This price gouging must STOP!

We all hate high gas prices. Record profits are in all the headlines. So let’s take a look:

Eight cents on three dollars is about 2.6% profit lining the pockets of Big Oil. Fifty-nine cents is about 19.6% tax for the various governments. Who’s making the money when we fill up?

Big Oil puts out the money to make it all happen and reaps eight cents. Government does virtually nothing whatsoever and simply collects fifty-nine cents every time we pass ‘Go’.

This isn’t really meant to be a defense of Big Oil. I’m just saying.

Why aren’t we hearing this side of the story?

Numbers from Who Is “Gouging” Whom at the Pumps? via Wizbang.

Comments

  1. Pardon me for being curious, but where did he get these numbers from? The text in his post makes him out to be *ANYTHING BUT* objective. I won’t get into specific examples, but he has clearly left his ‘debate flank’ wide open in numerous places, not to mention just begging to be dismissed as an extraordinarily non-critical thinker in others. He should note that if you finish writing an article with a good froth o’ foam at the corners of your mouth, you should probably go back and re-read what you just wrote. (Or better yet, have someone else do it!) Now, I want to clearly note that I am *NOT* calling him a liar, nor am I calling his numbers incorrect. I’m just curious why someone (say, me) would think that they are correct. Does it list the source, and I just didn’t see it? It seems like the sort of thing you’d include in a post like that if your numbers were factually based.

  2. Thank you for this post. Anyone in business knows they are an unpaid tax collector for the governments (city, county, state, feds). And the gov’t gets theirs first. Thank God I don’t run my own company anymore. The gov’t never even sent me flowers.

  3. Hmmm, what would the comments be if the gov’t spent money sending flowers to businesses? Would you prefer that the gov’t paid out money to business for the act of tax collection? (Apart from any existing subsidy, credit, or break.) Would that be a good use of gov’t (read: taxpayer) money?

  4. Why is the marketing chunk so huge? Do we see big billboards with slogsns like ‘Consume oil! It’s what gets you places!’? Geez, I really hate marketing 🙁 Such a waste of money. KTLA, I think we would all appreciate it if the government collected all the massive taxes, and then did NOT proceed to spend it on stuff such as fixing up a rail line and then tearing it down and moving it elsewhere. (Well that’s a US example but I’m sure I could find plenty of ways my gov’t is wasting my money too). I wouldn’t mind paying taxes if I thought they were spent carefully and on things I cared about. For example, if some of my tax money went to military action to stop genocide in Sudan I’d be OK with it. Sadly, nobody asked me…

  5. Just noticed it says ‘Marketing/Distribution’ and it COULD be that most of that is the distribution cost. Which does not seem ridiculous. But lumping those two together into one slice does seem silly. OK, maybe they both come out of one budget or something, but surely the distribution costs are well known?

  6. The latest quarterly reports for Oil companies are generally showing double-digit % profits — a lot more than 2.6% But, they range all over the place, from a loss for one to 31% for another. But, maximizing profits is what American business is supposed to do. We just need to make sure there’s no indirect collusion. The best thing we can do is buy oil stock and share in the bonanza. At least one company is using part of its new-found cash to buy back stock, rather than increase exploration or invest in alternative energy. But again, that’s its legal right.

  7. My bad. I see the 2.6% is 8 cents profit divided by the total price of a gallon of gas; which is apples and oranges vs. the % profit of an oil company, or the % increase thereof.

  8. Mistyped again. Meant to say the increase in profits ranges from a loss to 49%. According to someone on Fox this AM, the average profit for oil companies is about 8% — below the average for other industries. But, to understand that %, you have to dig into the depletion allowances. Back when DuPont owned Conoco (it made a big mistake seelling it), depletion allowances and other legal tax deductions enabled it to pay 0 federal taxes, and it’s the largest chemical company in the world. I’ve read oil company profits as a % of capital investment are quite large vs. other industries. As to the high cost of marketing, look at the full page ads the oil companies are buying to explain their position. Also, since gas is basically a commodity, the oil companies have to spend big dollars convincing the consumer their additives are better than the others; to maintain market share. I don’t claim to fully understand all this, but I’ve added links to some interesting articles on the subject at A-C-E. http://airbornecombatengineer.typepad.com/airborne_combat_engineer/

  9. Heh, screw how great the additives are, I want fuel that doesn’t make my engine knock or ping. My car is old and low quality fuel makes it run BAD. I’ve found Shell to be on average the best here.. and since it’s a commodity might as well buy from those who provide the highest quality. Even my sister’s car, a 2002 Rav4, was pinging with some of the liquid which passes for fuel that some dodgy place was selling! Disgraceful. A modern car has knock sensors, the fuel has to be really awful if it can’t even retard the spark enough to keep it from being audible. I’ve noticed the number of cars which drive past me that sound like their engines are destroying themselves has gone up in the last few years. Possibly companies cutting corners to try to get the price down and the profits up, and the consumers are too silly to realize they’re being sold junk fuel. *sigh*

  10. Actually, in case anyone is interested (probably not), for a while Shell was the fuel that my car ran best on, but now that fuels with ethanol additives are available, I find they work really well. the 5% and 10% ethanol fuels seem to have a really good octane rating, the engine runs nice and smooth. I tried it in a newer car and it also developed more power than usual (probably because it was able to advance the spark timing without any knocking). The caveats are that you get slightly worse economy, since ethanol has less energy per volume than gasolene, and you have to make sure your car can handle the ethanol in the fuel, it could destroy some components.

