Why Does Gas Cost So Much?

How can a single physicist know the answer?  Only an insider or an institute of experts like the Cambridge Energy Research Associates, or an investment company with computers and experts could do a good analysis of this, and they would charge you for it.  However, since this is an internet blog, I will just give my opinion of factors that could be involved.

First of all, the Republican debates will convince anyone that the goal of a company is to make as much profit as possible.  It is not to provide a service of supplying gas at the lowest price to consumers, or to provide jobs in the US, or even to fulfill a defense goal of achieving energy independence.  Some evidence of this is that the big five oil company profits were $137 billion last year, according to Joe Romm on thinkprogress.org.  The total profits from 2001 to 2011 were one trillion dollars.

Big 5 Oil Company Profits and Production, 2011

The $4 billion loss for BP in 2010 is due to a writeoff for the costs of the oil spill in the Deepwater Horizon.

While the total production of 16.2 million barrels a day is close to the US use of 19 billion barrels a day, a lot of the production is natural gas, and a lot of it is produced and sold abroad.  The oil companies also do refining.  So it is not at all accurate to take the profit and devide by the number of gallons produced a year to get a profit per gallon as I first did.

While talking about energy independence to get more offshore deep water drilling leases, the US oil companies exported an amount of oil equal to 15% of our oil usage, even though we were importing around 50% of our oil.  Remember, oil is a fungible commodity, tankering it around is cheap, and profit is their motive.

We now look at the profit as a percentage of sales.  The sales were extracted from their voluminous and highly technical 2011 annual reports by a physicist, not a financier, so I hope they are accurate.

Company Sales in Billions Profit in Billions % Profit Oil-equivalent Production Gallons/year Billions
BP $376 $26.1 6.94 54
Chevron $244 $26.9 11.0 41
ConocoPhillips $251 $12.4 4.94 26
ExxonMobil $467 $41.1 8.87 69
Shell $470 $31.2 6.64 49
Total $1,808 $137.7 7.62 239

Gas in the US averaged around $3.53 a gallon in 2011.  The average gas tax in the US was 48.1 cents a gallon in January of 2011.   So the net price from the oil companies is $3.05 per gallon.  The 7.62% profit on the total would give 23 cents a gallon profit.  This is only a rough approximation since the oil companies have other sources of income.  One company stated in the first quarter of 2011 that it was only making 7 cents a gallon off of its sales of gasoline in the US.

Gas taxes are 35.3 cents a gallon in exise tax in California plus an statewide average 2.25% sales tax, adding up to 44.3 cents a gallon for gas at $4.00 a gallon.  There is also a US excise gas tax of 18.4 cents a gallon, giving a total tax of 62.7 cents a gallon in California compared to a national average of 48.1 cents a gallon, or an excess of 14.6 cents a gallon.

I should comment here that Newt Gingrich recently told the California Republican Party that he could reduce the price per gallon of gas to $2.50 by okaying the Keystone XL and more drilling in the Gulf and Alaska to the tune of a new 2.3 million barrels a day.  But that is about equal to the amount that we exported last year, so that gas was already available, and did not lower the price.  Also, it appears that the Keystone XL will not be sold in the US.

If the price of gas were somehow forced down to $2.50 a gallon including excise taxes, then subtracting the 48.1 cents average tax per gallon, the oil companies would be selling at $2.02 per gallon.  Since the 2011 price from the oil company was $3.05 a gallon (above), then they would be selling for $1.03 a gallon less.  But their profit was at most 23 cents a gallon, and maybe far less.  So they would appear to be taking a hugh loss at Newt’s price.

The NRDC and TransCanada testimony lead one to believe that tar sands bitumen, once transported by the Keystone XL pipeline and refined in the free trade zone in the Texas Gulf, will be exported to China, without being taxed in the US.  In the question of whether the Keystone XL would lower the price of gas, the proposed 900,000 gallons a day target would only be 6% of the US oil usage even if used in the US, and unlikely to lower the price of gas.  It looks like international oil companies are not interested in true energy independence for the US.  The only way we  can control our own oil independence, and control its price, would be to nationalize it, which is of course impossible in the country based on free enterprise.

Another question about oil independence, is that our leading foreign suppliers are Canada, Mexico, and Venezuela.  These countries are not involved in Middle Eastern situations, nor do we require US troops to guarantee their supply.  We also have an oil reserve that has over 700 million barrels of oil.  If one of our minor suppliers from which we import a million barrels a day gets cut off, our reserve can last two years.

At the current price, of $3.50 a gallon in the US, or more than $4.00 a gallon in California, people are said to be spending only 4% of household income on gas.

In Table 1.4 on World Petroleum Consumption, over the decade 2000-2010, US oil comsumption has fallen an average of 0.3% a year, OECD countries (developed democracies) have fallen an average of 0.4 percent a year, and the rest of the world has risen on average 3.2% a year.  The world total consumption has risen an average of 1.1% over the last decade.  In 2010, US consumption was 19.15 billion barrels a day, total OECD was 46.24 billion barrels a day, and non-OECD was 39.02 billion barrels a day, for a world total of 85.26 billion barrels a day.

About Dennis SILVERMAN

I am a retired Professor of Physics and Astronomy at U C Irvine. For a decade I have been active in learning about energy and the environment, and in lecturing and attending classes at the Osher Lifelong Learning Institute (OLLI) at UC Irvine.
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