I’m asked this question a lot. And I know a lot of drivers ask themselves this question when they pull up to the pump.
The answer is based on the economics of supply and demand and how products are manufactured and sold – along with what the government takes in taxes. Let’s take a look, based on the U.S. Energy Information Administration’s breakdown of the estimated average price of a gallon of gas in December 2011, which was $3.27.
Raw materials = $2.62
The cost of the raw materials used to make a product has a major impact on the final product price. The raw material for gasoline is crude oil. The price of crude oil is set by global markets, where buyers and sellers constantly react to supply and demand factors. Oil is just one of many commodities traded every day in the global market. Others are the corn that affects the price of food and the cotton that affects the price of clothing.
Crude oil is by far the largest factor in the price of a gallon of gasoline – accounting for 80 percent of the $3.27 average retail price per gallon in December, according to the EIA.
To put that in another way – about $2.62 of the average gallon of gas in this example is set before a refiner even touches the raw material.
Where I find many people get confused is that they assume oil companies are producing all the oil that goes into their own refineries – and therefore can control gas prices by controlling the supply chain. That’s not the case.
U.S. crude oil production in 2010 was 5.5 million barrels per day. But U.S. refineries processed 15.2 million barrels of oil per day – almost three times more oil than was produced in the U.S. That means U.S. refiners, like ExxonMobil, have to purchase millions of barrels of crude oil – at market prices – to produce gasoline and other products for American consumers. For example, in 2010, ExxonMobil spent $198 billion purchasing oil around the world for its refining operations.
Manufacturing the product
Like any product, there are costs to manufacture it – so the manufacturer tries to recover those costs, plus make a profit, when it goes to sell the product.
The refining portion of a gallon of gasoline has, on average, accounted for about 11 percent of the price in 2011, according to the EIA data through December. That means a little less than 40 cents per gallon would be due to refiners’ costs – wages, equipment, financing and others – plus their profits.
As the EIA figures show, however, refining doesn’t always produce a profit. In December, the data indicate that the U.S. market price for gasoline coming out of refineries was on average about 7 cents per gallon (-2 percent) below the refiners’ cost of crude oil alone, and before accounting for their costs of upgrading the crude into gasoline. In other words, refineries faced a market where domestic gasoline prices were very weak relative to global crude prices.
How does that happen? Refiners are “price takers” that operate on relatively low profit margins that are highly dependent on the market demand for petroleum products. That means at times, the value of a petroleum product coming out of the refinery isn’t enough to cover the costs of obtaining and refining the crude oil.
Distributing and marketing the product = $0.33
Products then have to get from the manufacturing site to the retail site. When gasoline leaves the refinery, it is shipped largely via pipelines to local terminals. There, distributors load their trucks and transport the gasoline to a service station. Naturally, each step in the distribution chain includes labor, capital equipment and other expenses that must be recovered by operators. Of course, these operators must also compete to sustain their profitability while also paying taxes.
Retailers then set the price at the pump, based on recovering these costs of getting gasoline to the service station and the costs of marketing it to consumers. They also have to generate enough money to pay their taxes and make a profit to keep their business running. And on top of that, they have to collect mandatory state and federal gasoline taxes from the consumer (which we’ll break down in the next section).
So who are the retailers setting the prices? When consumers pull into an Exxon or Mobil station, they assume it’s ExxonMobil. But we own only about 5 percent of the stations with our name on them. About 95 percent of the stations carrying the Exxon or Mobil brand are actually owned by network retailers or local business owners – not ExxonMobil.
Taxes = $0.39
So how much does the government make on a gallon of gas?
In this example, retailers collected state and federal gasoline taxes of 39 cents per gallon on average. Total gas taxes per gallon range by state – from lows of less than 30 cents per gallon to highs of more than 60 cents per gallon in places like New York and California.
