Saturday, June 7, 2008

The truth about oil prices

The price of oil is given by the cost of one barrel of oil. A barrel of oil is 42 gallons. At an oil price of $138 a barrel, the price of oil is $3.29 a gallon. Yet we wonder why gasoline costs $4 a gallon.

With gasoline prices in the range of $4 a gallon, this leaves about $0.70 (70 cents) a gallon for oil to be processed into gasoline and other derivative products and for gasoline to be delivered and sold at the local gasoline station. Costs that must come out of the $0.70 include transportation to oil refineries, actual oil processing in accordance with environmental regulations, delivery to the gas station and ultimately to the pump.

Taxes also are part of the price of gasoline at the pump. To begin the tax calculation, the federal tax on gasoline is $0.184 per gallon (18.4 cents). State taxes vary from state-to-state, from a low of $0.08 a gallon in Alaska to a high of $0.32 per gallon in Wisconsin. Gasoline taxes in most states are in the 18 to 25 cents a gallon range but New York state gasoline tax is 32 cents a gallon and in Pennsylvania the gasoline tax is 31 cents a gallon.

Now recall that we started with $0.70 (70 cents) a gallon over the oil price for processing, etc. the oil and for bringing gasoline to the pump at the gas station, and all together the gasoline price of $4.00 a gallon includes state and federal taxes for a total of $0.27 per gallon in Alaska to $0.51 in Wisconsin. This leaves a potential "profit" maximum of $0.33 (33 cents a gallon) in Alaska and $0.19 (19 cents a gallon) in Wisconsin.

The profit for the oil company and the gas station must come out of the 33 cents or 19 cents. However both the oil company and gas station have costs that must be added to costs they incur before setting the gasoline price to you at the pump. These costs vary but there isn’t a lot of room for oil company stockholders and gas station owners to reap the benefit of their investments.

The obvious question then is how come oil companies are reporting such large profits if the numbers show the profit potential per gallon of oil to be so relatively low. The answer is volume.

Huge amounts of oil are needed to fuel the economic engines of all countries and the demand for oil continually grows. The latest forecast from the International Energy Agency calls for global oil demand of 87.2 million barrels a day this year. That would be an increase in consumption of 1.3 million barrels a day from 2007 despite a U.S. economic slowdown and soaring oil prices.

Just when oil is getting more expensive to produce, the oil industries in three key countries, Mexico, Russia and Nigeria, lack the money or will to maintain or increase levels of oil production and global oil production in general is headed into a decline.

The Russian oil industry, for example, announced that production had fallen 1% in the first quarter of 2008. According to the Russian energy ministry, oil production for the full year could be lower than in 2007. Any decline would mark a huge reversal. Russian production has grown steadily over the past 10 years, and in its supply-and-demand projections the International Energy Agency has been counting on growth in Russian production of 5% by 2012 to offset big declines in older fields in the North Sea and Mexico.

The International Energy Agency now estimates that worldwide production from older existing fields is now falling each year by about 4.5 million barrels a day. To stay even, let alone to meet rising demand from the new automobile drivers of Russia, China and other countries, the world has to increase annual production by 4.5 million barrels a day.

While all this is happening Democrats in government and environmentalists are standing in the way of the United States' ability to increase the supply of oil. Left-leaning politicians and, unfortunately too many Republicans, are more concerned with erroneous beliefs in man-made global warming to focus on the real needs of our country. As we switch light bulbs, create a huge additional bureaucracy for cap-and-trade "carbon credits, and make inferior additions to dilute the gasoline fuel, our economy will undergo an enormous destructive effect and our way of life will be irreversibly altered for the worse.

The United States is blessed with an almost limitless capability to produce oil but we are prevented from recovering and producing it. Proven technology can be harnessed to extract oil from abundant coal reserves and large amounts of oil in place remain untapped. Americans have proven to be able to rise to national emergencies and overcome all obstacles by unleashing a market economy on any problem but American success is artificially thwarted by socialists masquerading as environmentalists.

The only thing that can be done is for Americans to waken to the threats we face and take all possible action to change the direction our leaders are taking us; God help us all if we don’t.

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