  11. Well, the 6L engine in my 2002 GMC Denali pickup has never had any trouble running any kind of regular gas I’ve put into it. As has been said, modern engines have computer chips which adjust to the fuel. It does seem to have a bit more power with mid and premium grade, but not enough to justify the added cost, as it has more power than I ever need in any case. Just last week, a young guy at a station told me he used premium because it seemed he got better gas mileage with it. I suggested he let his tank get very near empty, fill it with $10 of regular, and log how many miles it took him. Then, do the same with premium. I’m willing to bet he’ll get more miles/dollar with regular. An older gentlemen told me he always used name-brand premiums because the additives kept his engine cleaner. If that was important, wouldn’t you think the owner’s manual would suggest you use the better name brands? The shelves at auto parts dealers are full of gas and oil additives which supposedly increase the life of your engine, or make it run better. I asked the mechanic at the GMC dealer if there were any gas and oil additives which would help my engine, and he said none were necessary, and I shouldn’t waste my money on them. Now, I don’t buy gas from low-volume gas stations off the main drag, mainly because bad things can happen to gasoline sitting in underground tanks too long (such as water separation and sludge buildup). As I understand it, gas is pumped by grade through the pipelines from the refineries, with some mixing between grades for a few hundred feet. When tank trucks for dealers pick up a load at the distribution station, the additives are added. That’s the only difference between Super Duper Shell and Econo-Gas. Most of the additives are detergents. Remember when some stations had filters in the fuel line? I used to use those stations, thinking I might be getting less impurities. But, that gimmick seems to be dead now. Gasoline is a commodity, like aspirin. By state law, each of the three levels have to meet certain octane levels. Big-engined older cars needed higher octance or they would ping. Most modern engines (with the exception of a few sports cars) can burn regular. Beyond that, it’s a matter mostly of detergent additives. As long as the gas is fresh and clean, they are not really needed. Correct me if wrong, so I can learn, but this is my understanding. ACE

  12. Re. the ‘number of cars which drive past me that sound like their engines are destroying themselves,’ I hear a lot of that waiting for traffic lights in the Atlanta area; but my guess is that’s less to do with the quality of gas and more to do with the need for replacing spark plugs and air/fuel filters and getting a tuneup. If the state inspectors are doing their job, gas which is not of adequate octane level will result in heavy fines for the station or distributor.

  13. Six litre engine? Geez. What kind of economy do you get with that? My engine is two litres (but, it’s just a regular sedan). And, mine is sure finnicky with fuel. Needs 98 octane. Oh well, that’s what I get for buying a car for a couple of thousand bucks. As I said, my sister’s RAV4 which is quite new didn’t like some fuel she got at a dodgy place. We probably have less strict controls on the quality of the fuel here. You’re right, I’m sure a lot of people don’t maintain their vehicles, but either there’s a recent trend towards it or something is helping hasten their demise. I agree that you don’t need anything fancy with fuel. But you do need to get fuel with an octane rating as high as, or higher than that which the car’s manual tells you. Newer cars can run fine with lower octane because they can adjust. Older cars like mine can’t adjust. Mine gets really rough if I put lower octane in. As for fuel economy vs. octane it depends a lot on the car and the design. Low octane fuel has more energy per volume than high octane, because the additives have less energy than gasolene does. So if you car runs fine with regular, you will get better economy with it. However, if your engine is a high compression ratio type, it may be designed to run with higher octane fuel, and thus may not run at 100% efficiency with lower octane. Whether the reduced efficiency is enough to overcome the energy density difference depende entirely on which engine you have. I don’t think any American-built engines will get better economy with higher octane. Here, and in Japan, 98 and 100 octane are common so engines are designed to run on it. If you have a Lexus or Honda, maybe higher octane fuel will get you better economy. You’d have to test it and find out. I’m sticking to putting the higher octane fuel with ethanol in my dad’s Taurus because the extra power I get out of it is noticable and I don’t want to have to merge with fast-moving traffic without as much power at my disposal as I can manage. I think that’s worth a few cents a liter extra. But again that engine is way smaller than 6L (it’s 3L I think). I don’t think 6L engines even exist in this country in passenger vehicles. 1.5-2L is common, 3L is big and almost nobody has more than 4L even in fairly big pickup trucks.

