Gas Prices in the United States

So, the Bachmann thread kept derailing on the concept of gas prices, so I figured I'd make a new thread. As my parents run a business that's directly part of the gas industry, I am close to all the workings, and so I felt I might be able to get answers for you guys if you had questions on the way it works. Anyone else who knows about the industry can feel free to chime in too, of course...

(This is "in the United States" because I don't know how it works in other countries, and because it's a big issue here. Sorry, foreign tropers...)

So, tell us, oh wise and mighty USAF: what determines prices at the pump?

A combination of many things. A BP station, for example, is not actually directly subject to the whims of the larger company, on prices. Like most fast food joints, they're chains, not one monolithic organization.

However, the price of gas as set by the actual company that gets it is what determines the price. It's really like any other store: they get the product at a certain price, add X markup %, and then sell it to you. The reality is, though, that it's pretty damn expensive by the time they get it. The current markup is only 3-10 cents, so they're barely making any money per gallon.

What happens is that BP (the manufacturer) sells the gas they drill to a supplier, who keep it in huge tanks. Then people like the workers for my parents come with the tankers and pick it up, bringing it to the stores. Neither the suppliers or the distributors (the stations) make more than about 15 cents per gallon. It's the suppliers who originally get gouged, and eventually it gets passed down to us.

Basically, you're only paying 30 cents more than the supplier...

Right. Which is precisely why when I talk about oil companies gouging customers, I'm not talking about "The price at the pump is too high" so much as that the price that people like your mom and pop have to pay just to get the supply is too high.

Actually, my parents don't pay anything for the gas. We just move it about, this way and that.

The thing about "that one guy undercutting everyone else" is that he was probably selling it at cost. That leaves all the other guys around with two options: sell it at cost or lower to compete, or lose all their business. At that point, no one will be making any money. In the case I saw, the supplier actually faked a billing fuck up and shut the guy down, so that the whole area wouldn't go out of business...

I shall be back. I have to eat...

So where does the main markup come from? The refining stage?

Well, it's odd.

In an actually perfect competition scenario, you sell all products exactly at cost-but that's including the cost of labor, the cost of rent, the cost of the person's time, etc etc etc. If there is a power structure that says "You're not allowed to charge a price that low" that's displaying market power, which is illegal in most scenarios. Theoretically, we WANT minimum prices.

On the flip side, if one firm has such intense power that it can deliberately sell a product for less than it costs, with the intention of driving competitors out of business, that too is considered unfair market practices, and thus illegal. So it's a complicated sector.

Simply put though, one gas station on the corner selling gas at-cost is not displaying an unfair level of market power, and shutting him down because of his selling gas at cost should be considered a huge violation of market regulations.

Long story short: shops are basically supposed to compete based on price. That's how competition works-the reason you don't charge higher prices is because if you charge that higher price, the other guy is going to charge a lower price, thus meaning no one will buy your gas.

edited 23rd Aug '11 5:20:20 PM by TheyCallMeTomu

Basically. When it's sold to the supplier (who basically just holds it so that the transport people can get it to the various distributors) it's already gotten it's price inflation...

Well, Tomu, I'm not sure, exactly. He may have actually been selling below cost, and it was a day where the price was going up. It probably is unethical; the whole business is rather... underhanded...

I always wanted to know...

Here, petrol costs £1.40/litre. I know a fair bit of that is taxes... so how does the petroleum company make the monies? Because Dutch Shell and BP and the rest churn out healthy profits.

Probably by passing the cost of the taxes on to the consumer...

They (oil companies) charge what people pay for it.

The problem is, fuel is a fairly inelastic resource, so they can charge high prices without experiencing much of a decay in consumption.

You'll note that other inelastic goods (food, electricity, water) are generally controlled to some degree by the government, to eliminate price gouging.

But, wait... fuel duty is about 60% of the entire £1.40. So, 40% of the entire price/l is going to the company.

So how do they churn out profits - even without fuel duty applied? Because they need to fuel the truck that takes the fuel, and then pay the driver, and then pay the people working at the refinery, and then pay for the workings of the refinery... and then the obtaining of the crude oil...

So, with all that, how does the company turn a profit?

Unless it works differently in Europe, they aren't paying for the transport of the gas and all that jazz.

Like noted above, you conflate the entire process as being under one company. The supplier is it's own company, and the transport is too; not to mention that each individual gas station is a chain, owned basically like a small store.

It could very well be different in Europe. But if it's not, the company only has to stick a good initial mark-up on the oil before selling it to the distributor and it can turn plenty of profit...

edited 23rd Aug '11 5:39:13 PM by USAF713

For what it's worth, in Illinois, state taxes on a gallon of gas is $0.50.6. The Federal gas taxes are another $0.19.0/gallon, for a total tax of $0.69.6.

Across the river, in Iowa, the Federal tax is the same, but the Iowa state taxes total $0.22.0, so Iowans pay $0.41.0 in taxes per gallon. (In general. There may be additional county or city taxes, but I can't find them listed.)

