Monday, November 05, 2007

Smoke and Mirrors on Petroleum Prices

Newspapers and online media outlets are full of breathless observations about crude oil prices and their effect on what we pay at the pump.
"The national average price for gasoline rose about 16 cents over the last two weeks..."

- San Francisco Chronicle
"If the uptrend continues, market watchers say this could be the week that oil manages to punch through the symbolic level and eclipse the inflation-adjusted record of $101.70 reached in April 1980."

- Wall Street Journal
But you know what? All these dire pronouncements are meaningless. The plain fact is that the price of gasoline right now has nothing to do with the price of crude. Are you paying $3.80 a gallon for gas? No? I didn't think so, and neither is anybody else...not anywhere in the nation! Despite the fact that, with crude at $100/barrel, $3.80 is the break even point for refiners...the BREAK EVEN POINT! Forget about profits.

Consider: Approximately half of the 42 gallons of crude in a standard barrel are refined into gasoline. So...$50 for 21 gallons or $2.38/gallon is the cost of the crude. Add to that the average of $1.40/gallon that comprises the cost of refining, transporting, and marketing gasoline (which includes $.40 in state and federal taxes). Hell the highest prices in the US are right here in Babylon by the Bay, and we're only seeing $3.28 for regular.

What's it all about then? Simple... Last spring--as the summertime petroleum consumption bonanza ramped up, crude hovered in the $70s, and gas prices topped out just above $4.00 a gallon--Big Oil raked in the profits. And now they can afford to subsidize our purchases--sell gasoline at a loss for a bit--because what they must ensure, in fact what they are desperate to ensure, is that we keep on consuming oil just as fast as we can. In other words, this is massive market manipulation.

So forget about opportunistic politicians who whine about price gouging. Complaining about gouging, with respect to a finite resource the remaining supply of which is already known, is absurd. What politicians should be talking about is the fact that Big Oil is selling at a loss in order to encourage demand. Or, to put this on a more personal level, we are all being manipulated through price fixing into consuming more petroleum than we probably should.

Think about that the next time you're at the pump.

More on the subject at Ice Station Tango.


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