  14. Yeah, the 6L in a 5K pickup is a gas hog. (The normal GMC pickup has a 5.3L) 9mph urban and 15mpg highway. I don’t help it by driving 82mph in a 75mph zone on the interstate. It’s for hauling and pulling. Rated for a 10K trailer. Even has a transmission temp gauge. I’m walking, jogging, or riding a bike around town when I can; and considering buying a 350cc bike.

  15. I like the idea of a bike too except the drivers here are crazy and I wouldn’t feel safe. Still, I think they’re OK if you don’t weave in and out of traffic. Anyway my original point was, I guess, that because fuel is a commodity, marketing costs should not really be all that high, especially considering how strong demand is. I guess what you said pretty much agrees with that. But, perhaps they feel they can make more money by advertising their fuel as being somehow better. Marketing doesn’t annoy me because it doesn’t work – it does – but because I can’t believe people are sucked in by it. But, humans are emotional creatures, and that’s why marketing works, as much as I hate that it does. Have you considered getting a smallish, cheap used car for doing shopping and such? I guess it depends on how much garage space you have and what it would do to your insurance. That might be more practical than a bike for some things, and you can use your truck when you need a truck.

  16. Actually, I have a 1980 2L, 4cyl Porsche 924 Turbo, which needs a $2K turbo and mainly a few other things. Repairing it would be cheaper than buying a small car. I might do so soon. Riding a pedal bike around Atlanta scares the heck out of me, given our drivers here, tight lanes, and few bike lanes. I prefer riding on a trail which starts near my house early in the AM, just for exercise. A motorized bike which can go the speed limit on surface streets would be fine for good weather, but a problem in the cold and rain. We’ll find a way to survive, I guess.

  17. Murdoc, Your graph is a little misleading. The smaller breakdown graph only shows the costs/profit portion from the refinery to your car. It ignores the breakdown of the crude oil portion. Most oil company profits (and 100% of the ‘excess profits’ people are complaining about) come from the crude oil side of the equation. Remember, crude is trading at $70 a barrel, and the average extraction cost of the U.S. companies is something like $30-40 a barrel. (I heard a number on the radio the other day and don’t remember exactly, but it was something like that.) That’s where the big profit is. If there are any companies that only refine and sell gasoline (and do not actually extract crude) then I’ll bet those companies are not particularly making excess profits these days. There was a piece on the radio the other day where they interviewed a gas station owner/operator who said they make $0.10 per gallon profit on top of what the refinery charges them wholesale. He said that $0.10 doesn’t generally change when the price flucutates, so that he makes better margin when gas is cheaper. He also said he makes well over half his profit on sales at the convenience store.

  18. 42 gallons of crude makes about 19.6 gallons of automobile gasoline. They make more than just gas out of a barrel of crude. The 42 gallons of crude actually makes 44 gallons of ‘stuff’. At $70 per barrel you’re paying $1.59 per gallon of ‘stuff’, 44% of which is gasoline. So that $1.71 for crude seems not out of line. (At $35 per barrel, it’s $0.79 per gallon of ‘stuff’.) Refining costs per gallon of gas are in the break-out already. For all we know, the real price gouging is in the convenience store department of the oil companies. That shows on the bottom line, right? If they break even on gas and make a billion dollars on Coke at $2 per bottle, they just had record profits…

  19. Murdoc, You’re still missing the point. Approximately half of the $1.71 of crude oil cost represents profit to whoever extracts the crude. So total profit at the pump is $0.93 per $3.00 or 31%. You have completely ignored the profit the companies make on the crude oil side of the equation. Note that this also means that oil companies make about twice as much profit on a gallon of gas as the amount of the taxes.

  20. ACE: Well, if you’d be comfortable riding a bike and you often make trips where you don’t need to bring much along, that sounds like a great option, and could be quite fun too. Just be careful – but you seem like the kind of guy who’s willing to take a few risks 🙂 It’s hard to avoid the convenience of owning a large vehicle for those times when you really need one. Personally I’m planning to borrow my parents’ if I need one, so I can get away with a smaller vehicle for the rest of the time.

  21. Chuck: You’re right. I was missing your point, which is a good one. I was totally disconnecting the crude supplier from the gasoline retailer, which isn’t always the case. Still, if that’s where the issue is, then it’s the suppliers (some of whom are also gasoline retailers) who are to blame. That doesn’t seem to be the sentimient or thinking of the ‘blame the oil companies’ crowd, at least in most cases that I’ve run into. I would like to repeat that I’m not really trying to defend the oil companies, here, BTW. What would be interesting would be to see how much of the oil companies’ record profits come from crude oil, retail sales of gasoline, convenience store sales, other investments, and misc stuff.

