Redstate...
‘Why does my gas cost
$4.00 per gallon?’
by Steve Maley
Tuesday, May 3rd
Everybody is asking that question these days. The average nationwide
price for all grades this week is $3.96/gallon; Californians are paying
on average $4.26, the highest in the nation.
Why does it cost so much, especially considering that the price was
below $2.00/gallon just within the last couple of years?
Nearly seventy percent of the price of a gallon of retail gasoline is
the price of the crude oil it is refined from. Two graphs from the
Energy Information Administration (EIA) make that point. The first
shows the price of a gallon of gasoline (left axis) plotted against the
price of a gallon of crude oil (right axis). The two move in virtual
lock-step; if you know the crude oil price per gallon, add $1.00 and
you’ll know the price of gasoline within a few cents. (At $105 per
42-gallon barrel, the per-gallon price of crude is $2.50; add a buck,
and you get a gasoline price around $3.50.) Click on link below to see
charts.
OK, so where does the $1.00 go that’s not paying for the raw product?
Nationwide, the average of state and federal taxes embedded into the
price of a gallon of gasoline is 43 cents. We usually think of taxes
the other way around, as with sales taxes. If you look at it that way,
the effective “sales tax” on gasoline is 13.6%.
But as the next graphic shows, tax burdens vary greatly by state.
Californians pay as much as they do at the pump largely because of the
difference in state taxes. On top of that, California and a few other
jurisdictions levy their tax as a percentage of the sales price
(exactly like a sales tax), so that the California state treasury
benefits handsomely from a higher gasoline price. (That’s not true in
most jurisdictions, where the state tax is a fixed rate per gallon.
Also, the tax burden shown in the graphic includes 18.4 cents per
gallon in Federal taxes which apply to us all.)
Chances are the next network news report you see concerning high
gasoline prices will come from one of the high-tax states on this map.
That leaves about 53 cents per gallon of your retail price that go
toward the “downstream” end of the business: refining and marketing.
Whether or not that’s a fair price to pay for these services is
probably a story for another diary (or another diarist!), but it would
be fair to say that the financial returns in the downstream end of the
energy business have not been consistently impressive.
$4.00 for a gallon seems expensive, relative to what we are accustomed
to paying. But a fair economic analysis of the value of the product
must include its utility. A gallon of gas can transport four or more
people in relative comfort 20 or more miles, and they can go when and
how they wish to go. What is the value of that?
From the perspective of a producer (the “upstream” of the business), it
is difficult and expensive to replace a gallon of gasoline in
inventory. The price should be high enough to discourage waste, and
high enough to reflect the true replacement cost of the resource.
Increasingly hostile government policies regarding domestic exploration
only increase the cost and difficulty of replacing reserves. An
administration which threatens higher taxes on exploration and
development dampens drilling plans. Supply tightens, prices go up. The
cycle continues.
One last point — even at $4.00, it is difficult to name a liquid
product which is cheaper per unit volume than gasoline.
See the charts and read the story at Redstate
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