May, 2006 browsing by month


The Price of Gas

Monday, May 8th, 2006

The price of gasoline is based on the price of a barrel of oil, or at least that’s what the oil companies tell us. Some simple calculations show that today’s high gas prices aren’t strictly based on the price of crude oil.

A 35 gallon barrel of oil produces 19.5 gallons of gas, the rest goes into other petroleum based products. Gasoline doesn’t carry the majority of the value of the oil, since diesel and heating oil cost about the same as gasoline. Therefore the raw materials cost for a gallon of gasoline is at most 3% of the cost of a barrel of oil.

Back in 1996 the price of a gallon of gas was about $1.20, and the price of a barrel of oil was about $20. Back then, $0.60 of the price of a gallon of gas was the raw material cost, the other $0.60 went to everything else (taxes, transportation, refining, marketing, etc.). Now it’s $2.90 a gallon of gas and $65 a barrel of oil. That works out to $1.95 for raw materials and $0.95 for everything else.

Even at the exaggerated rate of 3% a year, inflation would raise the price for everything else to $0.81. Over these ten years, due to improvements in such things as refining technology and distribution logistics, and the fact that inflation was nowhere near 3% a year, the “everything else” should stay steady or even decrease.

Therefore the oil companies are using the high cost of a barrel of oil as an hollow excuse. Crude oil is high, and that should make gasoline prices high. Yet these simple calculations, and the record profits of the oil companies show that they are gouging you and me.