  22. Well, the crude suppliers are the big oil companies in many cases. I think something like 30% of the crude we use is extracted by the big public oil companies, although they do tend to pay royalties to someone or other. And when you break down the profits of someone like Exxon, you’ll find that the ‘windfall profits’ come from their crude extraction business. That’s basically what your numbers show. This makes sense, because as the price of crude changes, the companies’ costs to extract remains constant, so any increase in crude prices is just gravy. But also keep in mind that plenty of these ‘windfall profits’ are going to our good friends in Saudi Arabia, Iran and Venezuela (unfortunately). But what most people tend not to understand is that none of those companies ‘sets the price of crude’. Crude oil prices are set by a broad global market which includes multiple buyers and sellers of crude, including speculators and energy hedgers. It’s possible that this market is being manipulated, but its much more likely that speculators and/or hedgers are driving the market due to fear of future violence in the Persian Gulf and/or fear of future supply/demand imbalance. Interestingly, there currently is NOT a under-supply or over-demand.

  23. Oh, and I never thought you were defending the oil companies, but regardless of your motivation, your numbers were skewing any possible discussion. 😉 (I did tend to think you were taking a jab at taxes, though. The original article most certainly was.)

  24. Interesting analysis, Chuck. The VP of PA of XOM says the company paid more in US taxes than it made in the US during the 1Q, and only made 9.7% profit overall. http://hughhewitt.com/archives/2006/04/30-week/index.php#a002087 I’m going to assume some sort of accounting shell game is going on with those numbers, as well. With almost everyone speaking/writing on this subject having some agenda, it’s really hard to find the bottom line truth. ACE

  25. In case you were wondering the ‘;)’ in my comment above is in there because I originally had a joke there, then deleted it and forgot to delete the wink. I usually would have just left it alone, but it seems so stupidly nonsequitor that I had to say something.

  26. ACE, I’m not sure I’d call it a shell game, since that implies a bias about accounting in general, but certainly there is plenty of complicated accounting involved in those numbers and, even more certainly, a single quarter is hard to draw conclusions from — especially when looking at the after tax number. Who knows how that tax analysis works? Not me. Also, remember that my analysis includes a guess on the average extraction costs of oil. That guess may be wrong or just might be different for XOM. And also, they still buy a significant amount of crude on the open market, so for some portion of their gasoline output, they have not gotten the profit on the crude portion. The whole profit margin issue is really not the important measure. Profit margin is only good for measuring performance among competitors or even companies in similar industries. The important measure is return on investment. My understanding is that, on that measure, oil companies are historically doing better than ever, but not ridiculously so. Certainly the oil companies are gonna come up with the best spin on the numbers possible, but I still doubt they are significantly playing with the numbers. The last thing they need right now is an accounting scandal.

  27. On a recent show, O’Reilly said it actually cost the oil companies $20 to extract a barrel of oil, but I don’t know his source. I wasn’t try to dis accounting. I just know accountants can do a lot legally (no scandal) to make the best statement. Personally, I don’t begrudge the oil companies trying to maximize profit. That’s how capitalism works. I just want the government to insure its a free and open market. Higher prices are achieving a good effect, which is to force us to conserve by reducing unnecessary travel, buy/repair cars which get better milleage, and walk or ride bikes when practical. Another artile I linked at A-C-E speculated that oil companies are using the huge influx of cash from recent high prices ($70 speculative price vs. $20 actual cost?) to buy back stock rather than invest in alternative sources because they believe the price of oil will drop back to around $40/barrel in a few years. That may be true, or not.

  28. Seriously. Will someone tell me why any of these numbers are plausible, either the ones Murdoc is working off of, or the new ones Cheuck came up with? So far, these numbers are OMA, I have yet to see that they are even remotely grounded in reality. (OMA = Outta My A**)

  29. You’d think if oil companies are making massive profits out of high oil prices, they’d be re-investing that into exploration to find more oil to sell at high prices and make more profit. I think that the high prices are having good effects too. Assuming oil will eventually run out, which pretty much everyone can agree with – I think there’s a lot more oil left, more than most people think, but it’s going to get harder and harder to get to and thus more expensive – it’s better for us to take the price hit now and encourage more conservation and exploration. If we wait until it’s REALLY running out the catalysts for replacing it as a resource may come so late that we get into a massive depression as the price shoots through the roof before alternatives are ready. Obviously, nobody’s happy about paying so much at the pump, but let’s face it, fuel is relatively cheap considering the utility it gives us even at these inflated prices. And I agree, it’s best to make sure all markets have a level playing field. That goes for software, oil, or anything else. Collusion, explicit or implicit, is in few peoples’ interest. And hey, maybe It makes financial sense for ACE to fix his Porsche and he can have some fun driving it around! 🙂