Although there are many different things which contribute to high gasoline prices, the biggest reason for an increase in gasoline prices has to do with refining capacity. Even if oil were super cheap, we would still have a problem converting that oil into gasoline that fuels our economy which would keep gas prices high. When gasoline supplies are low due to an inability to refine oil into gasoline, prices increase. This is all part of supply and demand economics and it works well in that high prices curtail usage. If gas remained cheap despite how much was available, we may find gas stations hanging “out of fuel” signs on their pumps because consumers wouldn’t cut back on consumption. So high gas prices do serve a purpose; they deter consumption so that we don’t completely run out of fuel. But how high is too high? Is there such a thing? Is the refining industry artificially inflating gas prices by reducing their refining capacities so as to improve profit margins?
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Contrary to what some think, gasoline isn’t the only product refined from crude oil. Only about 51.4% of an oil barrel is used to make gasoline. The rest of the oil is used to make other products such as jet fuel, asphalt, road oil, heating oil and liquefied refinery gas. This makes oil a high demand commodity around the world and because most countries don’t produce enough oil of their own, they have to import it from other countries that have more than they know what to do with. |
This creates a global market in which prices can fluctuate depending on who needs oil and how much. For example, China has a booming economy and requires more oil now than they did in years past. As a result, increased global demand causes a shortage in crude oil supplies which results in higher prices for these commodities (jet fuel, lubricants, gasoline, heating oil). Therefore, the price per barrel of oil increases to curtail demand. This price increase eventually gets passed along to the consumer and as the price for these products increases, fewer people are willing to pay for them. As a result, the demand retreats and eventually so do the oil prices. There are a few more complexities to it (such as shipping costs and where we get it from), but that’s generally how it works. In the past, gasoline prices pretty much mirrored the price per barrel of oil. If oil was in short supply and the price increased, gasoline prices would also increase. However, in the early part of this decade, we saw a new anomaly with gasoline prices; they started to spike.
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But is the price of oil really the cause of our high gas prices? The price per barrel of oil in 2005 was about $70 at its peak and gasoline prices averaged about $2.85 a gallon. In early 2007, the price per barrel of oil was about $60 dollars ($10 less per barrel) but the price of gasoline was averaging about $3.25 a gallon or about $.40 more. In the later part of 2007, the price per barrel of oil shot up to $98, but a gallon of gasoline was down around $2.95 on average. It would appear something other than the price of oil has a much greater affect on the the price of gasoline. |
While oil prices do have some affect on gasoline prices, it’s apparently not that much. After all, when oil was half the price it is now, gasoline wasn’t half its price. Something else is at work.
When the oil companies get their oil, they transport it to refining facilities across the country, most of which are in Texas. The refining facilities are responsible for taking the crude oil and converting it into usable products. When the demand for gasoline increases (summer months and holidays), these refineries start to approach their maximum operating capacity in order to keep up with demand. That is, they reach the limit of how much oil they can convert into gasoline. Once this happens, a bottleneck develops and the rate at which gasoline can be made hits a maximum. However, our demand for the gasoline continues to rise and once again, the economic principal of supply and demand kicks in. As demand increases and the supply remains the same (maximum refining capabilities), the price increases. It’s like pouring water into a funnel; a fixed amount will come out the small end no matter how much you pour into the big end. Riddle me this; if the price of gasoline is directly related to the price of oil, why was the national average for a gallon of gasoline in 2007 $3.25 when a barrel of oil cost $60 and now that oil is $100 a barrel the price for a gallon of gasoline is $2.80?
Consolidation in the refining industry has limited our refining capabilities. The three biggest American oil companies ExxonMobile, ConocoPhillips, and ChevronTexaco used to be six individual companies. There was a time when the oil industry wasn’t making a profit (hard to believe, but it wasn’t that long ago). When they combined, they also bought out some of the smaller refiners. The top five refiners now control more than half of the domestic refining capacity in the United States. Unfortunately, this has allowed the big refiners to tightly control gasoline reserves thus greatly affecting availability and prices. Is this bad? It depends. If they are deliberately reducing refining capabilities to reduce the amount of gasoline they produce, thus increasing their profit margins, then yeah … it is.
Without a competitive market the consumer will continue to suffer because there is no incentive for Big Oil to increase refining capacity when there is a shortage. Spending millions to construct new refineries to produce gasoline faster will only lower their profit margins. They like the prices high because it costs them the same amount of money to make the gasoline regardless of its price. In other words, their profit margins increase significantly when the price of gas goes up. It costs virtually the same for them to produce gasoline now as it did 5 years ago except they are selling their product for twice as much. Big Oil companies made multi-billion dollar profits in 2005 with Exxon Mobile leading the way by posting a profit of $36 billion dollars. Amazingly, in 2006 it beat that mark by earning $39.5 billion dollars on revenue of $377.6 billion dollars. Even more amazing is in 2007, they beat that mark for a $40+ billion dollar profit, more than any other company in US history.
Where does all this money go? Big Oil will tell you they are reinvesting the money into new drilling technologies and exploration. However, ask Lee Raymond, ex-CEO of Exxon, who in 2006 received one of the most generous retirement packages in history, nearly $400 million in cash including pension, stock options and other perks, such as a $1 million consulting deal, two years of home security, personal security, a car and driver, and use of a corporate jet for professional purposes. All that money came from our pockets during 2005 when gasoline prices hit an all-time new high.
Where did all that money come from? It came out of yours and my pockets. Instead of using that money to build new refineries, they gave it as bonuses, and salary increases. More of the money is being used to find more oil, but this won’t solve the problem. This will do NOTHING to increase the refining capacity and will only make the problem worse. They did use some of the money to improve upon some of the older refineries, but this has had virtually no affect on their refining capacity, otherwise, we wouldn’t be setting new record highs on the price per gallon of gasoline.
The refining industry will say there’s no place to build new refineries. That communities proclaim the “not in my backyard” excuse, but this isn’t the case. The Environmental Protection Agency (EPA) has not stopped new refineries from being built. In fact, from 1975 to 2000, the EPA received only one permit request for a new refinery. In other words, a new refinery hasn’t been built in 28 years! They are not interested in increasing their gasoline output because this would lower gasoline prices; thus cutting into their large profits.
What can we do about high gas prices? Absolutely nothing. There is nothing you can do to stick-it-to the gasoline companies except buy an electric, fuel cell or hydrogen vehicle whenever you get the chance. Boycotts won’t do a bit of good. If you don’t buy fuel today, you will have to buy more of it tomorrow. To make a boycott work, you would have to give up driving all together. Not simply delay when you buy the gas. Unfortunately, you as a consumer who is dependent on gasoline are at the mercy of “Big Oil”. As time goes on, demand will continue to increase, and since no new refineries are scheduled to be built to increase refining capacity, prices will only get higher.
At $3 a gallon, this may be a bargain considering $4 is just around the corner. Don’t think it won’t happen. I can remember people thinking $3 a gallon was out of the question in 2005 because we had just recently surpassed $2 a gallon. The price has never dropped below $2 and it may never drop below $3 after 2007. Time will tell.
