Who Controls Gas Prices?

Gas prices are all over the news right now, and I'm sure that the amount of your budget dedicated to fuel has increased dramatically over the past year or you have made significant changes to the way you use fuel. Without taking a political stand in this blog, I would like to shed some light on the fuel price situation, because a lot of unsubstantiated information and claims are coming across the media, and you deserve to know the truth!

The gas price that you pay includes all of the following expenses:

• Crude Oil (72%)
• Marketing and Refining costs (18%) - Includes Port of Entry to Refinery to Local Gas Station
• State and Federal Taxes (12%)

With crude oil now topping $100 per barrel, and no end in sight, the proportional cost of crude oil will continue to increase. Now, you might be outraged to know that it only costs the Arabs $2.00 to get one barrel of crude oil out of the ground. That is not a misprint, IT ONLY COSTS TWO DOLLARS TO PULL ONE BARREL OF OIL OUT OF THE GROUND!

In case you don't know, one barrel of oil is 55 gallons, so at $110 per barrel, the cost of crude oil is $2 per gallon. For those who think that the US oil companies are taking advantage, get over it! It's not true. They keep about 9% of sales as profits, which seems like a lot, until you start to compare with other industries. Also, much of their profit is reinvested in exploration and R&D activities. You may also be surprised to know that the oil companies give more money to the government in taxes than they keep as profits.

Why are we in this mess, anyway? What do we do about this? Who can fix this?

Well, worldwide consumption has increased, and continues to increase. You can blame China and India for this. Global oil demand is about 87 million barrels per day. At $100 per barrel, about $9 billion worth of crude is sold worldwide daily for an annual figure that staggers the mind at about $3.175 trillion!

We all know that OPEC in the Middle East controls the worldwide supply of oil, because they pull more of it out of the ground than anyone else. Good ol' Hugo Chavez in Venezuela makes a bunch of the stuff, and we have some here, but we can't drill for it. I'm sure it will surprise you to know that the Middle East only supplies 14% of the crude oil consumed in the USA. In fact, 55% of the crude oil we use comes from within our own borders. 12% of our oil comes from South America, and 15% of our oil comes from Africa. Africa could be the answer to a very interesting trivia question! Who knew we bought more oil from them than from the Middle East?

The falling US Dollar is another factor affecting oil prices, because oil prices are always set in Greenbacks. Some have called for the Euro to become the standard, although I don't think the argument has much traction. Regardless of the currency used, the effect is the same. A falling dollar increases our cost of imports. This is a basic Macro-Economic principle.

Crude oil prices are set based on Supply and Demand. OPEC has the capacity to produce a lot more oil, but they have no economic incentive to do so. Even as prices rise, our demand has not diminished greatly, yet. If OPEC made more oil, they would lower the price and their own profits, because a lower price would not increase demand to a point that would increase their overall profits. We need to find a way to increase the supply of oil, without counting on them to do it.

We have enough oil in the USA to serve our nation's needs for the next 100 years or more. Why don't we increase drilling here? Short Answer: The Environmentalists won't let us. Even if we opened Anwar (Alaska), allowed drilling off the coasts of Florida and California, and increased drilling in South Dakota and other oil-rich areas, it would probably take ten years for us to be producing enough oil each day to really make a dent in the world market.

We are going to have to find a way to decrease our demand, if we want to see any lowering of prices. Keep in mind that crude oil doesn't just affect the price of gasoline. Crude oil also affects the cost of heating your home. The high price of gasoline affects the price of every product you consume and most services that you use. Trucks need fuel to operate, and these increased costs are added to the price of the products you buy. Airlines use a lot of fuel, and they are already losing billions of dollars due to the rising cost of fuel. Airlines are instituting new fees to offset these costs, because they can't charge more for the tickets; we simply won't pay higher fares.

The best recommendation at this point is to limit your driving, if possible. Join a carpool. Use public transportation (buses and trains). Ride a bike. Consider buying a vehicle with better fuel economy, but be careful about hybrids. The higher price of a hybrid can take from one year to sixty years (no fooling!) to recover through gas savings, even at $4.00 per gallon.

As we are about to enter the general election cycle for President, it may become harder for me to avoid political issues, but I will do my best to discuss some of the topics, so that you can make an informed choice. I won't tell you how to vote or for whom to vote, unless you ask for my opinion.

See you next week.