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American Pi

I'm tired of this.

Tamara and I have driven across the country three times this year, and we have at least two more trips in front of us, and that's driving when fuel economy is most economical: on the highway. That's not to mention driving in town daily at lower MPG.

Given this expensive state of affairs, I wanted to learn more about why gas prices are as they are and where that money goes. Caveat: I'm no expert. I'm trying to piece it together from multiple sources... if you see an error, correct me where I'm wrong. But I'll give you what I can discern. Consider this learning out loud.

First, it's not easy to learn how the price of a gallon of gas breaks down.

I'm basing my breakdown on this report from Chicago Public Radio.

So to translate, about 50 percent of the price of a gallon is the cost of crude oil, 20 percent is refining and production, 10 percent is infrastructure and 20 percent is taxes.
20% goes to taxes. That's 63 at $3.14 per gallon. And what exactly does the government do to produce gas? It doesn't.

Yes, some of that money goes toward road maintenance. But think about it. If you fill up two to three times in a month, for both vehicles, as my family does, that's about $75 a month in taxes, or close to $1,000 a year. (I need to do a post in the future on the multiple places we're taxed... I recently wanted to install a home phone, since we're all on cell phones now, and learned that there's a flat $15 a month tax on a home phone, plus usage tax. My $50 a month home phone became a $70 a month purchase because of taxes. I cancelled the order.)

So now you know about taxes at the pump. The next time politicians bemoan oil company profits ask them about taxes. At least oil companies actually do something to put gas in the pump. Politicians just skim. That pump price shown above would be $2.51 if it weren't for the "because I can" money grab by politicians.

Imagine a world without 20% gas taxes... let's halve it to 10%, which is still more than sales tax alone. We're down to $2.83 per gallon.

I hear a lot about refining capacity. What's that all about? An oil refinery takes oil crude - what comes straight from the earth - and turns it into usable gasoline. We need those.

Refining capacity is how well and how much we crank out gasoline at refineries. The more we put out, the greater supply of gas there is. You've heard of supply and demand? The more supply, the lower the price? Well, we have a problem here.

This report, from the Department of Energy, shows that in 1982 there were 263 refineries. In 2002, there were 159. And today, only 150. I hear from right-wing media all the time how it's the environmentalists who aren't allowing more refineries to be built. Um, okay... that might be true to some degree. But isn't it easier to simply maintain what you already have permission to have - an existing refinery - than to get permission to built from scratch? We've dropped 113 refineries in 25 years. That's a reduction of 43%. Environmentalists didn't do that. Each of those was a business decision by an oil company.

Now, if what I produce is in high demand and getting more in demand all the time, and I can restrict the supply to make my production more valuable, why, that's just good business. Each refinery becomes more profitable. "More with less." Sound familiar?

During this decline in the number of refineries, technology helped them get more efficient. The 263 operating refineries in 1982 distilled 17,618,872 barrels of oil per day. The 159 operating refineries in 2002 distilled 17,177,371 barrels of oil per day. While that's close to the same output, it's a half million barrels fewer. And yet, demand has gone up. I'll bet they're laughing all the way to the bank. Less expense, more profit. Right-wing media appear to be dupes who haven't done their homework when they blame it only on environmentalists. (I haven't looked at why they closed, but I seriously doubt these facilities closed due to environmentalist pressures.)

So I can see that refineries are about 40% more efficient than they once were. If all of these were still operating, and if supply were that much more efficient, gas prices would be reduced. This guy says without source that "refiner's margins have gone from $.40 a gallon to $.80 over the last year." Let's make that assumption.

Imagine a world without refinery shut downs... subtracting 40 from gas prices, we're down to $2.43 per gallon, and the oil companies still profit 40 a gallon. Sounds fair to me.

Ethanol is a problem. Because laws demand an additive to make gas that burns cleaner, ethanol is the only readily available additive now that MTBE is out of the picture. And ethanol might be responsible for giving oil industry execs an excuse to scale back refinery expansions.

Oil industry executives no longer believe there will be the demand for gasoline over the next decade to warrant the billions of dollars in refinery expansions - as much as 10 percent increase in new refining capacity - they anticipated as recently as a year ago.
Nice. And then there's this, which says that ethanol gets a 51-cent per gallon government subsidy from you, the taxpayer. And ADM, the largest ethanol manufacturer, projects earnings to grow by 46% this year.

I don't even know how to subtract that out, but let's just say that ethanol is making our lives more expensive.

So what about crude oil prices?

We see that war in Iran or Iraq makes them spike and spike big.