How does this compare to what a company like ExxonMobil makes on a gallon of gasoline? As we saw earlier, sometimes a company or an operation may lose money. Other times, it may make money. A competitive market just provides an opportunity, not a guaranteed profit. In the first two quarters of 2011, for example, ExxonMobil made 7 cents and 8 cents a gallon , respectively, on the gasoline, diesel and other petroleum products it refined and sold in the United States.
What actions could help lower gas prices?
Again, let’s go back to the economics of supply and demand that govern the crude oil market, since it’s the largest determinant of the price at the pump.
There are many global factors that affect the crude oil market. But adding more supplies of crude oil to the global marketplace can help put downward pressure on the price of a barrel of oil. The United States has abundant supplies of oil, from the deep-water regions of the Gulf of Mexico to the tight oil resources throughout North Dakota and Montana. Combined with Canada’s oil resources (one of the largest in the world), North America has enormous potential to add new reliable supplies to the market. And, the U.S. has one of the largest and most advanced refinery systems in the world.
But first, the oil needs to get to market. There, we’ve often seen economics trumped by politics – even as the U.S. economy remains weak. The recent moratorium in the Gulf of Mexico, as well as the decision to deny the permit for the Keystone XL pipeline from Canada to U.S. refineries, are just two examples of U.S. political decisions that serve to keep supplies out of the market.
The economics behind a gallon of gas are pretty straightforward. It’s the policies behind access to U.S. energy resources that are less certain – but critical to our energy future.
Richard Dunn wrote:
What’s scary is the lack of efficient use of those taxes collected at the pump.
Byron Alexander wrote:
Worse yet is that those taxes are likely not enough to offset the cost of the Iraq misadventure or the huge standing military that we keep in place to secure the oil. The true cost of oil is in the huge defense budget and our killed and wounded brave soldiers.
James McKelvey wrote:
We did not go to war in Iraq for oil so get off that talking point. The problem is we have significatn raw materials in the ground in our won country and a Dem congress and Dem President won’t let us get it. Why are se spending billions in bailout funds for bankrupt unproven green energy companies and ignoring the vast amounts of natural gas we own and could be using as a fuel source.
The problem is government.
James West wrote:
There are so many facts that are NOT revealed in this article as to make it sound like a political campaign oratory!
For the first and major fact not addressed, is the fact that gasoline is only one of the products extracted from raw petroleum. If gasoline is the only product sold from all the products extracted, then this article makes sense. However, we all know that is not the case.
If the market price for ALL of the extracted products is factored in, then it reveals quite a different picture as to the TRUE cost of the gasoline as it arrives at the local pump.
I challenge you to write an accurate article which reveals the TRUE cost of gasoline at the pump. As this article would suggest, there is no contributing profit from the sale of ALL the other extracted products, that gasoline bears the entire cost of the raw material.
Come on guys, we aren’t morons here! We deserve the whole TRUTH, not the same old rhetoric we hear from every other source…!!
James Wheeler wrote:
Hello, James West,
When computing the cost of any product, whether gasoline, shoes, or doughnuts, the numbers used always relate to that product and that product only.
To factor in costs related to other products would totally distort the picture and would be meaningless.
I view Mr. Cohen’s comments to be straightforward and informative.
Have a great day!
Bill Kilgore wrote:
“Come on guys…” yourself. Get a copy of their financial statement and do a little homework. In the 3rd quarter report they indicate Income Before Tax of 18.68 bil. After Tax Net Income is 10.33 bil. That’s 43% taxes on the corporation on top of of what they show here. Relocate to Canada, like Tim Horton did, and their corporate taxes would be 15%. Add in having to pay the union boys sweeping the floor $60 an hour in wages and benefits and threats from the likes of Hillary Clinton(!) to take ALL their profit to subsidize wind mills and moonshine.
Is there any question why American companies move off-shore? Why our TRUE un-employment is upwards of 20%.
“Come on guys…” indeed!
Bill Kilgore
Tuck Smith wrote:
Come on, yourself. All those taxes you’re complaining about –went to OTHER countries. Not to the US. From a 2010 Forbes article, “What the financial statement says is that ExxonMobil, in 2009, after a handful of deferrals, recorded a total U.S. income tax benefit (i.e., a refund) of $46 million. Next to this, it shows total non-U.S. income taxes of $15.165 billion.”
