Fuzzy Math Keeps Oil Company Profits High

Domestic oil production is up, as is fuel efficiency. So why does gas cost more?

oil derrick at sunset
Unfortunately, the sun has not set on high gas prices. (Photo: Sergei Karpukhin)
A six-time grantee of the National Geographic Expeditions Council, Jon writes about all things ocean.

With more fuel-efficient cars on the highways, more domestic oil being tapped, and the global price of a barrel at recent low levels, the price of a gallon of gas at the pump should logically be coming down. Right?

The numbers would suggest that’s right-thinking: The price of a barrel of oil is currently experiencing the biggest monthly decline since December 2008, selling for less than $90 and expected to drop below $80 in June—compared to an all-time high of $145 on July 3, 2008.

Consumer costs should have plummeted by now.

Not exactly, reports the Natural Resources Defense Council, and here’s why: Not surprisingly, big oil—and its stockholders—have gotten used to the profits that come with high oil prices. Last year, according to the NRDC, the top five publicly traded oil companies pocketed more than $137 billion in profits.

Using an average price per gallon of $3.85, the report breaks down exactly how oil companies make sure to get their cut from each and every gallon. From that $3.85:

  • Production costs = 46 percent
  • Refining costs =15 percent
  • Taxes = 10 percent
  • Distribution, marketing and retail = 4 percent
  • Transport costs = 1 percent
  • Profits = 24 percent

It’s those double-digit profits that incentivize oil companies to keep prices at the pump high, no matter what’s going on in the oil fields.

Given current numbers, it would seem that the price of oil in the U.S. should keep declining. American oil production is expected to boom, growing by 1 million barrels per day by 2020, with some suggesting that number is conservative. In the past three years, the number of rigs in U.S. oil fields has more than quadrupled to 1,272. If you include working natural gas fields, the U.S. now has more rigs at work than the entire rest of the world.

When you combine all that new production with increased use of biofuels, less driving, and more fuel-efficient cars it would seem that the nation’s need for oil imports in the near future will dive and costs at the pump drop.

But, in fact, gas prices are 90 cents higher today than they were two years ago.

My guess is that unless some kind of heavy (and appropriate) federal fuel tax is imposed, the price of gasoline won’t drop by much—if at all. And profits at the oil companies will stay high.

Four things that the NRDC report, written by Simon Mui, encourages you to consider next time you’re filling your tank:

  1. The bulk of what you pay for gas goes to Big Oil companies, not your local service station. Big Oil includes the well-known companies like ExxonMobil, BP, Chevron, ConocoPhillips and Shell as well as some big state-owned companies like Saudi Arabia’s Aramaco and Venezuela’s PDVSA, which altogether control 90 percent of the world’s oil reserves and 73 percent of actual oil production.
  2. There is an incentive for oil companies to keep oil prices high, since their profits go up with the cost. It seems that it’s competition for the precious fuel that drives the cost up, which these days comes primarily from booming economies in India and China combined with always tense and unknown relations in the Mideast.
  3. Despite the boom in domestic production, the price of a gallon at the pump keeps creeping up. A partial explanation is that even though U.S. oil production is at an all-time high since 1998, the country still produces a relatively small percentage of the world’s total of oil (7 percent) and is home to small reserves (about 2 percent of the world’s total).
  4. Want to pay less at the pump? The solution is simple: Buy a more fuel-efficient car. Drive an SUV that gets 18 miles a gallon and you’re paying 21 cents a mile; trade it in for a smaller car that gets 50 miles per gallon and the cost drops to only 8 cents per mile.

Are high gas prices likely to compel you to purchase a hybrid or electric car?

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