The Cost of Gasoline – Let Me Break it Down for You
Well, it actually will not be me breaking it down for you, but rather one of the great military veteran commenters in the comment thread of this post at This Ain’t Hell: Obama: You Just Don’t Get How Great I Am
The following comment was in response to the nonsense spewed by the liberal ignoramus “Anonymous”:
As for oil, it topped out June 2008 at 132.68 a barrel, but is now at 86.80 a barrel. And as for “We should drill here, now”. Don’t you see the genius of not doing that? We use the rest of the world’s oil, and then we use ours. Sure, we might not have it better, but our children and grandchildren will.
I referenced the price of oil, not gasoline. The gasoline companies set those prices (and get record profits doing so). [ … ]
We have to buy gas, and they set the prices. Go ahead an look at some yearly statement of some of these companies, profits don’t lie. [ … ] since June 2009, gas price has increase 85.33%, while in the same time period, oil price has increased only 22%. I’m all ears for a better explanation.
July 13th, 2012 at 3:33 pm
Anonymous: the fact that “oil companies set the price of gasoline” is nothing but a persistent myth.
The actual breakout (as of Jan 2012, when gas prices were virtually identical to what they are now) of the cost of a gallon of gasoline is as follows:
Marketing and distribution costs: 6%
Refining costs: 6%
Crude oil costs: 76%
Oil companies thus “control” only approximately 12% of the retail cost of gasoline; taxes and raw material costs account for 88%. And half of the part that oil companies “control” is the cost of refining the gasoline from crude. That is rather essential in having gasoline. The process is very mature and likely cannot be substantially reduced any time soon.
Bottom line: except for panic spikes (like those occurring after Katrina), gasoline prices are pretty much pegged to the cost of crude. Cost of crude goes up, gasoline will go up. Cost of crude goes down, gasoline goes down. They operate generally almost in lockstep.
And supply and demand controls the price of crude. Oil companies don’t.
July 13th, 2012 at 3:58 pm
I would have thought someone who worked in the financial industry would understand the concepts of fixed costs and variable costs. However, here’s a simplified explanation.
Gasoline costs have 4 components. One is fixed, two are partially fixed, and one is variable.
The fixed component is taxes. (These actually can vary, but in practice do so so slowly that they can be considered fixed.) At current prices, these are about 12% of the total of each gallon of gasoline (on the order of 40-45 cents per gallon).
The two partially-fixed components are (1) refining costs (which include refinery profits) and (2) transportation and distribution costs (which include profits for distribution companies and gas stations). Each of these is about 6% of the cost of a gallon of gas at current rates – or about 15-18 cents per gallon. The former (refining costs) generates some profit for oil companies. The latter (transportation/distribution) generally does not. Both include huge amounts of fixed or otherwise necessary overhead costs (costs a bundle to refine the oil and to distribute it to gas stations).
The last component is the raw materials costs – e.g., the cost of crude. At current gas prices, this component accounts for about 76% of gas prices – or around $2.60 per gallon.
Now, cut crude prices by 1/2. That drops the share of a gallon of gasoline due to crude to approx $1.30 – but it has little effect on refining costs (maybe those costs drop by 10%, or about 2 cents per gallon) or on distribution and transportation (say those costs drop by 20%, or 4 cents per gallon). It has no effect on taxes per gallon. So the new cost of gasoline becomes $1.30 + $0.45 + $0.14 +$0.16 = $2.05.
This is a “quick and dirty” calculation, so it’s not exact. But it should be fairly close. So let’s check this analysis against history as a sanity check.
Crude oil cost $46.47/barrel on January 23, 2009. Regular grade gasoline cost $1.84/gallon on average.
Crude oil cost $84.96 about 2 weeks ago (June 26, 2012). Regular grade gasoline today costs $3.41/gallon on average.
Crude oil cost went up about 83% between January 23, 2009 and 2 weeks ago. In the same period, gasoline prices went up about 85%.
