This is so bogus…
In My View: Gas prices
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determined by 5 factors
STATE JOURNAL-REGISTERPosted May 17, 2008 @ 01:18 AM
I want to explain some issues regarding our national pastime. So, is this a column about baseball? Football? Nope! It’s about our real national pastime — gasoline price obsession. After 32 years on the front line explaining gasoline and diesel prices in literally thousands of interviews and testimony about industry activities here in the fourth-largest oil refining and transporting state, I feel I’m qualified to make that observation. Let me present a five-factor matrix that explains gasoline prices.** The biggest factor in gasoline prices, almost 58 percent, is the cost of crude oil. Crude oil prices are skyrocketing, but only recently at inflation adjusted highs. There are several reasons:
— Domestic demand, especially for diesel.
— Red-hot worldwide demand, especially in China and India.
— The historically low value of the U.S. dollar.
— Civil/political strife in major oil-producing countries such as Nigeria, Venezuela and Iran.
These factors have tightened worldwide supply significantly. Continued economic growth, which is directly tied to increased energy use, exerts further upward pressure on crude oil prices. Like it or not, local prices are directly tied to the world market and can’t be controlled by U.S. companies. Exxon controls a miniscule .62 percent of worldwide reserves, and BP accounts for only 3.42 percent of oil production. ** Taxes are the second biggest factor in gasoline prices. The federal gas tax is 18.4 cents and Illinois adds 19 cents. Unfortunately, Illinois is one of only nine states that charge a sales tax on gasoline and the only one I know that allows additional local gas and sales taxes.
These extra taxes are a massive self-inflicted price increase of almost 24 cents per gallon in Springfield and even more in Chicago, where an 85-cent total gas tax is the highest in the United States. And remember, gas prices include the tax! Consumers’ gas price perception would be different if the sign that says “$3.35 a gallon” said “$262.5 plus tax” as every other consumer item is priced. According to AAA, the difference between Illinois, with the fifth-highest price, and Missouri, with the fourth-lowest price, is all taxes! Illinois politicians don’t like to talk about taxes. I wonder why.
** The third factor in gas prices is about making the fuel. Price-wise, Springfield is fortunate not to have to sell special low-polluting fuels as Chicago and St. Louis do. They’re the world’s cleanest fuels but much more expensive. We have too many special fuel requirements, a gridlocking 45 or so required nationwide in the summer.
Since the 1990s, the oil industry has increased refinery capacity about 15 percent. Numerous Illinois expansions are planned but move slowly through a rocky political process where the same politicians and others who demand infrastructure expansions on Monday and Tuesday, oppose them on Wednesday and Thursday. NIMBY and lately BANANA (build absolutely nothing anywhere near anything) are factors in higher prices and uncertain supply. They’re self-imposed problems that reasonable people should be able to solve.
** The fourth-biggest factor in prices is the cost to establish and maintain the retail outlet. There are more than 5,000 service stations in Illinois and most experts believe gasoline sales are often a “loss leader.” Springfield is increasingly affected by large general retail chains selling gasoline. Most experts conclude these “new era” marketers sometimes offer lower prices, but cause significant price volatility. My experience tells me many consumers are more upset about volatility than the actual price. Unfortunately, I don’t see price volatility going away.
** The final factor in gasoline prices are earnings. Major oil companies earned a little above the U.S. industrial average, 8.3 percent, on gasoline for 2007. No doubt, 8 percent earnings represent billions in profit. However, consider that oil companies are large due to their financial commitments, such as alternate fuels ($100 billion since 2000) and clean fuel technology ($65 billion since 1999). Moreover, between 33 percent and 37 percent of gross industry revenues are paid back to government in taxes. And while conspiracy theorists love to think dark thoughts about 8 percent earnings, the reality is that over 65 percent of oil industry assets are held by pension plans, IRAs and 401(k)s. Industry executives hold less than 2 percent. When the “Who owns Big Oil?” question is raised, the answer is usually “You do!”
I’ve covered a lot of complex ground. I hope to visit with you again to discuss specific ideas on how to secure our energy future. Thank you for the opportunity to discuss our national pastime. David Sykuta is executive director of the Illinois Petroleum Council.