Marchand Chronicles: High Gas PricesGetting "S-crude"
The Marchand Chronicles
August 8, 2005
The gas pump couldn't have shocked me any more unless it actually hit me in the face with the nozzle.
My day job depends on a lot of (unreimbursed) travel, so I dread when the gasoline price spikes, as it did to the tune of a quarter per gallon this morning.
But what I dislike even more are the ridiculous ideas people come up with whenever the laws of supply and demand don't work in their favor.
People: the rise in gas prices is not a conspiracy. It's not a hoax by Big Oil to shake you down for cash. There are reasonable explanations for every penny that goes into the price.
Nearly half of the pump price is comprised of the cost of crude oil. Crude recently spiked at over $60 per barrel. There are 42 gallons in a barrel, so of the $2.559/gallon cost in my neighborhood, about a buck-fifty of it was needed just to purchase the crude oil.
Crude oil prices are market-based. While it's possible to game the market, for the most part, market prices reflect the economic reality of supply and demand. When demand outpaces supply, as it is right now, the price goes up, as it has.
This has caused many people to blame the Organization of Petroleum Exporting Countries (OPEC), especially the Middle East nations that make up the majority of their members, for the high market value of crude. This is only partially true; only one-fifth of American gas comes from Middle Eastern crude oil shipments, but OPEC dominates the world market and therefore has the largest say in the day-to-day rise and fall of the price.
The next process in the chain is refinery, followed by transport and finally sales. In each case, just as in the price of crude, the people responsible are limited by markets. In fact, what you pay at the pump is often sold at less than true cost because of "fuel duels" between competing stations. No, the secondary culprit for gas prices, after the price of crude, is taxes.
That's right: Uncle Sam and his fifty-one nephews (one of them's adopted) slap a massive surcharge on gasoline. The national average is 44¢/gallon.*** As the price of crude continues to rise, that tax represents less of the price of gas as a percentage, but even at $2.559/gallon, the tax rate on gas is over 17%.
There's a federal gas tax of 18.4¢/gal. There's state sales taxes. There's state excise taxes. There's state taxes addressed for environmental hazards. There's local and municipal taxes in many areas. Oil companies and gas stations are limited by the markets for how much they can charge; drilling, extracting, transporting, refining, more transporting, storage and sales all cost money. But the government takes its money — our money — without effort. They don't even pay anyone to collect the tax. So if you're upset about the high price of gas, consider petitioning your local or state government.
Here in Indiana, though, taxes aren't the problem. Combined federal and state taxes total 44.1¢/gal, just barely over the national average. But the average nationwide price for a gallon of unleaded is $2.369. Since the price of crude, transportation, and sales are more or less equivalent nationwide, the problem is in the refining. Here, once again, the "invisible foot" of government has punted this up.
As noted before, the economic law of supply and demand is incontrovertible. But thanks to government regulations, U.S. gasoline is not uniform nationwide. Depending on where and when you pump, you are putting one of over 40 different formulations of gasoline in your vehicle, mostly based on environmental guidelines. This splinters the total supply and raises the prices. Worse, areas with rare blends that suffer problems in the refinery or transport process will see the cost skyrocket dramatically. For example, in August 2003, the price of gas in Phoenix jumped to as high as $3.79/gallon after a pipeline rupture choked off the supply.
The gas that's $2.559 here is the same environmentally-friendlier, ethanol-based formula used in the Chicago metro area. Its rarity is the reason why it's nearly twenty cents higher per gallon.
Customers fed up with the high price of gas have clamored for the government to "do something." This stems from the belief that they're being gouged by the private sector. Nothing could be further from the truth: the market price can't be changed, but taxes and regulations can. While price fixing has happened (several arrests were made of owners who jacked up prices following the September 11 attacks), for the most part, the government is powerless. Crude oil prices are set by the market; more refineries can't be built because of Not-In-My-Backyard disagreements; rare gas blends can't be eliminated because of environmental concerns; and exploratory avenues for domestic production, like offshore derricks or opening the Alaska National Wildlife Refuge (ANWR) for drilling, are hot-button political controversies. In fact, the recent energy bill had the ANWR provisions stripped to ensure Congressional passage.
In order to get lower prices, a tradeoff will have to be made in lower tax rates or environmental protections. Until then, we're stuck. Get used to it.
*** Forty-four cents per gallon is an average by state. But since the most populous states (California, New York) tend to have higher state tax rates and the least populous states (Wyoming, Alaska) have some of the lowest rates, the average per pump is actually higher. Back