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

ABC News ^ | April 15, 2006

[snowsislander]

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?

I think that's correct (although I believe that we are also now bringing in refined products, so external refining capacity also comes into play.) And since we now have such a high regulatory compliance cost for new refineries, the strongest economic incentive is for companies to simply raise their refining charges.

The upfront costs to building a new refinery to bring new supply into the market are a strong financial disincentive. If you are an established refinery, why would you spend all that money to bring in new capacity that will just push prices down for all of your product?

[backhoe]

Allow me to drop out of Lurk and Link Mode for a brief bit of commentary- we all need to get serious about our dependency on foreign sources of energy, and use our own resources.

Our consumer-based economy is driven by and dependent on readily-available, reliable energy-- choke that off, and we'll all be back to using one rotary dial phone in the dining room, watching one TV, and driving one car per family-- probably a Hudson Hornet or Rambler...

We need to

1) end the nonsensical ban on offshore drilling off California and Florida--read & weep:
Castro Plans to Drill 45 Miles from US Shores, But We Can't

2) build a lot of next-generation nuclear power plants, not just for electricity, but for any process requiring heat, power, or steam.

3) end Jimmy Carter's idiotic ban on recycling nuclear waste, and reprocess the stuff rather than fighting over where to bury it. Europe has done it for decades.-- what to do with spent nuclear fuel? Answer here: http://www.freerepublic.com/focus/f-news/1468321/posts?page=50#50 hattip:  Mike (former Navy Nuclear Engineer)

4) use the 300-500 years worth of coal we have on our own land, using the new clean-coal technology.
-Clean Coal Centre--

5) and finally, there's nothing wrong with conservation- but you can't conserve your way out of a shortage. Nor is there anything wrong with "alternative" energy sources- except they don't supply the vast ( not to mention readily-available ) amounts of power we need at a price competitive to more conventional sources.

We do need to get serious about this before we get strangled by a bunch of petty thieves and dictators who don't like us much.

My tongue-in-cheek collection of energy-related links:

Sticker Shock-$3 a gallon gas? Click the picture:

And kindly note, and note well-- the first reply to this post ( when gas was less than $1.50 a gallon ) was derisive... so, who's laughing now?

Allow me to drop out of Lurk and Link Mode for a brief bit of commentary- we all need to get serious about our dependency on foreign sources of energy, and use our own resources.

Our consumer-based economy is driven by and dependent on readily-available, reliable energy-- choke that off, and we'll all be back to using one rotary dial phone in the dining room, watching one TV, and driving one car per family-- probably a Hudson Hornet or Rambler...

We need to

1) end the nonsensical ban on offshore drilling off California and Florida--read & weep:
Castro Plans to Drill 45 Miles from US Shores, But We Can't

2) build a lot of next-generation nuclear power plants, not just for electricity, but for any process requiring heat, power, or steam.

3) end Jimmy Carter's idiotic ban on recycling nuclear waste, and reprocess the stuff rather than fighting over where to bury it. Europe has done it for decades.-- what to do with spent nuclear fuel? Answer here: http://www.freerepublic.com/focus/f-news/1468321/posts?page=50#50 hattip:  Mike (former Navy Nuclear Engineer)

4) use the 300-500 years worth of coal we have on our own land, using the new clean-coal technology.
-Clean Coal Centre--

5) and finally, there's nothing wrong with conservation- but you can't conserve your way out of a shortage. Nor is there anything wrong with "alternative" energy sources- except they don't supply the vast ( not to mention readily-available ) amounts of power we need at a price competitive to more conventional sources.

We do need to get serious about this before we get strangled by a bunch of petty thieves and dictators who don't like us much.

My tongue-in-cheek collection of energy-related links:

Sticker Shock-$3 a gallon gas? Click the picture:

And kindly note, and note well-- the first reply to this post ( when gas was less than $1.50 a gallon ) was derisive... so, who's laughing now?

[RandallFlagg]

I'm gonna post this to every thread on this subject. It may get repetative, but it needs to be said:

We have the technology and capability to use surf-powered generators to seperate hydrogen from water, store the hydrogen and use it to fuel our vehicles. It would run just like the propane-powered cars do. We can do this RIGHT NOW!

EVERY single enemy of America would implode immediately if we did this. WHY AREN'T WE AT LEAST TRYING?!?!

[HankReardon]

If the refineries are running at full capcacity how would an increase in crude oil supply cause an increase in the finished product?

[OregonRancher]

You're right. Kuwait: 2nd largest field in the world, Burgar, last year produced 2.1 mb/d, now producing 1.7 mb/d

Mexico: Cantarell field, 4th largest in the world, is producing 2.1 mb/d and is expected to only produce 1.0 mb/d by 2008.

Saudi has just announced that their rate of production will be declining by 8% starting later this year.

Forget all the bs about refineries, OPEC, etc. It comes down to the fact that demand is greater than supply and it will only get worse.

