The truth about Gas Prices

If you ask almost anyone how they feel about oil companies and gas prices, chances are you will be met with the usual diatribe about greed, market manipulation, and lack of disposable income that keeps most people thinking oil companies are the most evil and economically abusive institutions around. But is that really true?

Gas prices are going up—no one disputes that. But the fact is, even at these prices we still get a bargain at the pump.

As of this month, the national average cost of gas is $3.67 per gallon. In comparison, the average 20 oz bottle of water costs about $1.99. That comes out to $11.94 for a gallon of water! That’s around three times what you would pay for the same amount of gas! Sure, it costs money to manufacture uniform bottles filled with safe drinking water, but it’s child’s play compared to drilling for oil, refining and transporting it, dealing with security risks involved, and then getting it to the gas station and providing consumers with the means to fill their tanks without blowing themselves up.

But maybe you don’t drink bottled water and would prefer to compare to orange juice. A gallon of moderately priced orange juice can cost anywhere between $5.00 and $8.00 a gallon! Is your sweet tooth bothering you? The average cost of pint of ice cream is currently $3.79. That’s $30.00 a gallon! 

However, it’s unlikely that you’ll be attempting to fill your gas tank with ice cream anytime soon, so maybe you don’t take much comfort in any of that.

Perhaps the greatest reason the average person is so shocked by gas prices, and easily fooled into believing we are seeing record highs, is that most people have little understanding of inflation. In fact, it would likely surprise many consumers to hear that, if inflation is factored in, today’s gas prices are lower than they were during a spike in 1918! In 1950, you could pump a gallon of gas for roughly 30 cents. Taking inflation into account, the same gallon of gas would cost $2.69, in today’s dollars. This assumes comparative tax levels for those years were the same—they weren’t.

The tax per gallon of gas in 1950 was around 1.5%. Today, federal, state, and local taxes make up about 20% of the cost of each gallon at the pump. Taking inflation and the increase in taxes into account, the same gallon of gas that cost 30 cents in 1950 should cost about $3.20, today.

 

Here enters supply and demand. Demand is constantly changing with the availability and attraction of “gas guzzlers” and the like, as well as the added demand placed on the oil market by developing nations. China is an excellent example of this.  While demand has increased considerably, supply has remained relatively unchanged for decades due to rigid domestic energy policy, here in America, as well as political volatility in the Middle East, much of which is fomented by our own government’s actions.

 

So what about those greedy oil companies? Despite the frequency and severity at which the media demonize them, claiming that greedy oil companies are to blame for high gas prices is simply unfair.

 

Let’s compare average profit margins of oil and gas companies, which is 6.2%, with just a few other industries:

  • Tobacco: 19.8%
  • Application Software: 22.7%
  • Brewers: 16.5%
  • Soft Drinks: 14.3%

So if high profits brought about by “greed” are such a problem, why is it that, out of the industries listed, only oil companies are made to testify on charges of price gauging? Keep in mind, the government currently profits twice as much from every gallon of gas sold as the private companies providing the gas. In some states and cities, the difference between public to private profit ratio is even greater! Why aren’t consumers directing their frustration at government officials?

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