By Ken Cohen
Texas Insider Report: AUSTIN Texas Im asked this question a lot. And I know a lot of drivers ask themselves this question when they pull up to the pump. The answer is based on the economics of supply & demand and how
products are manufactured and sold along with what the government takes in taxes.
Lets take a look at the
breakdown of the estimated average price of a gallon of gas in December 2011 which was $3.27 based on the U.S. Energy Information Administration.
Raw materials = $2.62
The cost of the raw materials used to make a product has a major impact on the final product price. The raw material for gasoline is crude oil. The price of crude oil is set by global markets where buyers and sellers constantly react to supply and demand factors. Oil is just one of many commodities traded every day in the global market. Others are the corn that affects the price of
food and the cotton that affects the price of clothing.
Crude oil is by far the largest factor in the price of a gallon of gasoline accounting for 80 percent of the $3.27 average retail price per gallon in December according to the EIA.
To put that in another way about $2.62 of the average gallon of gas in this example is set before a refiner even touches the raw material.
Where I find many people get confused is that they assume oil companies are producing all the oil that goes into their own refineries and therefore can control gas prices by controlling the supply chain. Thats not the case.
U.S. crude oil production in 2010 was
5.5 million barrels per day. But U.S. refineries processed
15.2 million barrels of oil per day almost three times more oil than was produced in the U.S. That means U.S. refiners like ExxonMobil have to purchase millions of barrels of crude oil at market prices to produce gasoline and other products for American consumers. For example in 2010 ExxonMobil spent
$198 billion purchasing oil around the world for its refining operations.
Manufacturing the product
Like any product there are costs to manufacture it so the manufacturer tries to recover those costs plus make a profit when it goes to sell the product.
The refining portion of a gallon of gasoline has on average accounted for about 11 percent of the price in 2011 according to the
EIA data through December. That means a
little less than 40 cents per gallon would be due to refiners costs wages equipment financing and others plus their profits.
As the EIA figures show however refining doesnt always produce a profit. In December the data indicate that the U.S. market price for gasoline coming out of refineries was on average about 7 cents per gallon (-2 percent) below the refiners cost of crude oil alone and before accounting for their costs of upgrading the crude into gasoline. In other words refineries faced a market where domestic gasoline prices were very weak relative to global crude prices.
How does that happen? Refiners are price takers" that operate on relatively low profit margins that are highly dependent on the market demand for petroleum products. That means at times the value of a petroleum product coming out of the refinery isnt enough to cover the costs of obtaining and refining the crude oil.
Distributing and marketing the product = $0.33
Products then have to get from the manufacturing site to the retail site. When gasoline leaves the refinery it is shipped largely via pipelines to local terminals. There distributors load their trucks and transport the gasoline to a service station.
Naturally each step in the distribution chain includes labor capital equipment and other expenses that must be recovered by operators.
Of course these operators must also compete to sustain their profitability while also paying taxes.
Retailers then set the price at the pump based on recovering these costs of getting gasoline to the service station and the costs of marketing it to consumers. They also have to generate enough money to pay their taxes and make a profit to keep their business running. And on top of that they have to collect mandatory state and federal gasoline taxes from the consumer (which well break down in the next section).
So who are the retailers setting the prices? When consumers pull into an Exxon or Mobil station they assume its ExxonMobil. But we own only about 5 percent of the stations with our name on them. About 95 percent of the stations carrying the Exxon or Mobil brand are actually owned by network retailers or local business owners not ExxonMobil.
Taxes = $0.39
So how much does the government make on a gallon of gas?
In this example retailers collected state and federal gasoline taxes of 39 cents per gallon on average. Total gas taxes per gallon range by state from lows
of less than 30 cents per gallon to highs of more than 60 cents per gallon in
places like New York and California.
How does this compare to what a company like ExxonMobil makes on a gallon of gasoline? As we saw earlier sometimes a company or an operation may lose money. Other times it may make money. A competitive market just provides an opportunity not a guaranteed profit. In the first two quarters of 2011 for example ExxonMobil
made 7 cents and 8 cents a gallon respectively on the gasoline diesel and other petroleum products it refined and sold in the United States.
What actions could help lower gas prices?
Again lets go back to the economics of supply and demand that govern the crude oil market since its the largest determinant of the price at the pump.
There are many global factors that affect the crude oil market. But adding more supplies of crude oil to the global marketplace can help put downward pressure on the price of a barrel of oil. The United States has abundant supplies of oil from the deep-water regions of the Gulf of Mexico to the tight oil resources throughout North Dakota and Montana. Combined with Canadas oil resources (one of the largest in the world) North America has enormous potential to add new reliable supplies to the market. And the U.S. has one of the largest and most advanced refinery systems in the world.
But first the oil needs to get to market. There weve often seen economics trumped by politics even as the U.S. economy remains weak. The recent moratorium in the Gulf of Mexico as well as the decision to deny the permit for the
Keystone XL pipeline from Canada to U.S. refineries are just two examples of U.S. political decisions that serve to keep supplies
out of the market.
The economics behind a gallon of gas are pretty straightforward. Its the policies behind access to U.S. energy resources that are less certain but critical to our energy future.
Ken Cohen is Vice President of Public & Government Affairs for Exxon Mobil Corporation. He has worldwide responsibility for the companys public policy government relations communications media relations & corporate citizenship activities.
