Crude Oil (Continued from 2)
that motor gasoline could reach $4.00
per gallon at some point in the June
to August period. Remember, this is
without any further rise in the price of
crude oil.
Ihe Basics
A barrel of oil contains 42 gallons.
Assuming there is a straight pass
through of higher crude oil costs to
petroleum product prices, in simple
terms every $1.00 increase in the price
of crude oil raises the price of gasoline
and other products by 2.4 cents a gal
lon. In round numbers then, a $10 in
crease in crude oil prices raises gasoline
by $0.25 per gallon. In reality, it’s much
more complicated than that. Local,
seasonal and cyclical market conditions
come into play, affecting the supply and
demand for individual petroleum prod
ucts, which can affect the ability of re
finers to pass through any given change
in crude oil costs. For example, in the
summer time, an increase in crude
oil costs might flow through faster to
higher gasoline prices on more than a
dollar for dollar basis, because demand
is high during the summer driving
season, while the flow through to home
heating oil prices may be constrained
by a weak market. The opposite would
be true in winter. Inventory levels and
competition also play a role.
In round numbers, the U.S. con
sumes about 20 mmbd of liquid petro
leum products every day, consisting
of motor gasoline (46%), jet fuel (9%),
diesel fuel, heating oil, other middle
distillates (25%), and other petroleum
products like heavy fuel oil and lique
fied petroleum gases (20%). Altogether,
transportation fuels (jet fuel, diesel,
and gasoline) account for about 75%
of all U.S. petroleum consumption. So
the price of oil, working through the
distribution system, has an immediate
impact on the price of almost every
thing, especially food. An increase in
the cost of gasoline or other petroleum
products affects consumers in the same _
way as a tax increase. It leaves consum
ers with less money to spend on other
things, and the economy suffers. The
average price of gasoline is projected to
be about $1.00 per gallon higher this
summer than last, and if these higher
prices persist, the EIA estimates that
vehicle-fueling costs for the average U.S.
household (which owns 1.6 cars) will
be about $700 higher in 2011 than they
were last year. If the price of all petro
leum products rises by $1.00 per gallon
and stays there, U.S. consumers will
spend an additional $840 million per
day, and $306 billion per year on oil. In
macroeconomic terms, this is equal to
about 2 percent of our GDP, an amount
equal to roughly one-half of the mas
sive economic stimulus plan signed in
March 2009.
What’s in the Price of Gasoline?
There are about 250 million vehicles
that use gasoline in the U.S., each travel
ing an average of about 12,000 miles per
year, with an average fuel efficiency of
22.6 miles per gallon (mpg). Gasoline is
delivered from oil refineries and import
terminals mainly through pipelines to
a massive distribution system, where
it is finally trucked to about 168,000
retail outlets throughout the U.S. The
price you pay at the pump is made up
of four main components: crude oil
cost, refining, distribution and market
ing and taxes. To illustrate by example,
on March 7, the national average retail
price of regular grade gasoline at self-
service gas stations, including taxes was
$3.52 per gallon. About 66% of this (or
$2.40 per gallon) was the refiners cost
of crude oil, about 11% (or $0.38 per
gallon) was refinery processing costs,
9% (or $0.32 per gallon) was market
ing and distribution costs (that include
delivery by pipeline and truck, storage
and retail markup), and 14% (or $0.42
per gallon) was federal, state and local
taxes and fees combined. These percent
ages are not fixed, and they can vary
significantly over time.
Price levels are not equal every
where, and there can be significant
regional, state, and local differences.
Greater distances from the source of
supply usually mean higher prices.
Gasoline prices in the Gulf Coast states
where most of our oil is produced,
imported and refined are among the
lowest in the nation. Winter gasoline
blends are different than summer gaso
line blends. Some parts of the country
require “reformulated” gasoline to re
duce air pollutants during combustion
and evaporation during refueling, and
that reformulated gas is more expensive.
Other parts of the country put different
levels of restrictions on fuel transporta
tion and storage, raising costs. Ethanol
is blended into some gasoline streams
(up to 10%), while others are ethanol-
free, depending instead on different •
additives (called oxygenates) to raise
octane and promote clean burning.
