[I Was Naked]
When I Wrote ThisGas Pricing- A Primer Or Why Gas Emails Don’t Work
2007-04-22
Every year another one of these emails comes around with the idea of lowering gas prices if we boycott two stations, or don’t buy gas at all on a Monday.Obviously, the American people who perpetuate these emails don’t understand how the industry works.
I used to work for a company that was responsible for delivery of oil, gas etc to the stations so here is a primer on how the industry works.
Gasoline is a refined product of crude oil, same as propane, kerosene, and home heating oil. The United States is the world's third largest producer of crude oil. The biggest production region is around the Gulf of Mexico, and the largest producing state is Texas.
The Gulf Coast region is home to two important producing areas: the Permian Basin, located in west-central Texas and eastern New Mexico, and the federal offshore portion of the Gulf. Other big oil-producing states include Alaska, Louisiana, California, Oklahoma, and Arizona.
Even with the United States producing so much oil, it is still heavily dependent on foreign sources. That dependence crippled the country during the oil embargo of 1973 and 1974. To offset that from happening again the federal government formed the Strategic Petroleum Reserve (SPR). While most domestic oil is sent directly to refineries and then to the consumer market, some of it is held back and sent to the SPR.
The Strategic Petroleum Reserve exists, first and foremost, as an emergency response tool the President can use should the United States be confronted with an economically-threatening disruption in oil supplies. This has happened twice after two test sales, one in 1985 and the other during the 1990/91 Desert Shield/Storm when Saddam forces breached Kuwait and oil prices shot up globally.
The US released on 5 billion gallons to show the world what it was capable of doing. But releasing crude oil from the reserve isn’t then disbursed to your latest Quiki Mart for your consumption.
The government takes bids for companies that submit a proposal to buy X amount of barrels by bid. According to Jim Watkins during the Desert Storm release, "We clearly must remain sensitive to the market by making available the crude oil the industry is saying it really needs and not allowing bargain hunters to take advantage of the taxpayers," and accept only those offers that were above 97.5 percent of benchmark prices of comparable crude oils.
That’s right people, the only ones going to take advantage of the American Public is your government, and not anyone else, so don’t you forget it.
Crude oil whether sour or sweet still has to be processed, and shipped for your consumption. This example doesn’t show “Zone Pricing.”
Zone pricing is a practice under which refiners sell gasoline to retailers at wholesale prices that differ across geographic areas. Generally, these geographic areas vary in the level of competition and traffic counts. Refiners charge more in areas where demand is high and/or competition is low. This practice is viewed by some as price gouging and by others as a natural outcome of competitive markets.
This is also why gas boycotts don’t work, as the products is just resold if inventory is too high. Gas stations order for the week, so a one day boycott accomplishes nothing or boycotting two specific gas stations such as Exxon or Mobil.
Price increases generally occur when the world crude-oil market tightens and lowers inventories. We will discuss who controls the crude-oil market later. Also, growing demand can sometimes outpace refinery capacity. In the spring, refineries perform maintenance, which can place a pinch on the gasoline market. By the end of May, refineries are usually back to full capacity.
When you pump $20 dollars into your tank, that money is broken up into little pieces that get distributed among several entities. Gas is just like any other consumer product: There's a supply chain and several groups who are responsible for setting the price of the product. The media can sometimes lead you to believe that the price of gas is based solely on the price of crude oil, but there are actually many factors that determine what you pay at the pump. No matter how expensive gas becomes, all of these entities have to get their slice of the pie.
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Crude oil - The biggest portion of the cost of gas -- as of February 2006, that's about 59 percent -- goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC)
The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices averaged around $37 per barrel (1 barrel = 42 gallons or 159.6 L) in 2004 (Source: U.S. DOE). After Hurricane Katrina, some prices were almost double that. In July 2006, crude-oil prices averaged around $72 per barrel (1 barrel = 45 gallons or 159.6 L).
Sometimes, gas prices go up even though there is plenty of crude oil on the market. It depends on what kind of oil it is. Oil can be classified as heavy or light, and as sweet or sour (no one actually tastes the oil, that's just what they call it). Light, sweet crude is easier and cheaper to refine, but supplies have been running low. There's plenty of heavy, sour crude available in the world, but refineries, particularly those in the U.S., have to undergo costly retooling to handle it.
Refining costs - The refining of crude oil makes up about 10 percent of the price of gasoline.
Distribution and marketing - Crude oil is transported to refineries, and gasoline is shipped from the refineries to distribution points and then to gas stations. The price of transportation is passed along to the consumer. In the business the term used is “A Buck to the Truck” to make it worthwhile for independent haulers to transport the fuel.
Marketing the brand of the oil company is also added into the cost of the gasoline you buy. Together, these two factors account for about 11 percent of the price of gasoline.
Taxes - Taxes, including federal and local, account for about 20 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 20 cents per gallon. There may also be some additional state sales taxes, as well as local and city taxes. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, gas prices in England have risen as high as $6 per gallon, with 78 percent of that going to taxes.
Station markup - While it isn't represented in the diagram above, of course some of the actual money you spend at the pump does go to the service station. Service stations add on a few cents per gallon. There's no set standard for how much gas stations add on to the price. Some may add just a couple of cents, while others may add as much as a dime or more. However, some states have markup laws prohibiting stations from charging less than a certain percentage over invoice from the wholesaler. These laws are designed to protect small, individually-owned gas stations from being driven out of business by large chains who can afford to slash prices at select s.
PRICE COMPARISON FOR PRIOR YEARS 2004 -2005
Now I know this is a lot to absorb, and I’m not addressing the entire global market, just our domestic usage. But the only way to truly affect anything is to find another source of utilizing fossil fuels, or we find another way to stop the consumption. Carpooling in the late 80’s and 90’s was made “mandatory” but without a real essential way of enforcing it, it didn’t quite catch on. Hybrid cars offer some potential but South Park addressed that well enough. If you want to affect gas pricing you would need to get everyone to stop buying gas and oil products for months at a time. Until alternative choices are available, or we think outside the box and not used flawed logic, we are dependent on this commodity.
Though if we go with the other alternative; self sufficient, build a wall around the country, everyone work from home, ship the immigrants out, bring our troops home to defend our borders, live in a bubble, we are just going to have to suck it up and realize we need to be smarter, reform the government, and recognize that other countries do it better than we do with less taxes.
But that is another post for another day. I’m off to go buy gas. By the way? Gas prices normally increase on Tuesday’s.
surrogate (2007-04-26)
"...recognize that other countries do it better than we do with less taxes."
Where? I'm not being argumentative, but everyone I talk to in other countries say that taxes on gasoline are usually much higher and the price they pay is often at least 50% more than we pay. In Western Europe and Canada and South America the prices averaged about five bucks a gallon last time I checked.
Just checked Canadian prices before I hit this and they average about $4.25 (U.S. dollars) right now. Am I missing the point though? Maybe I am.
Great post.
piper (2007-04-22)
I love smart women - you sound like a PHD - a very well-rounded lady
The FoXCaP (2007-04-22)
Wow, I never knew half of that! Thanks for educating me.
Aims (2007-04-22)
Very informative! Thanks for the post...
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