Eyes of the Fleet

Eyes of the Fleet

Thursday, March 01, 2012

Energy: The Price of Gas at the Pump

From our friends at the Energy Information Administration, the components of the price you pay for gasoline at the pump, first, the definitions:
Crude Oil - the monthly average of the composite refiner acquisition cost, which is the average price of crude oil purchased by refiners.

Refining Costs and Profits - the difference between the monthly average of the spot price of gasoline or diesel fuel (used as a proxy for the value of gasoline or diesel fuel as it exits the refinery) and the average price of crude oil purchased by refiners (the crude oil component).

Distribution and Marketing Costs and Profits - the difference between the average retail price of gasoline or diesel fuel as computed from EIA's weekly survey and the sum of the other 3 components.

Taxes - a monthly national average of federal and state taxes applied to gasoline or diesel fuel.

Then the graphic:

Now, you want relief at the pump? First, reduce the 12% tax burden, which does not include, by the way, the tax burden to the producers, refiners, marketers, truckers, pipelines, etc. on their "profits" in getting the gas or diesel to the pump. No, it's the 12% most noticeable to the consumer because it's at the pump. That's a $.35 per gallon reduction off the top if it were eliminated.

And, if you were to really reduce the corporate income tax paid by all the entities involved in getting the gas to the pump (about 35%), you could see a further drop in gas prices.

And, if you could increase the amount of crude available, the price would drop - so, you could increase drilling, add a pipeline to Canada, etc. then the crude oil component would drop in price.

Or, you could curse the oil companies and demand hearings into their "obscene" profits or argue that the price is still too low and that a higher price at the pump would force Americans to conserve, switch to alternatives and become like Europe. High speed trains to nowhere for everyone!

Finally, there are graphs that show the price of gas adjusted for inflation. See here. I note that the price information is not adjusted for tax increases on the gas. That would be an interesting chart.
Definitions from the EIA:
Real price: A price that has been adjusted to remove the effect of changes in the purchasing power of the dollar. Real prices, which are expressed in constant dollars, usually reflect buying power relative to a base year.

Nominal price: The price paid for a product or service at the time of the transaction. Nominal prices are those that have not been adjusted to remove the effect of changes in the purchasing power of the dollar; they reflect buying power in the year in which the transaction occurred.

Info on the EIA chart :
Real Petroleum Prices are computed by dividing the nominal price in a given month by the ratio of the Consumer Price Index (CPI) in that month to the CPI in some "base" period. The Real Petroleum Prices spreadsheet and charts are updated every month so that the current month is the base period in the monthly price series. Consequently, all real prices are expressed in "current" dollars and any current month price may be compared directly with any past or projected real prices.
What is shown, as I understand it, is that for years the price of gasoline at the pump was less than that that would have been expected due to inflation. In recent months, the price has caught up with inflation. For example, the nominal price of gas in the 1980 period was $1.20 per gallon. The inflation adjusted "real price" was $3.40 in today's dollars. The current "real price" is $3.60 and the actual ("nominal") prices is about the same. In short, the price of gas at the pump today is almost the same as the effective per gallon price was in the 1980's. Further, for all that period between 1980 something and 2009, the effective price at the pump of gasoline was below the rate of inflation - gasoline costs were a decreasing part of your budget.

Until 2009.

Hmm. What could have happened in 2009?

 Feel free to correct me in the comments if my understanding is incorrect.


  1. Just to show how lucky those in the US are the price of gas in UK and Europe is averaging $8.40 per US gallon. I suggest your taxes need to be higher for that rainy day........

  2. Anonymous2:03 PM

    It's worth noting that the completion of Keystone XL will probably raise crude oil prices in much of the US. Brent crude (the European benchmark price) and West Texas Intermediate (the US benchmark) have diverged lately, with WTI being the lower, due to the difficulty of exporting from the midwest and central Canada. The lower portion of Keystone XL will connect Cushing with the Gulf of Mexico to allow export of that oil, which will mean that WTI prices will rise to match level of Brent since producers would be able to sell to all the same customers bidding on Brent. Also, note that this isn't the portion of Keystone that the feds control, as it's the lower bit that doesn't cross borders.