Keeping separate all these different
fuels, in three grades and winter and
summer blends, raises distribution and
storage costs. Finally, let’s not forget
taxes. The federal excise tax on motor
gasoline is 18.4 cents per gallon, and
it hasn’t changed in years. The average
state tax is about 22 cents per gallon,
and the average local tax (including
other fees) is about 2 cents. North Caro
lina ranks 13th in the nation on gasoline
taxes, with combined federal and state
taxes of 51.2 cents per gallon (18.4 cents
federal, 32.8 cents state). California,
Hawaii, Indiana, Illinois and New York,
at 70 cents per gallon or more, have the
highest gasoline taxes in the nation.
Our Local Stations
In times of extreme price volatil
ity, some retail outlets, especially those
in high traffic areas, will change their
prices daily or even hourly. Most of
our local station operators generally
change their prices each time they get a
delivery, and many low volume dealers
may get deliveries only once or twice
a week. In this case, with rapid price
movements, a low volume dealer who
hasn’t received a shipment in five or six
days may be behind the curve compared
to the station across the street that just
took delivery of a higher priced load.
There are other things that can account
for differences too. For example, there
are two stations next to each other di
rectly across the Atlantic Beach cause
way. At the time I wrote this article, the
stations had a price differential of five
cents per gallon for regular grade gaso
line. Upon closer examination, however,
I discovered that the higher-priced sta
tion was offering ethanol-free gasoline.
Ethanol-free is more expensive to pro
duce, but it gets better mileage (ethanol
has a 33% lower energy content than
gasoline), and ethanol-free gas is pre
ferred by many boaters because ethanol
is a magnet for water. It soaks up water
like a sponge, and we all know what
water can do to a boat’s fuel system.
So What’s a Person to Do?
Suck it up and put a brick in your
gas tank (just kidding). While this may
save water in your toilet, it won’t work
to save gas. While an individual acting
alone won’t have much influence on the
global forces at work in the oil market,
there are a number of common sense
measures you can take to save money.
For example, before you fill up, go to
www.gasbuddy.com, put in your zip
code, and you will get the prices being
charged by local stations that day. You
can also plan your errands ahead, con
solidate tasks and minimize the number
of miles you have to drive to get things
done. If you have more than one car, use
the smallest one you need to do the job.
Also, keep your car in tune, check tire
pressures often, clean your air filter, and
get the “junk out of the trunk.” If you
are in the market for a new car, remem
ber, weight is the enemy of efficiency.
You could consider a clean diesel, a
hybrid (gas-electric) or one of the new
plug-in electric vehicles (pev’s) if you
have a round-trip commute of 50 miles
or less. Sure they cost more, and you
will need to hire an electrician to install
a recharging station in your garage, but
you get a $7,500 tax deduction. And
remember, technology marches on. The
sporty versions of today’s compact cars
(like the Mini Cooper S, Civic Si, and
the VW GTI) have all the same bells
and whistles as luxury vehicles, and they
outperform the muscle cars of the ‘60s
and ‘70s in speed, acceleration and han
dling, all while returning 30 plus MPG.
The Answer to High Oil Prices is High
Oil Prices
Oil is traded 24/7 on electronically-
linked commodities exchanges around
the world. The volume of “paper bar
rels” traded daily exceeds actual con
sumption by many multiples. This large
volume of trades is an efficient price dis
covery mechanism and a guarantee that
no one group can ever have sufficient
clout to manipulate the market. We, and
the rest of the world, are “price tak
ers,” meaning that the price is what the
price is. High oil prices sow the seeds of
their own demise, as they always have.
They signal consumers to conserve,
switch to alternatives or do without,
which leads to demand reduction. At
the same time, high prices encourage
producers to produce more oil and earn
more income. High prices also make
it possible to produce more high-cost
reserves, from deep water for example,
Arctic seas or oil shale. High oil prices
also pave the way for alternative energy
supplies. If the U.S. is indeed the Saudi
Arabia of solar and wind energy and
shale oil, why aren’t we using more of
•them? Because they are too expensive,
and they can’t compete with cheaper oil.
But as oil prices rise, they gradually look
better and better.
28 The Shoreline I April 2011