Now I happen to believe that we did the right thing in going into Iraq. But the mismanagement of the war certainly made it last longer, and that keeps crude prices higher longer. Purposeful? Never ascribe to malice what can be explained by stupidity. Let's finish the fight and go home (link via Glenn Reynolds).

If crude is half the cost of gas at the pump, and if we can get prices back to even $35 a barrel, that's roughly a 75 reduction in gas prices.

All totalled, in my imaginary world, gas is then $1.68 at the pump. That's livable and easier to swallow.

Tags: high gas prices
by Brett Rogers, 7/16/2007 5:42:21 PM


Off topic, but how I feel: What would really be easier to live with and better for everyone is a renewable, cheap and clean alternative to oil in the first place. I happen to believe the technology exists for that to happen, but that's where the real greed comes into play. You can make it about taxes and politicians, but there's also an arguement for the American public playing right into their hands.

There's always alternatives to the high price of gas...public transit and driving less. I'm a hippie, I know, but as long as we keep demanding it, it's going to continue to get taxed.

Posted by Bella, 7/17/2007 12:55:28 PM

I agree that the technology exists to make a go at some alternative, but from there vehicles have to be fitted for the new alternative, distribution has to become universally available, and people have to accept it as worthwhile. That would take years, maybe decades. In the meantime, it's about taxes, politicians, oil companies, and ethanol.

And in the meantime, I'll keep riding my bike as much as I can and encouraging my kids to do the same.

Posted by Brett Rogers (, 7/17/2007 1:03:19 PM

I need to jump in here and take a shot at the effects of "oil speculation" on crude prices and how quickly crude price increases are reflected at the pump (funny when crude drops the price reduction is much slower). Analysts can say "we fear" and up goes the price. War, gremlins, global warming, you pick it, they can toss it out there and drive up the prices. That is an area ripe for corruption.

I'm not sold on ethanol yet. I like that it is a clean burning fuel but the cost of it I don't yet have a grip on. How much and what type of energy is needed to create it? What is the effect on the agricultural industry?

I think the oil lobby (hell lobbying in general) needs to be cut way back before we will ever see serious investment in alternative fuels. Too much money changing hands to keep us dependent on it. Anyone see Exxon-Mobil risking their billions?

Dude, $50 or $70 for home phone charges? Go digital phone over your broadband connection. $30-$40 max should take care of it and you can talk all you want.

Posted by Pale Rider, 7/17/2007 11:03:11 PM

I don't even know how to subtract that out, but let's just say that ethanol is making our lives more expensive.

Okay, I'm not being argumentative (for a change ;>), this is a sincere question. I just went to get gas, and unleaded with ethanol was cheaper. So I don't get this statement.

PR, my gut feeling would be that the ag industry would love ethanol...drives up demand for Iowa Gold, but I've also heard that it takes up more energy to produce than it actually saves, so that may not be the case. There are also those who fear industry using up all the feed for fuel rather than feeding third world countries. As far as I can tell, nobody is doing a very good job of feeding third world countries's an interesting arguement, because crops would seem far more renewable than oil. Granted, you can overfarm land, but you can also rotate crops and corn isn't the only thing that will make the stuff.

Interesting stuff, guys :-)

Posted by Anonymous, 7/19/2007 2:26:00 PM


Not all the ag industry loves ethanol. True, it has driven demand for corn, which has put some money in the farmers pockets. But there are some other things to consider. The increase in price of corn has led feed producers to look for alternatives or substitutes. Well, now the people that buy the by products from the slaughtered cows or other animals that eat the new blended feeds have to adjust their processes because the nature of the incoming stuff has changed, and so it goes on through the economy. Not everyone's life has gotten better.

Concerning environmentalists not closing oil refining plants: I wouldn't be too sure that they haven't caused it. They may not be able to directly close an existing plant. But they can get legislation passed that makes it impossible to continue operating profitably. Which is the same as forcing a closing. Example: In the past I worked in the printing industry. Being on the health and safety committee I had to put together data from our printing operations on their potential to emit VOC (Volatile Organic Compounds). Yes, this was a tax based on a company's POTENTIAL to emit. The worksheet that the government used was a joke. The calculations were based on the presses running at full capacity for the entire hous of operations the plant was open, i.e. 3 shifts x 5 days. There isn't a printing press in the world that maintains that kind of operation. Sometime you've got to do mainenance, change over, etc.

Just some thoughts for the mill.

Posted by Lyle (N/A), 7/19/2007 6:46:17 PM

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