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As gas prices continue to soar, tempers are flaring and Americans are starting to ask a little testily what can be done to
stem the flow of cash to the local gas station. Mostly our ire is directed at “Big Oil” – those evil oil
companies with their record profits. And wouldn’t a “windfall profits” tax, as advocated by Obama and Hillary
show them?
First, a primer on the factors that make up gas prices.
The single biggest factor in the price you pay at the pump is far and away the cost of crude oil. The cost of crude oil as
a share of the retail price varies over time and among regions of the country, but on average, accounts for about 68% of the
price of a gallon of gasoline. At $3.80 per gallon, that means about $2.58 goes for the crude. About 8% goes for the cost
of refining which, in our $3.80/gallon, means around 30 cents.
Next, the oil companies operate, on average, on a 9%-12% profit margin, with 11% being the average. 11% of $3.80 means those
nasty, mean guys over at “Big Oil” are getting about 42 cents on each gallon of gas we buy. Now, if you think
11% is out of line, and those nasty, wicked, mean oil executives – whose inclination toward sheer evil is rivaled only
by “Big Tobacco” – are “gouging” you, think on this: the average profit margin for S&P 500 firms
is 13%, meaning the “markup” for the oil and gas industry is below average.
So who’s jacking us? No one. Petroleum is a global market. What that means is that everyone in every corner of the globe
is competing for that oil. China and India – together home to about two billion people – are in the midst of an
incredible industrial expansion requiring massive amounts of oil. It won’t be long before the automobile becomes increasingly
affordable in those societies, meaning even more demand for petroleum.
Now as every graduate of a Beginning Economics course knows, when demand increases and supply fails to keep up – what
happens? That’s right boys and girls – the price goes…up. If crude oil costs have increased fourfold in
the last couple of years and crude oil accounts for 68% of the price you pay at the pump, what would your cost per fillup
do over that period? If you said “rise,” congratulations, you’re smarter than three-fourths of the men and
women on the street and 95% of people hosting the network nightly news.
There are 42 gallons in a barrel of oil. A price of $108 per barrel means $2.58 a gallon just for the crude oil to begin the
process of getting the motion lotion to you.
Between 1986 and 2006, crude oil cost an average of $25.95
a barrel. It’s now hovering in the $130 range. Back in those good old days, the cost of crude oil accounted for around
60 cents per gallon of your price at the pump. Each step in the process of converting crude oil into your buggy’s fuel
adds cost. Refining changes crude oil from a useless thick goo into the gasoline that powers our lives. It also costs money.
So add that to the $2.58. Government gets in on the act, so add that to the mix. And finally, since the oil companies have
stockholders and employees, they insist on getting in on the action, too, so add that.
So, let’s review. We pay $3.80 for a gallon of gas. $2.58 goes for the raw material – the crude oil. Starting
with our $3.80 and subtracting $2.58 for crude oil leaves us with $1.22. Now, crude oil is useless to us if it isn’t
refined, so we refine it at a cost of about 30 cents a gallon. We subtract 30 cents from our $1.22 and that leaves us with
92 cents.
Next, along come those evil, wicked oil executive types adding 42 cents to the cost of your gallon of go-juice.
Now so far, we have paid for the location, extraction,
refining, marketing, and distribution of our gallon of gasoline – all productive ventures leading to the delivery of
that gallon of gas to the pump at our local Gas n’ Go, where we get the benefit of the efforts of all the people who
made it possible.
But here’s where it gets interesting. On a national average, Federal, State, and local government taxes are the largest
part of the retail price of a gallon of gasoline after the cost of crude oil – 13% on average. Add 50 cents to your
cost at the pump.
And what did our friends in Congress, the State House, or your local County Commission or City Hall do to get that gallon
of gas to you in a usable form? Nothing. Zip. Zilch. Nil. Nada. In fact, at the Federal level at least, our elected buttinskis
did all that they could to make it more difficult to find, extract, refine, and deliver those dead dinosaurs to you.
