The Gasoline Culprit

While gasoline accounts for roughly 17% of the energy consumed in our country, it is amazing the impact it has on the modern consumer, and if I was a betting man, the impact has everything to do with the constant presence of mind. Not only are you inundated with advertising on every filling station bringing the increase to the forefront, but the major media outlets whip the frenzy every night as you sit in the comfort of your living-room. Boy, are they quick to point the finger, but who really is to blame for the increase in prices?

In its simplest from, gas prices are broken down into only a few categories: crude oil cost, refining, marketing and distribution, taxes and retail station cost. Federal and State Taxes account for a large portion of the cost. Currently, Federal Excise Taxes are set from state to state at 18.4%. The state addition, depending largely on location and implementation of political philosophy, will tax gas use as high as 69%. States that are primarily Democrat tend to tax gas consumption at a higher rate. In fact, of the top ten (10) tax rates on fuel use, nine (9) are states that vote traditionally Democrat.

In 2007, nearly 50% of the cost of a gallon of gas is born from the cost of crude prices. With our reliance on foreign oil, the natural increase can be attributed in part to events in the middle-eastern market. The hesitance to open opportunities within our continental market, such as the opposition led by a Democratic Congress to relieve restrictions on drilling within the Alaska National Wildlife Refuge (ANWR) also contribute in that it forces the use of these foreign sources. Incidentally, the Organization of Petroleum Exporting Companies (OPEC) has recently voted to increase the cost per barrel of its export. This will lead to continued increases in oil prices.

Refining accounts for about 28% of the price of gasoline! Although American refineries utilize more advanced methods compared with their international rivals, many of these facilities are aging and putting the cost at risk for increase. Ironically, the US Government, through entities such as the Environmental Protection Agency (EPA), makes it more difficult to upgrade refining processes. Sulfur restrictions and legislation such as the Clean Air Act have been directly responsible for gas price increase. The Tier 2 Vehicle and Gasoline Sulfur Program directly reduces the supply of gasoline through our refineries and increase prices, and now on the horizon are the scare tactics used to perpetuate global climate change and any legislation as a result of how it is viewed.

One of the smallest factors affecting the cost is Marketing and Distribution. The Department of Energy puts the 2007 number at approximately 9%. This is the cost corporations like Exxon bear to put the brand in the eye of the beholder, often for image damage control these days, and the cost for getting the product to you, the consumer. Geographic location can increase this price. Take for example area prices of the Gulf of Mexico and how fuel prices increased, and shortages developed as a result of a major hurricane approaching New Orleans.

The easiest measurement of how Station Markups are a factor is by simply evaluating the competition. Though there is an argument that some stations will naturally be higher as a result of the product they deliver, some with special additives, the stations that tout ten cent and higher increases are likely doing so through mark-ups generated at their pumps. If a station is willing to decrease the price of their product through a special offer (i.e., pay inside with cash and receive a discount) they have a safe markup.

Overall, you can thank your state and federal government for their direct and indirect involvement in increasing gas prices. They’ve been pretty successful in legislating the industry into a state of life support. Ultimately, you and I are the ones left holding the bill. If you want to vent though, at least now you know where to start!