So, before your next rant about all those “evul” US taxes those “poor” corporations have to pay, how about doing your OWN homework?
Sheesh.
James McKelvey wrote:
Hey Tuc, if we could drill in our own country perhaps the business tax revenue would show an appropriate growth rate. It matches the controlled/regulated market they are in.
p s wrote:
60 bucks for sweeping floor sounds high, untill you look at ceo pay thats 77519. bucks per hour
Carrol Kessens wrote:
Bill, there is a difference in accounting for income tax and actually paying for income tax. If you did a little homework, then you would realize that they did not pay 43% income tax. Look at the increase in Deferred tax. In the deferred tax account, you will find items that are in the accounting for income tax that they are not actually paying in income tax. This account for Exxon has more than doubled in the last 4 years.
Richard Ray wrote:
I think what Mr. West is saying is that it’s improper to include the full cost of the crude oil that goes into refining gasoline. This article does not make it clear, nor does the USEIA article cited here. Given, say 1 barrel of crude oil, some of it is refined to gasoline, some to diesel, some ends up as asphalt. To say that 100% of the cost of crude oil should be factored into the cost of gasoline is of course incorrect. However, I don’t think that this was done here either. This is a classic example of over-simplification
Doug Boone wrote:
So James West, if you think refining is such a great business, why don’t you start your own refinery? Then you too, can stack up the big bucks. Oh wait, sorry I forgot the tree huggers will not let anyone start a new refinery these days just like they keep us from using nuclear power by covering investors in paperwork. Well alt least you could go to west Texas and buy an old existing refinery, but wait, some of those same folks will not even let you start up an existing refinery, again a reason our jobs are moving off shore. Soon we will all be like Joe Biden and be forced to take a 200 tonne government subsidize train to work each day.
C. Gates wrote:
“…two examples of U.S. political decisions that serve to keep supplies out of the market….”
Artificial supply constraints, imposed by government, are the biggest factor in per gallon ‘pain’ to consumers. The number one (by far) prospect for significant US oil continues to be denied to proper development. +8 BilBarrels – at the least, is available at a known location – at a site set aside in the 1970’s specifically for oil exploration and production – ANWR on the north coast of the most remote location on earth- located close to a pipeline that is starving for throughput… Yet ANWR is denied to our country for fear of disturbing the sensibilities of kids who have no idea how remote, un-special and ideal a location it is for oil production. The locals want it. Alaska needs it. Caribou thrive near man-made oil facilities. Pad area for +7Bil BBLs would be about the size of Dulles AIrport in an area bigger than the State of Iowa…Absolutely nothing is unique or special in this arctic wasteland that is worthy of forcing us to buy oil from the Middle East rather than putting Americans to work providing oil from our own land. … read more »
…Prudhoe, a few miles to the east shipped +2milbbls/day = 20% of the US required oil per day 12 years ago. It’s now down to ~600,000bbl/d and decreasing at an increasing rate. ANWR needs to be approved for development to keep the TAPS pipeline operating. If we lose that 800 mile piece of nationally-critical infrastructure our options for self production in time of oil games from the middle east are greatly reduced. To those who have any concern for the environment – stand back when the country really needs to open ANWR – it will be ripped open in months rather than properly developed under the 13,241 required permits and monitoring tasks of normal modern oil-field development. Get Govt. away from artificially constraining supply! Reduce our need for foreign oil. Allow this oil field to be developed!
Jody Bilyeu wrote:
The problem that people looking at this diagram and reading this blog post are likely to immediately recognize, but perhaps are struggling to explain–namely that the diagram makes it look as if oil companies aren’t making any money off of gasoline–has nothing to do with inaccuracy or manipulation of the figures. I’m sure they’re quite accurate.