    Also, unless you want to burn your cheaper gas without any decent roads, you should probably leave the gas taxes where they are, if not higher. Congress has to keep putting outside tax money into the highways trust as it is.

  3. Really? And I suppose producing more oil and gas raises prices, too? The more oil available, the lower the price according to most economic theories.

    As far as the tax goes, if the complaint is that the price of gas at the pump is stifling the economy, the quickest way to reduce the price is to cut the taxes. Raising the taxes will only reduce driving, slow the economy and lower the revenue below that that would have been raised by cutting the taxes.

  4. mandb: I can see how the additional gas taxes have really helped the European economies as a saved emergency fund.

  5. I agree with Eagle1's points about taxation and would note the over the road diesel is taxed more heavily while that mode affects the cost of goods shipped.

    I would add that the distribution system needs to be looked at more closely. For years the number of oil refinieries have been adversely affected by govt regs and NIMBY views. While at the same time it is the big oil companies which directly affect the amoung to tank storage and oil pipelines in CONUS. Restrict the suypply (and distribution), increase the cost at the pump I believe I learned in ECON 101?

  6. Gary Stringer5:17 AM

    I find it interesting to look at that image on how much is spent on which areas in each gallon of petrol. I'm from the UK and here around 60 pence in each pound on petrol is tax, very envious.

  7. Gary: Your taxes are too high.

  8. The gas pump graphic seems haywire...the cost to refine diesel should be a fraction of the cost to refine gas...was told long ago diesel is a processed natural product, gasoline is a manufactured product. Why the large disparity in distribution?

    1. You are right diesel is a distallate while gasoline is more refined product. It takes less resouces to make diesel, why then does it cost more? The graphic does not support that assumption?? Why is their a big difference in distribution and distilling? Maybe that too is an oil companies choice affecting the cost? The less demand side? Whatever the reasons, the more our truckers pay at the pump on diesel, we consumer see in the end?

  9. Gary Stringer5:51 AM

    Definitely Mark, the amount of tax is set to increase again and our petrol will reach a record cost per litre!

  10. An ongoing irritation for me is the fable that if we could only drill without constraint, the price of oil would plummet and gas would be cheap. This was even pushed by John McCain during the last election, after two Bush terms. It sounds fine to chant "drill, baby, drill" but what are the realities?

    One reality is that oil sells at a world price. An "American" oil company can extract American oil out of a field in Texas and sell it to an American customer. If the price for that grade of oil on that day is $125/bbl, that's what that American customer will pay. The oil will never sell for less out of any patriotic consideration.

    Well then, how about drilling more, adding to the supply, and dropping the price that way? That would take a lot of oil! More than we have on hand - and OPEC producers alone control enough supply that throttling back on their output a bit could restore the status quo. US production will never control oil prices.

    And no amount of drilling will give us energy independence based on oil - or even reduce oil imports substantially. Incremental improvement is possible; independence is right out.

    The above is so obvious that I'm surprised most folks seem to buy the hogwash. And I have little respect for the politicians who think we're dumb enough to buy it.

    So - what's an energy-hungry country to do? How about turning to an energy source that doesn't currently sell at a world price, that unlike oil we do control, and that offers a genuine path to energy independence?

    Natural gas can do all that, and probably clean up our skies, too. It's a mystery to me why virtually no one is onto this. Boone Pickens has done a good job of keeping the issue on the front burner, and there has been some slow uptake.

    Using natural gas as motor fuel may be a jump for some people's minds to make, but it's really a "natural" fit. As a hydrocarbon fuel it will run easily in most engines, and if you have a look at the map of gas pipelines already built around this country, you'll see that the infrastructure backbone is already in place.

    The technical problems of making this happen are well within our scope. Fracking concerns can be addressed if companies pay strict attention to doing the job right. Like the Macondo well disaster in the Gulf, the fracking problems I've read about have been caused by taking shortcuts and sacrificing proper procedure to cut cost. We know how to do this safely.

    So I'd love to hear less about this "drill, baby" fairy tale and more about the real way forward. We CAN be energy-independent, and it doesn't rely on developing the hydrogen car tomorrow. It only requires us to make intelligent use of the huge domestic energy gift we've been given. Clean, low-priced, and ours - let's hit the gas! (hey, can I sell that slogan?)

    What do you think? Anyone else thought about this?