I wrote something about the real cost of gasoline a while back. Most of that information is valid, but I had a real “DUH!” moment this weekend. So I just had to update that post.

I heard that regular gasoline was averaging $3.16 per gallon this week. Wow, that is a lot, huh?

But did you know that crude oil costs $75 per barrel this week also? Do you know how many gallons of oil are in a barrel? There are 42 gallons of crude oil in a barrel. Now $75 per barrel / 42 gallons per barrel calculates to be $1.79 per gallon JUST FOR THE COST OF CRUDE OIL!!!

NPR (see link below) indicates that there is 55 cents per gallon of taxes at the pump. I thought it was about 75 cents. My bad. Additionally, NPR says that marketing and distribution runs about 11 cents per gallon.

$3.16 (cost at the pump) - $1.79 (cost of crude oil) – 55 cents per gallon (cost of taxes at the pump) – 11 cents per gallon (cost of marketing and distribution) = 71 cents at the pump for the oil companies.

Wow, 71 cents per gallon? That is not that much. Is it? THIS is how BIG OIL is cheating the drivers of the US?

Let’s look at this a bit more.

I remember when I first began to drive. The absolute lowest price I ever saw for gas was 19 cents per gallon during what used to be called a “gas war” sometime in the late 1960’s. Typically the price was more like 22 cents per gallon. But we will use 20 cents per gallon as a nice round figure for the cost of gasoline 40 years ago in 1967.

Honestly, I don’t know how much total tax there was at the pump in 1967. The link below indicates there was 4 cents per gallon federal tax, so we will use that. Additionally, crude oil cost $2.90 per barrel in 1967, which calculates to be 7 cents per gallon at the pump. I have no idea what marketing and distribution costs were in 1967, but let’s assume 2 cents per gallon. So assuming 20 cents per gallon total cost at the pump – 7 cents per gallon (cost of crude oil) - 4 cents per gallon (cost of taxes at the pump) – 2 cents per gallon (cost of marketing and distribution) = an actual take for BIG OIL of 7 cents per gallon in 1967.

If you do the math (and I did) an increase from 7 cents per gallon in 1967 to 71 cents per gallon in 2007 over a 40 year period means about a 6.0 % rate of increase per year. Huh? Yep, that is the amazing power of compound interest

Now I am not an economist, but doing some internet research, I calculated that the rate of inflation for the last 40 years is about 4.6 %. In comparison, the price of a first class stamp has risen at a 4.9 % rate and a Hershey candy bar has risen at a 7.6% rate. And let’s not even THINK about the cost of bottled water!

Remember that during that same 40 year period, all of these events have also happened:

1. The oil depletion allowance was eliminated by Congress. This used to be a tax break that acknowledged that there is a depleting amount of oil under the ground. No longer do the oil companies get this tax break.

2. OPEC was formed, meaning that the US and the oil companies have to deal with a political group of foreigners that set the price of crude.

3. My understanding is there has not been a new US refinery built in 35 years or so. I would suggest that our domestic use of petroleum has increased pretty dramatically over that period.

4. The EPA has forced dozens if not hundreds of designer gasoline blends on the oil companies. Gasoline made for use in Chicago won’t work in New York, for example. Remember Katrina? EPA regulations wouldn’t let gas from other areas of the country be shipped into the Southeast. Additionally, there are different blends for different seasons of the year! All this means that there are huge inefficiencies when the refiners have to switch from one to another.

5. How about the nationalization of oil company facilities in the Middle East, in Africa, and recently in Venezuela and I believe in Russia.

6. The environmentalists have worked as hard as possible to keep the oil IN the ground off the US coasts, in Alaska, etc. Additionally, they have WORKED to make gasoline as expensive as possible.

7. Don’t forget that you are paying something like 75 cents per gallon of taxes on a gallon of gasoline.

8. Let’s not forget the huge increases in use of oil around the world, especially in China and India.

9. Gasoline prices in the US are still ½ to 1/3 of what they are in Europe.

Now it seems to me, that taking all this into account, the price of gasoline is not so unreasonably high. In fact, it seems to me that the oil companies have worked pretty efficiently in keeping prices as low as they are today.

I am just glad that I do not have to drive my car on bottled water.

THE TAKE FROM A GALLON OF CRUDE OIL:

I did a bit of research and found this data for the amount of gasoline vs. other products produced from a barrel of crude oil:

44.2 gallons total *

* The total volume of products made is 2.2 gallons greater than the original 42 gallons of crude oil, representing a processing gain.

http://en.allexperts.com/q/Oil-Gas-3147/Gallon-gas.htm

NOTE: Only 19.5 gallons of gasoline come out of each barrel of crude oil! Also, I suspect that the extra 2.2 gallons is due to additives, etc. that don’t just grow from thin air, but cost the refiner money.

WHAT DOES NPR (OF ALL PEOPLE) HAVE TO SAY?:

Here is an NPR article about what constitutes the cost of gasoline. This article was written in April of 2006. Crude oil prices were over $70 per barrel and Gasoline cost $2.90 per gallon. Not all that different than now. At that time they indicated that crude oil costs were $1.60 of the cost of that gallon and that taxes added 55 cents per gallon with distribution and marketing at about 11 cents per gallon.

http://www.npr.org/templates/story/story.php?storyId=5365439

LOTS OF ANSWERS ABOUT THE COST OF GASOLINE:

Here is a neat site from the Feds that answers a lot of questions about gasoline, cost, etc.

http://216.239.51.104/search?q=cache:c8ijBHsyqAAJ:www.fueleconomy.gov/feg/gasprices/FAQ.shtml+historical+taxes+on+gasoline&hl=en&ct=clnk&cd=2&gl=us

HISTORICAL COST OF CRUDE OIL

Lastly, here is a site that gives the cost of crude oil per barrel, raw numbers and adjusted for inflation. It is worth noting that when I started to drive, real cost of crude oil was $2.92 per barrel and that adjusted for inflation it would be $16.56 per barrel.

http://inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp

HISTORICAL TAXES ON GASOLINE AT THE PUMP

http://216.239.51.104/search?q=cache:g1J_tpvtF8QJ:www.artba.org/economics_research/reports/gas_tax_history.htm+historical+taxes+on+gasoline&hl=en&ct=clnk&cd=1&gl=us