This means that if I drive three miles across the bridge, I can get my gas at between $0.15 and $0.25 cents a gallon cheaper, depending on which gas stations I'm comparing. Right now, the difference is almost $0.35 a gallon ($3.69 in Illinois, $3.35 in Iowa)

Which is another thing — which gas station I choose. If I go to the gas station at the grocery store on the Illinois side, I can expect to pay about $0.07 to $0.10 cents a gallon more than I would pay at the Circle K on the Illinois side. In Iowa, it's the same — the difference between the highest price and the lowest for the same grade of gas is about $0.10 a gallon.

The supplier ultimately sets the price. 90+% of the price comes from them. and that part is under one company.

Or rather, it's under about 5 or 6 different companies. Exxon, BP, etc, that are operating under an oligopoly situation that, due to their market structure, is able to benefit from strong market power.

A large part. A very large part. There are less than a half dozen full capacity oil refineries in the US (and diminishing since the eco-terrorist movement politically shut down the idea of refining our own oil in the early 1980s), losing one (say to a hurricane at Port Arthur Texas) rapidly increases prices across the country because the other five cannot produce enough to keep pace with demand.

The real process for price is roughly:

• Commodity level. At 100$ per barrel, raw crude without refinement costs about $2.50 per gallon.
• Refining costs. At $100 per barrel commodity cost, that 2.50 suddenly gets about 45-50 cents tacked on plus a roughly 5 cent margin since refined oil is sold on the general market. So now it costs $3.05.
• Taxes (Federal): Tack on $.25 cents. $3.30
• Taxes (State): Tack on an additional $.25 cents. $3.55
• End distributor (chain stores, petroleum distributors, etc.) profit markup 5%. End price $3.62.

In actually it's a little higher owing to variances in taxes and profit margins. (This demonstration is more or less how it works in the State of Colorado.)

edited 23rd Aug '11 5:43:33 PM by MajorTom

Here's some raw data:

The cost of crude oil is determined by the market, not the big oil companies. Most of the fluctuations in the price of crude oil are caused by speculators, not the gas producers. The gas producers want the market price as low as possible all the time — they make their money by selling the product. Speculators want to buy low(er) and sell high(er)

A barrel of crude oil currently costs between 85 and 109 dollars. I'll take the low end — $85.00

Each 42 gallon barrel of crude oil will yield about 19 gallons of gasoline (roughly 46% of the refined yield) and 25 gallons of other petroleum products. (Yes, that adds up to more the 42 original gallons. It's called "processing gain" but I don't entirely understand how it works. Chemistry. Magic. Same thing.)

Taking the simplest route and simply dividing the $85.00 the barrel cost by the 44 gallons that it produces, you get $1.93 as the amount they need to sell each gallon of <whatever> for to just make back the purchase price (That's assuming that all the products sell for the same amount — they don't, really.)

Then you add the cost of refining and storage and transportation and a profit margin for the refiners; more storage and more transportation and a profit margin for the wholesalers; and a little bit of profit for the retailers, and you can see where the money goes.

^ Tom: don't forget the crude is sold on the open market as well. And Federal taxes are 19 cents a gallon,. not 25. Most state taxes total between 30 and 50 cents a gallon, not 25.

edited 23rd Aug '11 6:15:45 PM by Madrugada

^ I made it consistent for argument's sake since I didn't know the individual rates but knew the combined total taxes.

I wish I could get my parents to sit down and talk with you guys, but they don't do forums...

Hmmm... Interesting. Mostly, I view companies making huge profits with great suspicion because, frankly, Net Profits Fall To Zero is an economic trope. It means that competition forces aren't really operating normally.

Tomu, I don't really follow your model. Are you actually implying they should sell everything at-cost? They wouldn't make any money, then, even factoring transport and labor and whatnot. How would you run a business like that...? I mean, yeah, sure, a government agency, but not a business...

Net profits fall to zero means that your net profits = the opportunity cost of investing in something else. If the profits of the gas and oil industry are consistently outpacing every other industry, that's a sign that something is preventing equilibrium. Namely, barriers to entry-which is normally what happens when firms enter into a given market that is lucrative, which raises supply thus reducing prices. Of course, since the total amount of oil in the world is basically finite, it makes sense that there are heavy barriers to entry, but that just rather proves the point that the firms that are in the market are able to use the inability of new firms to enter to their advantage.

...the only language I think I deciphered out of that was "they're a collaborative monopoly, and it makes it expensive." Care to speak a little English?

That's basically what I was getting at. A cartel, if you will. Needs international moderation, basically.

I wonder what would happen if we went to hydrogen. Water is cheap, after all...

As I understand it, they're desperately trying to make it so that the majority of the existing infrastructure will stay the same. I hope they still need tanker transport, for my parents' sake...

I bet the price of gas will still be high even if we find a replacement, because there are so many gas cars it would take forever to replace them all...