Are We Getting Gouged or Not?

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There is a lot of punditry in the sphere this week about gas prices, the President's approval rating, crude oil costs, Lee Raymond's retirement package, price gouging, and how all of these subjects are closely related.

Being the analytical (anal my friends would say) dude that I am, I cannot stand having a discussion without any facts.  Most of the pontificating coming from politicians and pundits is fact free, so I found the relevant data from the DOE, slapped it into a spreadsheet, and generated a few graphical masterpieces to help me understand what was really going on.

Here is the first chart, which shows the world price of crude oil per gallon compared to the retail price of gasoline in the US for the past 15 years or so, along with the percentage of the gas price that is the cost of the crude.  Click on the chart for a larger look. 

A couple of notes before I go on. 

The gas price is net of US taxes, using the $0.184/gallon federal tax and $0.24/gallon (I used the Maryland rate since it looked near the median of state tax rates-and I live in MD now) for a state tax rate.  So I subtracted $0.424 from the reported US gas price to get the price in the graph.

There are 42 US gallons in each barrel.

I used the total world crude oil price.  There are many different types of crude, and I have no clue which is used primarily for gasoline, if there is one.

I used the average US gas price, for all grades.

What did I learn from this data?  Well....

1.  In the past 4 months, the cost of crude oil is a larger part of the retail price of gas then it has been in the past 17 years (at the end of 2005, it was 67.8%, the highest in this period).  That indicates that gas producers/retailers are not passing along all of the supply cost increases.

2.  Crude oil prices went down after the Gulf War in 1991.  It appears that the Gulf War had little impact on prices long term.  The US invasion of Iraq in 2003 had minimal impact on world crude oil prices.  Prices on 3/28/03 were 23.6% lower then on 3/14/03, and 19.6% lower then on 12/28/02.  In fact, oil on 3/28/03 was only 4% higher then at the beginning of 2000.  Prices stayed fairly flat through this period until late 2003 and into 2004.  If the US in Iraq had an impact on oil prices, it was delayed.  The conventional wisdom probably said prices would go up as a result of the two wars.  Not sure if this means anything, but I thought it was interesting.

3.  There is little consistent relationship between supply cost and retail price.  Look at '97-'99 where gas prices follow crude prices down.  Then between '00 and '01, crude prices drop slightly, but gas prices rise significantly.  I generally think this is how it should be, as oil/gas is a commodity, and should be priced to sell as the market will pay.  To all you price control freaks out there-more supply means lower prices, period.  More on this later.

4.  Point one tells me that if we are being gouged, it's by the oil suppliers, not the gas producers/retailers.  Since 3/28/03, crude has increased from 45.5% of the retail gas price to 62.4%.  Crude is up 160.4%, gas is only up 89.6%.  If Exxon/Mobil is buying oil at the world crude cost, they are eating some of the cost increases since 2003.  If you apply the same mix of costs to today's crude price, gas would retail at $3.30, plus the $0.424 in US taxes for a total of $3.724 per gallon.  I would expect gas to get to this range sooner rather then later, but I don't really know anything about the oil business. 

For US sourced oil, the suppliers are the oil companies, so for the 34.8% of our crude processed that is US sourced, it would be fair to say the oil companies (who are the crude suppliers) are gouging us.  For the other two-thirds of our crude supply, we are being gouged by the suppliers, which in most cases are countries, not companies.  It's probably fair to say that two-thirds of the US consumer's anger is not directed at Canada (#1 @ 17% of imports), Mexico (#2 @ 13.2%), Venezuela (#3 @ 11.3%), Saudi Arabia (#4 @ 10.1%) and Nigeria (#5 @ 8.7%).  I expect to hear Senator Clinton and her mates immediately insist that the oil producing countries who are gouging us appear before Congress to explain their pricing strategy.  Ha!  Did you know the Saudis weren't even in the top 3?

Check out this post for some analysis of Exxon's recent profit reports.

