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Other Voices: Factoring the ultimate costs is like comparing berries and oil

William Clark

Suppose you’re a farmer who grows blueberries and also has a small business making and selling blueberry jam. Suppose you are located in a state where the demand for blueberry jam is very strong. Suppose you can grow only enough blueberries to satisfy a third of your customer demand and you must import bushels of blueberries from surrounding states to make up the remaining two-thirds. And suppose those bushels you “import” cost twice as much as it costs you to grow and process your own blueberry crop into blueberry jam. My question is, how much should you charge for your jars of blueberry jam?

You could sell your jam based on the cost of the bushels of berries you “imported” and reap a nice profit since one-third of the berries (your own berries) cost you half as much as the “imported” ones. Or you could sell your jam at a price that factored in the lower costs of your own berries and pass the “savings” on to your customers. Which method would you choose?

Well, Big Oil is in a similar situation with regard to crude oil and I think they have chosen the first method by which to price their gasoline for sale to us. U.S. oil companies produce a third of the crude they refine on a daily basis. The remaining two-thirds they import from oil producers around the world. The crude that U.S. companies produce in the continental U.S. and refine into gasoline and other petroleum products costs them a fraction of the price of crude on the world market. Yet I’m sure they sell us gasoline as if the cost of all the crude they refine is based on the world market price. They pump crude from our own oil fields, refine it in their refineries, then sell it back to us as gasoline at a price based on the cost of crude worldwide. We get no cost savings from the one-third of the total crude that’s pumped from our own oil fields by our own oil companies.

I realize this analogy is not exact. All crude is not created equal and the quality varies considerably depending on the region. Also, crude is a traded commodity and is not a product subject to Free Market dynamics of supply and demand. But let us continue.

Last year at this time crude cost $78 a barrel and gasoline was selling for $3.04 a gallon. Big Oil was happy, profits were up, consumers griped but we lived with it. Then OPEC started to manipulate the oil supply and then the commodity traders, and speculators got into the act, and today we have crude at $144 a barrel. Then Big Oil got into the act and now gasoline is selling for $4.65 a gallon.

What if Big Oil decided to price gasoline based on actual costs of the crude they refine? What if they took into account the lower cost of the crude they produce in the continental U.S. and run through their refineries? Our oil companies produce just over 5 million barrels per day (BPD) of crude and import 10.8 million BPD. At today’s price, Big Oil treats the total amount of crude (15.8 million BPD) as costing $144 per barrel. After the refining process, we pay $4.65 a gallon for gas.

Now, take the 5 million BPD of U.S. produced crude and price it at, say, what it was last year, $78 per barrel. After all, it’s our own oil and we should be able to set the price. Then take the 10.8 million BPD of imported crude and price it at the world market of $144 per barrel. When the U.S. crude is factored in at the lower cost, I calculate a total of $1.95 billion a day for the crude. If Big Oil prices the whole 15.8 million BPD at $144 per barrel, I calculate a total of $2.3 billion a day. The difference is $350 million a day. Depending on which side of the fence you’re on, that figure represents a profit for Big Oil or a savings to the consumer, which could result in lower prices at the gas pump.

Whether you’re a small farmer in the business of making blueberry jam or you are Big Oil refining crude into gasoline, consumers should reap the benefits of cost differentials of the kind discussed here.

William Clark lives in Grass Valley. He is not an oilman or an economist or a commodities trader. He is a senior citizen just trying to juggle a fixed income so he can buy gasoline as well as an occasional jar of blueberry jam.

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