The problem is that for companies, payroll is counted as an expense, not as profit. In other words, the enormous salaries and bonuses of oil company executives are included in this diagram as a part of the cost of producing oil.
That depiction is, of course, dishonest, and I imagine intentionally so, in terms of how the public will register the information the diagram presents.
In fact, when it’s in a company’s interests to do so, as showing small profits in that diagram is in Exxon/Mobil’s political and PR interests, that company can decrease its profits showing on the books by increasing its payroll. In other words, everyone involved in running the company is making more money, while on the books the company is turning less profit. Make no mistake: Exorbitant executive salaries account for a substantial portion of what you’re paying for fuel. To… read more »
…put it a different way, they are profiting handsomely by increasing your hardship.
In business terms, the people who should be taking responsibility for this state of affairs, which is to say this institutionalized dishonesty and the fiduciary waste it’s meant to cover, are shareholders and boards of directors. Those groups are presently not shouldering that responsibility.
Given that in the instance of oil companies, inflated salaries and bonuses of executives are absorbing vast revenues that could be decreasing our fuel prices, or being used to develop sources of energy that don’t compromise our national security, the American public also has a responsibility to call for accountability from oil companies, in addition to accounting. We are not shouldering that responsibility, either.
I imagine if executive salaries and bonuses had their own stripe in the diagram, they would consume the lion’s share of what’s depicted here as “crude oil” costs, and they would exceed the size of the “Taxes” stripe by a good margin. The fact that the “Crude Oil” label is now used in that diagram to embrace the unimaginable amounts of intentionally hidden money going into the pockets of very wealthy people, even as other Americans are struggling to fill their gas tanks is a) insultingly disingenuous and b) an indication of a single lapse in common decency in the author, Mr. Cohen, which is merely one instance in an ongoing lapse in corporate responsibility and common decency in the company which sponsors him.
G E Whittenburg wrote:
I note this article brings up “supply AND demand,” but does not talk about demand? You can lower the price of gasoline just as easily by lowering the demand as raising the supply. Of course then, Exxon would make less money. Very one-side information told from a single point of view.
Al Cook wrote:
If crude oil is selling for $100 a barrel, and say there are 50 gallons in a barrel, this would make a gallon of crude cost $20. So $2.62 would be the total cost of a gallon of gasoline of raw materials for producing gasoline. Other products would be costed against their portion of the rest of the gallon of crude.
John Griffing wrote:
There are 42 US Liquid Gallons per barrel, so in this case assuming $100 a barrel, a gallon would cost about $2.38. In order to achieve the $2.62 figure, a reference price per barrel was likely approximately $110.
But we in the USA are very fortunate to pay so little for gasoline. Here is just one quick example why: In Italy, gasoline at the pump has a cost of 1.80 EURO per LITER.
2 conversion factors to consider:
Current exchange rate: 1 EURO = approx. $1.31
1 US Liquid Gallon = 3.785412 Liters
Let’s do the math:
1.80 Euro * $1.31 per Euro = $2.36 per LITER
$2.36 * 3.785412 Liters per US Liquid Gallon = $8.93 per Gallon
David P wrote:
The real way to drive down the price of a barrel of oil is to increase the supply of energy. One way to do that which was effective in the 1980’s is to increase the role of Nuclear power in the energy mix. Nuclear powered merchant ships would reduce diesel demand. Nuclear power plants reduce demand for natural gas. In the 1970’s and 80’s Nuclear power plants replaced the 20% of electricity being generated by diesel generators at the time. I remember 80 cents a gallon at the time.
David Rosas wrote:
We cannot blame the current administration for not exploiting domestic drilling and extraction…if the resources have been there, they didn’t, by miracle, just “show up” following his election. I for one, am ready to see our nation extract, purchase or even take every drop, vapor, sand of petroleum that we can so we can finally move on to newer technologies that are not petroleum-dependent. It can be done — it’s just ignored and set aside for profits (which is fine by me). I can’t wait to take a picture in Yellowstone National Park with vast oilfields in the foreground of the mountains.