Record Profits for Evil Oil
In 1981 gasoline prices reached a record high of $1.66 per gallon (nominal dollars, not adjusted for inflation) in California. Some say that this high price was the result of then President Ronald Reagan removing the oil price controls, allowing U.S. companies to set the price at a free-market rate. Regardless of the reason, there was a major hew and cry, and the citizenry of America decided that we needed to do something about the cost of oil. The price of oil has less to do with geopolitics than it does with geo-economics.
In any market, commodities will sell at the price at which people will pay. Increased demand leads to an increase in price. If more people want it, the value is higher. If there is a shortage (decrease in supply) costs will also rise as more people compete for a limited commodity. That deals with the cost of oil, but there is an additional cost that must be figured into the cost of gasoline-the refining process.
We have several options to change the price of oil and thus of gasoline. The most apparent would be to increase the supply. We could double the amount of domestic oil produced in the United States by drilling in ANWR. A USGS survey in 1980 estimated that there are up to 17 billion barrels in ANWR. A later survey, 1987, by the Department of the Interior, identified 26 separate oil and gas fields that could produce over 500 million barrels each. The estimate of recoverable crude oil increased in the USGS survey of 1998. In other words, we’ve known of a vast untapped potential since 1981, but have neglected to go after it. Why haven’t we?
Along with increasing the supply, we should focus on reducing the demand. As crude oil (petroleum) is refined, we end up with several products. First comes napthas (dry cleaning fluid, paint solvents, etc, which are combined to make gasoline), followed by kerosene, diesel fuel and heavier fuel oils like heating oil. Then comes lubricating oils, such as engine oil, gear oils and grease. Following the lubricating oils are solids, such as paraffin, tar and asphalt. All of these products come from petroleum (crude oil), the only difference is the length of the carbon chains.
7% of our total consumption of oil is used to either produce electricity or heat homes. Both of these heavy consumers of oil can be solved by the use of nuclear power. As an Arizonan, none of our electricity or heat comes from fuel oil. Electricity is generated by either the Salt River Project (Hydro-electric) or the Palo Verde nuclear power station. In addition to completely eliminating the use of fuel oil for eating and electrical consumption, a source of ready electricity would cut down on the amount of oil used in industrial and transportation applications. Nuclear power is safe and clean, but we haven’t built a nuclear generating system in the United States since the 1970’s. Why not?
Contributing to the cost of gasoline is the refinement process. Without newer, more modern and efficient refineries, we cannot take advantage of the advances in technology. The last refinery built in the United States was in Louisiana in 1976. We can’t seem to build more refineries. Why not?
There are people that would have us believe that oil companies are gouging us on the cost of gasoline. “Record oil profits,” “price gouging,” and “windfall profits” are terms being thrown about today. Oil companies are generally making about $.09 per gallon in profit. Of course that does translate to record profits, as so much gasoline is being used, but expressed as a percentage of the price, it’s not very much.
The Federal Government charges $.184 per gallon of gas and $.24 per gallon of diesel as an excise tax, more than twice the profit that an oil company makes per gallon. The state average tax is $.28 per gallon of gas with a low of $.08 in Alaska and highs of more than $.40 in California, New York and Hawaii. Of course, cities also put the bite on gasoline prices with sales taxes. In addition to these taxes, there is also a production tax levied by most states that have production facilities, and refinery taxes where oil is refined. The amount of taxes on gasoline FAR outweighs the oil companies’ profits.
I am not advocating drilling in ANWR, building Nuclear Power Generating Stations or even slicing fuel taxes. What I hope to do is inform you of what contributes to the high prices of gasoline so that we can make decisions based on information instead of rhetoric. If we choose to protect ANWR at the cost of higher gasoline, that is our right as a republican society. Likewise, if we choose to limit refineries in our states, that is also within our rights. We can even raise taxes on gasoline, if that’s our desire. What we cannot do, and should not do, is demonize the oil company for “excess” profits while our government takes far more.