The U.S. remains the only oil-producing nation that has placed a substantial amount of its energy potential off-limits. Consider
this – our Congress has consistently voted against turning on our own American oil tap of 1 million barrels of oil a
day by opening a 2,000 acre portion of the 19 Million acre Alaskan National Wildlife Refuge (ANWR) – which represents
0.00001 of the total ANWR area for math-averse people. They also won't allow oil shale recovery in Colorado which could mean
800 billion barrels - three times the supply of Saudi Arabia, according to CNN.
We also can’t drill in the Gulf of Mexico, at least no closer than 120 miles from the Florida coast. There could be
between 3 billion-15 billion barrels of oil there, according to wide-ranging Associated Press estimates.
Our old friend, Fidel Castro, who isn’t bound by the nonsense spouted by enviro-leftists, inked a deal with the Chinese
in 2006 to drill in the Florida Strait. Cuba's state-run oil company, Cubapetroleo, partnered up with China's Sinopec to explore
for oil in its half of the strait – using Chinese-made drilling equipment to conduct the exploration.
Oil fields do not respect international boundaries, so Cuba and others will be pumping petroleum that could be ours. When
you consider the track record of Socialist states like Cuba and China when it comes to ecological issues, the whole "pristine
environment" argument goes out the window. And tell me please, how logical is it that there is now a presence of Chinese oil
rigs, there by agreement with Cuba, within view of the Florida coastline, but American companies are forbidden to tap into
that fuel source? On what planet does that make sense?
As reported on the Powerline blog,
“According to the Department of the Interior, 62 percent of all on-shore federal lands are off limits to oil and gas
developments, with restrictions applying to 92 percent of all federal lands. We have an outer continental shelf moratorium
on the Atlantic Ocean, an outer continental shelf moratorium on the Pacific Ocean, an outer continental shelf moratorium on
the eastern Gulf of Mexico, congressional bans on on-shore oil and gas activities in specific areas of the Rockies and Alaska,
and even a congressional ban on doing an analysis of the resource potential for oil and gas in the Atlantic, Pacific and eastern
Gulf of Mexico.
The Argonne National Laboratory did a report in 2004 that identified 40 specific federal policy areas that halt, limit, delay
or restrict natural gas projects. I urge you to review it. It is a long list.”
Our government also places severe limits on nuclear power, as well as oil refining.
There’s more. A behemoth oil reserve spans North Dakota, Montana and parts of Saskatchewan. Locals call it "The Bakken."
It’s a reserve that contains 10 times more barrels of oil than Alaska's North Slope. The U.S. Geological Survey has
reported that the Bakken Formation could hold more than 400 billion barrels of recoverable oil. Leigh Price, the scientist
who started the analysis of the formation but died before the report was published, pegged it as possibly holding 900 billion
barrels of oil.
Until recently, the technology wasn't available to make extraction of oil from shale – such as that of “The Bakken”
– economically feasible. But with rising oil costs and breakthrough techniques such as horizontal drilling, the Bakken
Formation, most of which lies within U.S. boundaries, could now be developed. According to the Energy and Capital website,
the Bakken's oil shales can be extracted relatively cheaply. Maybe as cheaply as $16 per barrel.
It remains to be seen what roadblocks our friends, mostly Democrats, in Washington, will erect to keep that oil in the ground.
And what’s their solution? Their same old answer to everything: more taxes. Taxes that will ultimately be paid by the
consumer – that’s you and me.
If these American sources were made available, there would be a lot more oil. Why aren't we discussing that? And how close
to energy independence would this nation be if all of these options were on the table? My guess is we’d be a lot closer
than we are at present.
My guess as to why the majority party of Congress would want to choke off oil, the life-blood of our economy? It has very
little to do with actually protecting the environment, but everything to do with generating certain economic results to facilitate
the desired outcome on a certain Tuesday this November.
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