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Other Voices: What’s a fair price to pay for gasoline?

Refining petroleum products from crude oil is a chemist’s dream. For every barrel of crude (42 gallons) flowing into a refinery, out comes 19 gallons of gasoline, nine gallons of diesel, three and a half gallons of heating oil, four gallons of jet fuel, one point seven gallons of propane, and seven point three gallons of petroleum distillates used to produce plastics, synthetics, asphalt, and petrochemicals. (Additives and catalysts result in more than 42 gallons of refined products).

Big Oil must price these products so total revenues cover the costs to produce/import the crude, refine the crude, distribute the refined products and provide a profit.

So what’s a fair price to pay for gasoline and the other petroleum products? The problem is crude oil is a traded commodity and is only loosely subject to Free-Market supply and demand. So how does Big Oil set the price?



You can get a glimpse of what might be a pricing strategy if you visit The Energy Information Administration (EIA) website (www.eia.doe.gov). It provides a wealth of information about crude oil and the costs of refined products. Take gasoline for example. Over the last three years, Big Oil has priced gasoline so that gasoline revenues cover about two thirds of the cost of a barrel of crude. Whether this is by design or that’s just how it turned out is not clear.

In June 2006, crude cost $64 a barrel and gasoline cost $2.28 per gallon average. The revenue from gasoline, diesel, Jet fuel, heating oil, and propane was $90.21, for a gross profit of $26.21 per barrel of crude. The revenue from gasoline alone covered about 66% of the cost of the crude.




In January 2008, crude cost $93 a barrel and gasoline cost $3.10 a gallon average. The revenue from the refined products above was $111.94, for a gross profit of $18.94 per barrel of crude. The revenue from gasoline alone covered about 63% of the cost of the crude.

In June 2008, crude cost $140 a barrel and gas cost $4.10 a gallon average. The revenue from the refined products above was $153.44, for a gross profit of $13.44 a barrel of crude. The revenue from gasoline alone covered about 56% of the cost of the crude. In this case, gasoline was edging towards $5 a gallon and Big Oil started to back off on how much gasoline revenue to extract per barrel of crude, possibly fearing a consumer revolt at the gas pump.

In mid-April 2008, the U.S. production of crude was 5.1 million barrels a day. Crude oil imports were 9.5 million barrels a day. So the crude oil input to U.S. refineries was 14.6 million barrels a day. The U.S. refineries produced 6.86 million barrels of gasoline a day along with the other products of diesel, Jet fuel, heating oil, propane and the other petroleum distillates. And since we have limited refining capacity in the U.S., we must import two point three million barrels a day of gasoline to meet the U.S. demand.

I think the EIA data shows that Big Oil is pricing gasoline at a level so the gasoline revenue covers about 65% of the cost of a barrel of crude. The other refined products Ð diesel, jet fuel, heating oil, and propane are priced so their revenues, combined with the gasoline revenues bring a gross profit of about $20 per barrel of crude. A refinery input of 14.6 million barrels a day would generate a profit of about $300 million a day. Data for revenues from other products Ð plastics, synthetics, asphalt and petrochemicals are not available but their revenues would increase the profit figure.

I have a problem with Big Oil’s apparent pricing strategy. I don’t think gasoline should be priced to cover 65% of the cost of a barrel of crude. Maybe 50% is a better number. With a lower price, Big Oil would see less profit and would likely raise the prices of diesel, Jet fuel, heating oil, and propane to offset the reduced gasoline revenue. I think a profit figure of $300 million a day is excessive and comes at the expense of the driving public who have no recourse but to pay the high gasoline prices.

Do you think Big Oil would agree to revise their pricing policies and profit structure in favor of us consumers? I don’t think so either. But we certainly should take a closer look at the causes of wildly fluctuating crude oil prices beginning with the commodity market, commodity traders, and market speculators.

The best solution, though, is to say no to Big Oil and demand more alternative-powered-vehicles such as hybrids, electrics, hydrogen, bio-fuel, and fuel cells.

rrr

William Clark

lives in Grass Valley.


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