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Friday, May 25, 2007

How to Lower Gas Prices

I laugh when I get the e-mails on how we can "not buy gas on tuesday" to lower prices, anyone knows that won't work, you'll need it again wednesday.

The latestest, supposedly from a former Coca Cola executive and Haliburton guy is this one:

For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.

Sorry, that won't work either. You see, gas prices work on supply and demand and a healthy dose of commodity traders. There is an open wholesale market for gas. So, if you decided to boycott Exxon Mobile, and only buy from BP or Chevron you actually won't have much effect on Exxon Mobile.

What will happen is as their inventories rise (and the others fall because of their increased demand) they will just sell the gas for the wholesale price on the commodity market, as opposed to the retail price at the pump.

In fact, because they won't be having to import gas (since they don't refine enough here) they'll probably make a bigger profit on what they produce on their own.

While you are thinking "But Bob, they make that huge profit at the pump", the truth is, it's less of a profit per gallon than you think. The wholesale price of gasoline on NYMEX this morning is $2.37 per gallon. You have to add to that the cost of blending, which is adding government required, and industry desired additives to each gallon.

Then you add transport costs, of the gasoline. At that point you are around $2.67 per gallon. Now add 18.4 cents federal tax, and the average of 21 cents per gallon state taxes, that has the price at 3.03 per gallon.


Add the normal (average) retail markup of 5% (except in Wisconsin where the law requires a 9% markup) and you have gas costing about 3.17 per gallon. That means the evil oil company made about $0.12-0.17 per gallon on it with the retail price averaging 3.29. Notice, that amount is less than both the federal and state gas taxes! If it's "self refined" gasoline that profit does go up to between a quarter and thirty cents a gallon, still less than many states gas tax, and lower by at least a quarter than the total tax on that gallon of go-go juice.


So, how do you get the price of gas down? Well, that's easy. Quit driving so much, nimrod! (based on my own job I know it's not totally practical for everyone, but even I can cut down some).

Gasoline is a supply and demand commodity, and contrary to popular belief, the US is not the only demander of it. China's gas market is expanding twice as fast as ours, yet world wide supply over the last few years hasn't expanded at nearly the rate of use.


By reducing use (demand) we'll increase supply here, lowering prices but it has to be long term reduction, not a feel good "no gas Tuesday".

Because of growth in the third world and China, we'd have to cut it a lot. So increasing supply is also important, though tough here since congress doesn't want to allow drilling new wells anywhere.

Increasing the use of ethanol helps, but not as much as you think price wise. Ethanol futures on the Chicago Board of Trade are around $1.80 per gallon right now, and rising. So E-85 is a cheaper alternative, but as demand increases, it's price will go up.

And, while some states have reduced, or eliminated gas taxes on E-85 to spur it's use, there will be a point when they quit with that, jacking up the price further. Do you really think politicians are going to leave anything in your wallet, it's a great sound bite and holy picture to say they aren't taxing a renewable energy source. But when it pinches their pet projects too much, you bet that tax is coming back.

So, lets review, you pay more per gallon in taxes on gas than oil companies make in profit per gallon(by about 100%).

The legislators who bitch about high oil prices are the same one's who've blocked efforts to increase the domestic supply of oil and gas.

E-85 is a reasonable, but not totally perfect alternative. And it's price is going to go up as use (demand) rises and supply falls.

And, finally, if you want gas prices to come down, use less of it, over a long period of time. Get rid of the Tahoe and F-250, use public transportation, and eliminate needless trips.

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