Gasoline Prices

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Dear Dollar Stretcher,
In Davenport, Iowa the price of gasoline is $1.17. During the last year it went as low as $0.86. I bought it in Southwest Missouri two weeks ago at $1.06. Considering the variations in price, there is a little gouging going on.
Harold L.

Here's a subject that has readers all over North America excited. The increase in gasoline prices in 1999 has certainly been steep. In most places 25% to 50% increases are being reported. So what happened? Why did gas prices jump so much? Will they continue to go up? And, what can we do about it?

Although our currencies and unit of measures differ, both the U.S. and Canada are in much the same situation with gasoline. The source of the gas and the nature of the tax systems are similar.

In 1997 the U.S. consumed 118 billion gallons of gasoline. That works out to about 573 gallons per vehicle for the year. So a fifty-cent increase at the pumps takes close to $300 out of your wallet.

Let's begin by trying to break down the price that we pay at the pump into its components. According to the Canadian Taxpayers Federation, a non-profit education organization, last summer the average retail cost for a liter of gas was 53 cents. Of that, 28.6 cents went to pay various forms of taxes. Getting the gas from the ground, through the refining process and to the pump cost 19.1 cents. Marketing and profit margins consumed 5.3 cents per liter. Figures from the American Petroleum Institute show that the U.S. breakdown is similar. Based on a gas price of $1.20, they calculated that 56 cents went to various taxes and 64 cents went to the people who found, refined and transported the oil to the gas station. The National Center for Policy Analysis estimates that about 17 cents is profit for the wholesalers and your local retailer.

Gas taxes have become a sensitive issue for some Canadians. The Canadian Taxpayers Federation have started something called "Gas Tax Honesty Day". It's an attempt to show how high gas taxes are and that the majority of monies raised are used for things other than highways. Similar complaints are being made in the states.

In the U.S., the first federal gas tax began in 1932. As recently as 1965 it was just 4 cents per gallon. Today it's 18.4 cents per gallon. To that is added state, county and city taxes. And they vary widely. If you live in Georgia the state only tacks on 7.5 cents per gallon. But in Connecticut it's a whopping 36 cents per gallon.

Harold mentioned an eleven cent difference in price between Iowa and Missouri. Iowa's state gas tax is three cents higher than Missouri. County and city taxes could make up part of the difference.

Many environmentalists favor even higher taxes in an effort to reduce consumption of gas. On the other side consumer advocates point out that a 56 cent tax on a 64 cent item is an effective tax rate of 87%. Pretty hefty when compared to most sales taxes.

The other large component of gasoline prices is the cost of the crude oil used. The United States consumes an average of about 20 million barrels of oil per day. Since World War Two crude oil prices have averaged $19.27 per barrel if adjusted for inflation. But that average masks wide swings in price. As recently as March, 1998 it ran $14.33 per barrel. Today's price is about $22.00 per barrel. That's a 53% increase in just 18 months. So it's not surprising that gasoline prices are up.

The Energy Information Administration (part of the U.S. Dept. of Energy) provides some interesting information. In data from 1991-97, they show that the profit margin per barrel of gasoline sold went from $0.74 in 1991 to $1.50 in 1997.

They also have some data about regional pricing. Wholesale prices for gasoline are fairly consistent. The high is $0.68 per gallon in New York city and the low is $0.6375 in Houston. But retail prices show more variation. The Gulf Coast area is low at $1.20 and the West Coast is high at $1.38.

What does the future hold? For that we'll turn to the commodity futures market. And it looks as if prices aren't going to drop significantly any time soon. Wholesale unleaded gas (without any taxes) was going for about 33 cents per gallon at the beginning of 1999. That same gallon is going for about 65 cents today. The futures market expects unleaded to stay above 60 cents per gallon all the way to next summer.

Are the oil companies conspiring to price gouge? Many people think so. Petroleum producers, notably OPEC, would like to control prices. But they haven't had a firm grasp on production for years. Even so, they have managed to squeeze more profit per barrel.

A good case can be made that crude oil (and thus gasoline) prices are just a reflection of worldwide supply and demand. Oil consumption is up. North America hasn't used this much oil since the late '70's. The Far East is using nearly twice as much oil as it did 20 years ago. While production is up about 5 million barrels per day, it hasn't kept pace with demand. And that means higher profits for producers.

What can the consumer do? The obvious answer is to limit the number of miles you drive. Combine trips, carpool, use alternative transportation. Keep your car in good mechanical condition and check your tires for proper pressure. While it's tempting to join in gas boycotts, it's probably only effective as a tool to create public awareness. Postponing a fill-up from Tuesday to Thursday isn't going to affect the oil producers or retail outlets.

Sure, it makes us angry when prices jump this way. But as a practical matter, with gas prices expected to continue at this level, the best most of us can do is to adjust our habits and try to consume less.

Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.

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