[canuck_conservative]

The price is so high because the market is afraid.

That is, certain groups are going around now, irresponsibly talking about nuclear war and trying to drum up support for an attack on Iran; the market (correctly) fears that this could lead to WWIII.

[BunnySlippers]

I spent $3.25 for Super here in Los Angeles yesterday.

[Logophile]

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.

Penalized by whom?

[snowsislander]

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.

Yes, the idea that producer costs determine prices is a common pitfall.

If producer costs solely determined the price of the sweet breakfast cereals, then I believe that they would be nowhere the price that they are. I think the same is true for diamonds; I don't think that the retail price for diamonds is anywhere near the cost of producing them.

Another example is gold. Gold is selling for about $600 per ounce, but I believe that it can be generally produced for much less per ounce (though of course there are marginal mines that can only operate profitably at higher prices.)

I think that some of the Canadian, South African, and Japanese sites can be operated for a fraction of the current price. For instance, Goldcorp puts on their homepage http://www.goldcorp.com/: Goldcorp’s annualized gold production in 2006 is forecast to be 2 million ounces at a cash cost of US$150 per ounce, and the Company remains unhedged.

[OldSmaj]

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.

What...do they do house calls for this pipe-cleaning?

I wonder how much they charge?

I've a beautiful Meerschaum that needs a good cleaning, but if these folks are having to pay that much for gas for their trucks, then maybe I could arrange to have it mailed to them for cleaning? I could go back to my briars for awhile, while awaiting the return of the Meerschaum.

Might save on some charges, huh?

There is a real need for this service, since so many people are buying those little pipe cleaner thingies to make little animals and such with, and I know that drives up the price of them. They were never intended as craft items.

I just wish people would understand the economics of the situation.

In any event, I suppose a good pipe-cleaning is worth the money, even if the price is driven up by high fuel costs.

But I won't stop smoking my pipes, just because the cost of cleaning them is resulting in more fuel useage.

Maybe there's a hybid pipe out there?

[raybbr]

Penalized by whom?

The corporation and the stockholders. Yet, they continue to rake in huge bonuses for doing nothing.

[antivenom]

http://www.mobil.com/USA-English/Files/US%20Gasoline%20Map%20100102.pdf

Interesting map of the US and the areas that require REFINING special blends...compare the prices in those areas against areas that don't have to play the "Clean Air Act" games.

[quantim]

and also levies a 6% sales tax on gasoline sales.

Note that on a state sales tax such as this they are actually taxing taxes, which escalates as the price goes up.  It's no secret gubmit likes high gas prices, it keeps them in business.

[Wristpin]

I can't understand why the Repubs haven't burn the Dems at the stake for blocking new domestic drilling efforts?

[Logophile]

The corporation and the stockholders. Yet, they continue to rake in huge bonuses for doing nothing.

Whew! For a moment there, I thought you might be saying "There oughta be a law . . . "

I agree with you that the stockholders need to be vigilant when it comes to executive compensation packages.

However, "doing nothing" may well have been the best policy for the company's bottom line. A new refinery may cost as much as $6 billion to build, with no guarantee of a sufficient return on that investment. If the company can make higher profits without building more refineries, it should do so.

[OregonRancher]

It's a drop in the bucket. Look, all the big fields are gone, the elephants. Sure we can drill more offshore and in restricted areas, but the amount of crude actually produced will be a very tiny percentage of what we use daily. Which is 20.5 mb/day.
From all the present data, if we had to rely on ANWR for all our oil, it would be gone in less than 2-3 months.
Look at what Katrina did. Not one single destroyed platform is going to be replaced. Why? cost vs recovered
gas or oil.
Factoid: Crude oil fields are non-producers when only
50% has been recovered. It becomes an energy sink to recover any more than that. Has nothing to do with money.

[raybbr]

Whew! For a moment there, I thought you might be saying "There oughta be a law . . . "

Hey, that's not a bad idea. I'm glad you thought of it.

[Triggerhippie]

Don't forget that the Chinese started buying oil in crazy amounts recently, as their economy is picking up.

It's not just diminished supply. There is also an increased demand.

[Ditter]

Do you really need super? I have never pumped super into any vehicle I have ever owned. My Cheve Tahoe runs like a bat on regular.

[IronJack]

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.

20/20 insight! Everyone wants to blame the lack of refinery capacity on "The Government" or "The Envirowacks." But the fact is, every business likes running its existing facilities at peak volume, with a little pent-up demand stashed away for good measure. That's exactly what's happening with the oil companies.

It doesn't make any sense to have 20 refineries operating at 75 percent -- and possibly unable to get crude -- when you can have 10 refineries operating at 100 percent and never have to worry about keeping them supplied.

This whole gas pricing structure is a complete fabrication, from wellhead to pump. There is nothing of the natural marketplace in it.