one biz to support their governments + banana republic. The insecurity from chances of take over increases the risk, so the profit margins go up to compensate.

[snowsislander]

I thought that some locales use a percentage of the price to calculate taxes, so that while the percentage might not have gone up, the amount paid in taxes has.

Looking at this link, it appears that most locales apparently charge both a flat per gallon tax and also collect some tax at a (low) percentage rate. That flat portion would represent a smaller percentage of the price if gasoline goes up and a larger percentage if gasoline goes down.

So your observation that the absolute amount collected does indeed go up in most locales since they have some tax that does float with the price, and the relative amount also tends to go down since a portion of the tax is based on a flat tax per gallon.

As a concrete example, let's say that state A is charging a flat 25 cents per gallon, and also levies a 6% sales tax on gasoline sales. Then if the pump price before sales tax is $2.00, and the final price with sales tax is $2.12, taxes are 37 cents per gallon (12 cents for sales tax, 25 for the per gallon gas gax.) Then tax represents 17.45% of the price.

Now let's say that gas goes to a pump price of $3.00 per gallon before taxes. Now the final price is $3.18; the tax portion would 18 cents for sales tax, and still 25 for the per gallon tax. That makes for 43 cents in taxes, which is indeed more than the 37 cents when gas is selling for $2.00, but the percentage has now droppoed to 13.5%.

[gotribe]

"It is a choice that we make every day of our lives — whether or not to buy gas and go to work or to have health insurance,"

Someone needs to place a "newsroom logic" tag on the headline. I'm tired of seeing simple-minded reporters couch everything in guns or butter, and not questioning the idiocy of griping comments like this. Fact is, this small business will find a way to buy gas AND healthcare, but the reporter will NEVER go back in four months to see how.

[harpu]

Here's a breakdown of the cost of gasoline...

Gasoline; 'the breakdown of its cost'

[snowsislander]

Thanks. I had the seen the California numbers broken out before, but I hadn't seen this page. I found their description of how they calculate "refinery costs" interesting:

Refinery Cost and Profits includes all non-crude oil costs associated with refining and terminal operation, crude oil processing, oxygenate additives, product shipment and storage, oil spill fees, depreciation, purchases of gasoline to cover refinery shortages, brand advertising and profits. The component is calculated as the difference between the Oil Price Information Service (OPIS) average rack price of gasoline and crude oil cost.

[Logophile]

The author assumes that the price of gasoline depends (or should depend) on the cost of producing it. That is not so: the price is determined by supply and demand.

[raybbr]

If the CEO would not have gotten his huge retirement bonus how would this have increased refining capablities?

Actually, the question is: If these corporations are basically doing nothing but riding the tide of high crude prices thereby generating high profits, what justification is there to reward CEO's who have basically done nothing to generate those profits?

How do they justify rewarding these people for doing nothing? In fact, they should be penalized for not getting refining capacity up higher to sell more product.