Gas prices are much higher than they were 2 years ago. Everyone wants to point the finger, or at least give the finger to their favorite scapegoat. But what is with the current gas prices.
Let’s start with who is getting the money. We have to start with crude oil, then refineries, then distributors and gas stations. Refineries buy crude oil. Out of a barrel of crude oil, the refineries get 42 gallons of oil products. But you can’t just buy a barrel of crude and make 42 gallons of gas. The crude oil separates into several products. Based on the grade of crude oil, you get different amounts of gasoline but the average is 19.36 gallons of gasoline per barrel of crude oil. That is 43.3% of the products made from a barrel. Oil prices are currently $109 per barrel, as of July 1st when this was written. That calculates out to $2.44 per gallon going to the crude oil sellers. That is their gross profit. The oil companies have costs to pull the oil out of the ground, and get it to the selling point. Basically for every $10 in crude oil price increase, the oil companies get an extra 22.3 cents per gallon of gas you buy.
Next is the refineries. The refineries take the crude oil and refine it into the different products that can be made. For simplicity sake, we will only consider their profit on gasoline. Other products have their own supply and demand pricing pressures, and may be more or less profitable than gasoline depending on the time of the year and the state of the world economy. The current wholesale price for gasoline averages 3.69 per gallon. So between the refiners and wholesalers, there is a profit of $1.25 per gallon. This again is gross, before the cost of building and operating refineries and transporting the fuel to the destination.
Next comes the government. The federal government gets 18.4 cents per gallon gas tax and the Illinois government gets 39.2 cents per gallon gas tax. In addition, the Illinois government charges a 6.25 percent sales tax for another 31 cents per gallon. So taxes count for more than 88 cents per gallon of gas.
Now we come to the gas stations. The gas stations are left with 41 cents per gallon gross profit. But of course, they still have to pay their operating costs.
In addition, there are additives that must be added to make summer fuel, additives that are required by certain states or metropolitan areas to reduce smog, and engine cleaning additives that many fuel companies add. All of these items cut into someone’s profit.
Now, lets talk about some of the supply and demand pressures on gasoline and other oil based products. Of course the war in Ukraine has reduced the amount of crude freely available. But let’s acknowledge that Russian oil is still being sold, albeit at a lower price than other markets. So worldwide, we are not really seeing much pressure on oil prices from that source.
The world economy gearing back up and trying to make up for past supply chain issues is putting pressure on oil prices. With higher demand worldwide, and supply stable or slightly falling, prices must go up. But this is only part of the story.
The elephant in the room is the green movement, and some of our own leader’s actions to support that movement. Some of the first actions of our newly elected President were to limit where oil drilling could occur in the US, and to cut pipelines to bring oil in to the refineries. In addition, plans for banning internal combustion vehicles and other oil product uses within the next 15 years with a goal of phasing out the oil industry within 30 years, made new investments much less cost effective, starting a slow reduction of refining capability and therefore a reduction in domestic supply. Anyone with a modicum of economic understanding and the most basic understanding of the policy changes that our new President was proposing knew that this would result in higher gasoline and other fuel costs for the foreseeable future. That is why many people were posting gas prices before the inauguration knowing that gas prices would rise afterward.
So gas prices are high, and will remain so for a long time, without policy reversals. Were those policies smart? Under the current circumstances, probably not. We do not have the supply chains ready to keep up with the current demand for electric vehicles. Policies designed to artificially increase that demand are not smart till we are ready to fill that increased demand. My personal opinion is that battery powered electric vehicles are not going to be the solution for the climate crisis we face, and that we have yet to bring the true solution to market. The constant battle for the rare earth metals currently needed to hold all the current needed for electric vehicles is going to be the limiting factor in the green movement. In fact, razing the earth in search of those needed metals really can’t be considered green, even if it is to fill demand brought on by the so called green movement.
In the meantime, we really must reconsider our policies, open up drilling and maintain or increase refinery capability. Then start working on trying to reduce demand without reducing economic output, and without resorting to policy produced price pressure to induce change. Then when we know we are stable and ready to push toward alternative fuels with a supply chain that exceeds demand, we can carefully put some of these policies back in place.