Who Is Making All The Profits Selling Gasoline

SUBJECT: Who Is Making All The Money Selling Oil

In June, 2006 a report on the distribution of costs and profits in various parts of the petroleum industry was published in Scientific American. The report was extracted by the author from data given by Harold Schobert, professor of fuel science and director of the Energy Institute of Pennsylvania State University.
Half of all crude oil is converted into gasoline. There have been no new refineries built in the United States for over 30 years. This is so because of three reasons. The first reason is that environmental permit requirements are so filled with bureaucratic hurdles that the time and cost necessary to build the refineries is too much to justify the investment. The second reason is that there are not very many places in the Unites States that the local governments wish to have a refinery in their back yard. The surviving refineries have expanded to try to fulfill the market demand but the oil industry is running above 90% of refining capacity. We were told that when hurricane Katrina hit, the refineries were damaged and production was diminished. Because there is essentially no excess refining capacity available as a back-up, the supply of gasoline is reduced and the pump price goes up. You may ask, why not force the oil refineries to keep the prices as they were before the loss of refining capacity. That assumption misses the point. If there is not enough gasoline to satisfy everyone’s demands then some people will be willing to pay more for the gasoline that is available just to satisfy their needs. “ I need that gasoline now and I will pay you more than this other guy because that is the only way I can get to work, keep in business, or make a living. The price of any commodity is driven by demand versus supply. It is never driven by some bureaucrats idea of a “fair” price. Our government leaders talk about excess profits tax to punish the refineries for making too much money at the expense of the public needs. The tax goes into the public coffers and does absolutely nothing to increase the supply of gasoline which is the root of the problem. This is like the child who drops his ice cream to the ground so he knocks ice cream off his buddy’s cone so they are equally without any ice cream. This is known as mutual misery.
The third reason for high gasoline prices is the lack of profit to the companies that make the gasoline. The United States Energy Information Administration has published the distribution of costs and profits for a dollars worth of gasoline at the pump. The costs are as follows:

Refining: 18 cents
Cost of Crude Oil 47 cents
Taxes 23 cents
Distribution and Retail Dealers 12 cents
----------------
100 cents
Schobert’s report showed that the profit at the refinery step is only a few cents per gallon.
It is exceedingly low profits and public resistance to building refineries that give little incentive for companies to spend the $2 billion dollars needed to build a new refinery. It is no surprise that the second biggest cost of making gasoline is the tax burden placed on the companies. Government is second only to the OPEC cartel as the reason why the price of gasoline is so high and the supply is so limited. Why am I not surprised??
The only solution that makes any sense is to find another energy source that is not dependent on OPEC manipulation of the supply and price of crude oil. Before 1970, the price of crude oil was about $10 per barrel. The present price is in the $65 per barrel range. The difference represents the difference between present gasoline at about $2.40 a gallon versus a price of about 37 cents a gallon!! Conservation of gasoline is often touted as a solution to the problem. If we use less gasoline and hence less crude oil, there will be more available and the price will drop. However, conservation is just another form of mutual misery. “If I can’t get the gasoline I need then you can’t get it either“. Children!!!! Making ethanol from corn is not a solution either. Over 85% of total corn production would be needed to make ethanol that still would not bring the price down to acceptable levels. Only the conversion of cellulose to ethanol will give the volume of ethanol that will truly make a satisfactory difference in the price of gasoline.
Moreover, the money that is going to the OPEC countries for their crude oil is being used to finance the Islamic Imperialist attacks around the world. It is no accident that the rise in the price of crude oil and the first attacks by Islamic fanatics occurred at the same time.
The petroleum companies are making huge profits in spite of the huge cost of crude oil and the small profit margin making gasoline. The reason for the huge profits is not because they are charging more for their product than is ethically reasonable. The reason for the huge profits is the fact that there are only five or six refineries left in the whole United States. Kalamazoo used to have the Lakeside Refinery on Cork St. but it went out of business when the price of crude oil made it impossible to make any profit. There are no refineries left in Michigan and the same is true for all states except those that have nearby sources of crude oil or are located where oil tankers can unload directly into the refineries. The result of only a few existing refineries left, is that the profit that is available is concentrated in those refineries that are still able to stay in business. The United States must have sufficient gasoline, even at high prices, to keep the economy going.
Taxing the oil companies with the excuse that they are making “excess profits” only gives government more money to spend for reelection and does nothing to increase the supply of gasoline or make the price of crude oil more reasonable. The result of an “excess profits tax” is that the consumer must pay more for the gasoline that is available and thus has less for living expenses. This is just another example of the childish “mutual misery” social dynamic. If I am hurting, then you have to hurt too.!!!
The petroleum companies are making huge profits in spite of the huge cost of crude oil and the small profit margin making gasoline. The reason for the huge profits is not because they are charging more for their product than is ethically reasonable. The reason for the huge profits is the fact that there are only five or six refineries left in the whole United States. Kalamazoo used to have the Lakeside Refinery on Cork St. but it went out of business when the price of crude oil made it impossible to make any profit. There are no refineries left in Michigan and the same is true for all states except those that have nearby sources of crude oil or are located where oil tankers can unload directly into the refineries. The result of only a few existing refineries left, is that the profit that is available is concentrated in those refineries that are still able to stay in business. When many smaller refineries were still in business, the existing profits were distributed instead of concentrated. The United States must have sufficient gasoline, even at high prices, to keep the economy going.
Taxing the oil companies with the excuse that they are making “excess profits” only gives government more money to spend for reelection and does nothing to increase the supply of gasoline or make the price of crude oil more reasonable. It was career politicians who passed previous “excess profits taxes” The result of an “excess profits tax” is that the consumer must pay more for the gasoline that is available and thus has less for living expenses. This is just another example of the childish “mutual misery” social dynamic that politicians and government in general use to try and justify raising taxes. The politicians believe that we are so stupid that we never understand or object to the “If I am hurting, then you have to hurt too“ policy that they use to try and justify raising taxes. Voters are not as stupid as our government and social experimenters would like to believe.
If government and global business were really ready to find other sources of energy besides oil, they would have encouraged and helped the effort a long time ago.
Reference: Scientific American, June 2006, pg. 88-89