Much of the anger over gasoline prices has calmed down as those prices have dropped in the past few weeks. However, just a few months ago, Congress held hearings on “obscene” profits made by oil companies. America has consistently been up-in-arms over the outrageous price of a single gallon of gasoline. The gut-reaction of many Americans is to demand that their government set limits and get control over the price of gasoline. However, such a reaction on the part of the government would be foolish and counterproductive.

How much do oil companies make off of a gallon of gasoline? When all of the expenses are broken down, oil companies only make a profit of approximately ten cents per gallon. There are enormous costs involved, as is shown in the graphic below.

Costs that oil companies cannot control in any way comprise 93 percent of the price of gasoline. The companies only truly control the costs of distribution and marketing. Obviously, the crude oil itself consumes more than half of the price of a gallon of gasoline. An outrageous 18 percent of the cost of every gallon of gas goes to the government in the form of federal, state, and local taxes. Higher gas prices do not mean larger profits per gallon for oil companies. Instead, both higher and lower prices at the pump indicate changes in the price of crude oil and changes in the oil futures market.

Oil company profits have jumped recently, too. Are they price-gouging us at the pump? Not at all—in fact, oil company profits per dollar are on par with the per-dollar profits of other industries within our economy, as you can clearly see in this graphic:

One easy explanation for higher oil-company profits is an increase in demand. Even when car sales slow, more cars are on the roads every year. This increase in the number of cars has a natural effect on the economy at large, but gas prices are where we are most likely to see an increase in demand. This increase in demand results from the fact that, when it comes to gasoline, the quantity demanded at every price is higher when there are more cars on the road. As a result, the demand curve shifts outward, raising the price of gasoline. The profits of oil companies do not come from price gouging, but rather from the basic economic concepts behind an increase in demand. Suppliers naturally make more money when the overall demand for their product increases. Additionally, oil companies do not control most of the production of the world’s crude oil. Instead, the Organization of Petroleum Exporting Countries (OPEC) sets limits on production from their member countries, which control 78 percent of the world’s oil reserves, as is seen in the graphic at the bottom of the page.

These factors indicate that the government price-controls would be disastrous for the economy. If the government caps the price of gasoline, oil companies will inevitably cap the quantity they supply. After all, if obtaining, refining, and distributing oil costs the companies more than they can make by selling the refined product, then they have no incentive to produce any of the product beyond that which makes them a profit. Simply put, a price cap will also likely cap the quantity supplied, which may or may not result in a shortage. At the very least, a price cap would discourage oil companies from exploring for more oil. If they could make only slim profits on what they were currently supplying, they would have absolutely no incentive to spend money trying to find more oil. In the long-run, this situation would make a shortage much more likely, since demand for gasoline and other forms of refined oil, both in the United States and worldwide, is on the rise.

Our instinctive reaction to high prices may push us to call for controls on what we see as exorbitant gas prices, but such caps would be foolish. As a nation, we must understand that high gasoline prices do not indicate an increase in revenue per gallon for oil companies. Instead, high gasoline prices are a result of many other factors, including the government’s gouging of the American driver in the form of taxes. Instead of caps on gasoline prices, we should talk about caps on gasoline taxes.

Sources: http://www.conocophillips.com/newsroom/other_resources/energyanswers/oil_profits.htm, http://www.opec.org

Print       E-mail      

Who Then Can Be Saved? Randomness From a College Campus The American View on Torture: Past and Present Panic at the Pump