And that is why I love being a conservative: we have the facts on our side. It is also pretty obvious that the liberal was ‘reasoning’ with emotion (he started out whining about oil company profits and then assuming things based off that incorrect emotional assumption), while the conservative laid out the facts and then came to the conclusion. That’s the difference between liberals and conservatives. Liberals make up ‘facts’ to try to fit their worldview, while conservatives form their worldview after collecting the facts.
And Hondo’s takedown of the ignorant liberal is why I love This Ain’t Hell. The military veterans there are some of the most educated and informed and common sense conservatives online in addition to being great military heroes. Not to mention, they know how to take down liberal nonsense with some flair and humor!
Of course, as is to be expected with liberals, “Anonymous” could not admit to the fact that s/he was wrong, even in the face of facts completely destroying his/her ignorant opinion:
no, you obviously know more about the complexities of oil precaution then I do. I understand fixed costs and variable costs, but you’ve calling into question my knowledge of finance because I’m not as well informed as you about oil precaution. With that sort of hubris, I guess that you are well versed in fixed and variable costs of almost every industry out there.
Typical liberal. When they get owned by facts, instead of admitting they are wrong, they turn it around and throw insults at the conservative providing the facts. Pathetic.
Of course, as is the brilliance of the military guys on the site, Hondo gets in a nice jab in return:
July 13th, 2012 at 4:19 pm
Anonymous: no, I don’t claim omniscience in that area. I actually don’t work in either finance or the oil industry. But I would have thought you could have figured this out for yourself after you looked at the first article I cited, given your background in finance and the raw data contained in the article and otherwise readily available.
It only took me about 20 min to do the research and write each of the above comments relating to gasoline pricing. And I’m no expert in economics, finance, or the oil industry.
Heh. And with that, the “Anonymous” ignoramus did not return. Again, typical liberal. When faced with facts that discredit their ignorant worldview, instead of changing their worldview to fit reality, they fling some insults before stomping away in continued ignorance. Maybe he’s going to find out where to sign up for a class to teach him how to do simple research, since it’s pretty obvious he did not learn that while going to school for finance.
This is also an example of another debating trick that liberals love to use: appeal to authority. “Anonymous” started out claiming that s/he was an expert in finance, thus his/her *opinion* on gasoline prices and profits must be the right one. Yeah, not so much. A piece of paper from a university does not make one an expert. Appeal to authority means nothing. Facts mean everything. A high school freshman could have researched those facts and put the ignorant liberal snob in his place.
Heh, I forgot to include NHSparky’s great takedown of the ignoramus as well:
July 14th, 2012 at 8:26 am
Go ahead an look at some yearly statement of some of these companies, profits don’t lie.
Yup – Exxon/Mobil makes a profit of about $40 billion on revenues of $450 billion. That comes out to about 9 percent. Pretty shitty if you ask me, especially compared to banks which have profit margins in the 30-plus percent range.
Also, I’ll trust Hondo @41; since June 2009, gas price has increase 85.33%, while in the same time period, oil price has increased only 22%. I’m all ears for a better explanation.
Not true. In January 2009, the average pump price was $1.81/gallon, and crude price was $43.91/bbl. In June 2009, gas price was $2.74/gallon, and crude was $69.13/bbl. Today, the average price is $3.43/gal with a crude price in June of $90.73/bbl, which is down from the post-2008 peak in March of this year of $117.79/bbl and gas nationall at that point was $3.97/gal.
So no, you fail.
Oh, and before you think that $40 billion in profit on revenues of $450 billion is a lot, consider this, anon – in that same year, the federal government got over $105 billion in taxes, for doing nothing more than sitting on their asses with their hands out.
Amazing how someone supposedly educated in finance cannot do simple math.
If you like that, go read the rest of the comments. They also take down this liberal clown with regards to its claim that unemployment has improved under Obama. Yeah, the ignoramus actually made that comment.
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