Here's the second graph.  It shows the estimated annual tax revenue generated for the federal and state governments on gasoline sales, along with the daily US gasoline consumption.  As in the graph above, this is based on the current federal tax of $0.184/gallon and the Maryland state tax rate of $0.24/gallon.  I used Maryland because I live here.  The actual state tax rates vary from a low of $0.075 in Georgia to a high of $0.30 in Pennsylvania and Rhode Island.  Most are in the low to mid 20's so I used MD's rate.  If someone wants to figure out the actual state tax revenue based on each state's consumption and rate, or has access to revenue data, let it rip, I would love to see it.

   

What did I learn from this graph?

1.  The feds and the states are making a ton of dough on our backs every time we fill up.  This blew me away.  Twenty five to thirty five Billion dollars  a year on gasoline taxes?  Holy cow.  I would think the roads would be in a lot better shape than they are.  Think about that next time you hear a politician calling for tax increases.  What the heck are they spending this money on? 

2.  We are burning a lot of gas, and our usage is growing, but not as fast as I thought.  Only 16% more then 5 years ago.  I thought it would be faster then that.  Usage was actually lower at the end of '03 then it was at the end of '01 and '02.  Go figure.

The consumption numbers in the chart are millions of barrels per day.  Forty-two gallons per barrel.  That's 382.2 million gallons per day in April of 2006.  If we used all of Lee Raymond's $400m pay package to buy gas, it wouldn't pay for half of one day's worth of gas for the US.  We should give the guy a break.  He worked for Exxon for 43 years, made a lot of good moves, and deserves to be well compensated.  Arguing about it and dragging him in front of Congress is a waste of time and effort.  Do you want to run Exxon/Mobil for a pittance? 

Well, this was fun for me (I said analytical, didn't I?) and I hope it was for you too.  Now I can have a more factual conversation about oil and gas pricing.  Some final thoughts-

1.  Oil costs have little to do with gas prices, at least on a consistent basis.  If we will pay for it, they will charge for it.  That's the way a free market should work, we should stop trying to fix it and devote those energies to finding more supply.

2.  We need more domestic independent sources of oil, that aren't controlled by countries we don't, or potentially won't, get along with.  Demand is not going to decline, so supply must increase if we want prices to come down.  Everyone who whines about high gas prices, while working to prevent US oil exploration or refinery construction is a hypocrite (see members of Congress).   

3.  We use a bunch of gas, and will continue to do so until a better energy source is developed.  We are kidding ourselves by attempting to force feed consumers into the next energy source, whatever it may be, especially using the government to do the forcing.  It has never worked in the past, and it will not work this time.  Free people and free markets will drive innovation, we don't need Uncle Sam to do or manage this.

4.  We need to figure out a way to get our $60b in annual gas taxes back from the government.  Is anyone calling Congress and their state government on the carpet for this gouging?  Ok, I guess I just did.      

Is there a single member of Congress that gets this?      

LATER (April 21, 2006 11:39a EDT):  For more on gas taxes, read this brief (pdf link-from the API) I found from November 2004.  I was reading some more after I posted about gas tax revenue, and I initially thought I overstated the estimated tax dollars.  I couldn't find gas tax receipts in the federal budget.  Then, after reading the API info, I realized that I may have understated the tax revenue we pay on gasoline purchases.  It looks like the state tax rate is higher than $0.24/gallon.  OMG! 

LATER 2 (April 25, 2006 10:47a EDT):  Michelle Malkin links to a piece from Neil Cavuto raising the gas tax issue.  Maybe this should be part of the pork busters issue. 

LATER 3 (April 25, 2006 1:10p EDT):  Here is a graph that compares the tax dollars collected to the oil industry's profit for the last 25 years.  HT: commenter Greg F on Captains Quarters.  These guys from the Tax Foundation have the actual numbers for gas tax revenue from the Bureau of Economic Analysis.  My nums were pretty close.

LATER 4 (April 25, 2006 5:14p EDT):  Instapundit suggests that the Republicans timidity on gas prices is all part of a Rovian plot to get the Democrats to support tax cuts.  I may have to retract my Bob Menendez sarcasm.