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Zoe Padgett, from Chico, fills up her tank in downtown Truckee. “Lower prices are good news, but they’re still higher here in Tahoe. I was in Georgia last week and gas was $1.97!” she said. photo by Beth Ingalls |
CommentsWhat's in Your Tank?
How do you break down the cost of a gallon of gas? Take one part massive overconsumption, add two parts taxation and misguided incentives and multiply by immoral profiteering.
Published: November 11, 2008by Beth Ingalls
Regular unleaded gas in Truckee fell below $3 a gallon for the first time in over 18 months on Nov. 10.
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California ranks number three in the country (behind only Alaska and Hawaii) for the highest priced gasoline and it’s no secret that the prices up here in Tahoe are consistently the most inflated in the state. You’d think that paying exorbitant prices would have an effect on consumption, but not so. According to a report by the California Energy Commission, the Golden State had the dubious distinction of using more gas in 2007, 15.672 billion gallons, than any other country in the world (except the U.S. as a whole, of course).
When George Bush was sworn in on Jan. 20, 2001, gasoline prices in the U.S. were the lowest they would ever be during his eight-year reign, except for a period after 9/11. A gallon of regular unleaded averaged $1.47 and crude oil was going for just under $30 per barrel.
Jump ahead to summer 2008. After peaking in mid-July at a national average of $4.11 per gallon and $145 per barrel, gas prices have been in a steady decline recently to their lowest point in over 18 months. On November 10, the average price for regular unleaded in the Sacramento metropolitan area was $2.28. In Truckee, prices have fallen to $2.99.
Why are gas prices so high in California and even higher here in Tahoe? What’s behind their rise during the Bush years and why are they coming down so rapidly now? We wanted to know!
What Goes Into a Gallon of Gas?
In order to understand the economics of gasoline pricing, one must navigate a maze of federal, state and local tax law, U.S. energy policy, oil production and distribution chains, refinery output, retail pricing and big oil mergers, all set among a field of PADD’s. Not familiar with that acronym? It’s short for Petroleum Administration for Defense Districts. We’re in PADD five, which also includes Oregon, Washington, Alaska, Hawaii, Nevada and Arizona. During WW II, the country was divided up into five “PADDs” to facilitate oil allocation and we still use the designations.
Every gallon of gas we buy has seven uniform components built into its cost: the barrel price of crude oil, taxes, refining costs, distribution and marketing, and profits. In addition to the base costs which are relatively uniform across all the PADD’s, California has several unique factors which pump up our prices. Our large and rapidly growing population stretches production and distribution infrastructure to the max, plus the stringent fuel regulations that come with California’s Reformulated Gasoline Program, (CaRFG) add about four to eight cents to every gallon. There are very few sources of this unique blend of gasoline outside of the state.
Also, California has the highest combined state and local gas taxes in the country, which add 63.9 cents to every gallon (Connecticut ranks second at 62.5 cents per gallon). Of this, 18.4 cents goes to the federal government and 18 cents to the state. These amounts have held steady for almost two decades. Other taxes, including an underground storage tank fee, sales tax and county tax, totaling up to 27.5 cents, make up the rest. We pay even more in Tahoe due to several other factors: our distance from Bay Area refineries and our status as a destination resort area. Gas prices are often adjusted up on weekends and holidays, just because.
On a global note, while California taxes are high, they still pale in comparison to those paid in Europe. Here in Tahoe, we pay less than 20 percent of the total price of our gas in taxes, while EU citizens pay 60 percent. That translates to $4.20 in taxes on $7 per gallon gasoline for them.
Where Does OurGas Come From?
Since 2005, California has met only 37 percent of its crude oil needs from in-state sources. The rest is about evenly split between crude from Alaska’s North Slope (ANS) and foreign imports. The imports come, in the following percentages, from Saudi Arabia (34.8), Ecuador (24.7), Iraq (12.5), Mexico (7), Angola (4.7), Brazil (4.6) with the rest supplied by Argentina, Canada, Colombia, Oman and others.
California is a major producer of gasoline products and the majority of the gas we burn up here is distilled at seven Bay Area refineries. From there it is distributed via pipeline to outlying bulk terminals and then delivered via tanker trucks to our local service stations. All of California’s 13 operating refineries must be running near their full capacity to meet our state’s demand.
How Much of Our Gallon Price Goes to Big Oil Profits?
In 2007, the Energy Information Administration reported that refining costs and profits make up 17 percent of the cost of a gallon of gas, but there is no further breakdown provided, nor an explanation of why these two categories are bundled together. Oil companies often site the high costs of development and exploration as contributing to high prices at the pumps, but those same corporations have been racking up mind-boggling profits over the last few years. The U.K.’s Guardian newspaper reported that on October 31, Texas-based Exxon racked up the largest profit ever recorded by any publically traded US Company – $13.38 billion! Not only was the profit huge, but it was up 58 percent from the previous quarter! Supply side economics doesn’t explain any of this. Why are we paying so much when they are making so much?
One reason is that our Government facilitates it with tax breaks and subsidies to the industry. A detailed report from Friends of the Earth published in July documented that taxpayer “handouts” to oil companies in the form of subsidies will total $32.9 billion over the next five years. Friends of the Earth holds that their report was “conservative” in its numbers. The Cato Institute, a libertarian think tank, calculated that actual subsidies to Big Oil are between $78 to $158 billion per year.
The first oil subsidy, passed in 1916, allowed companies to deduct 15 percent of their revenue to reflect the “declining value of their investment.” Though incentives like this one have been in place for years, tax breaks for big oil increased dramatically with the passage of the Republican-sponsored Energy Policy Act in 2005. For example, integrated oil companies are allowed to deduct 70 percent of their “intangible drilling cost” and they can also deduct 50 percent of the cost of their refining equipment. In addition to incentives and breaks, the U.S. government further rewards the industry by claiming a much smaller percentage of royalties, about 40 percent, for oil and gas produced on federal lands. International standards are in the range of 60 to 65 percent.
The system also heavily favors integrated companies. By 2006, consolidations and mergers brought the total number of U.S. based oil companies from 27 down to only eight. While the number of refineries and retail service stations are decreasing, distillation capacity and sales are increasing due to the power of mega corporations taking control and taking advantage of economy of scale to boost profits even more.
What Else Contributed to the Price Surge?
While conventional wisdom attributes higher gas prices to all of the above factors plus decreasing supply, others believe we need to look no further than Wall Street. Henry Ford said, “Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.” Traders in oil and energy futures are only required to put up 5 to 7 percent of the value of a purchase rather than the 50 percent required on stock trades. This makes it cheap and easy to engage in speculation in the oil market. In September, the Senate’s Permanent Subcommittee on Investigations conducted an investigation of market speculation and oil/gas prices and concluded that not only has there been a rise in speculation over the last few years but that it has increased prices and distorted the historical relationship between price and inventory (supply and demand). Their report, issued in September, also found that because electronic commodity traders engaged in oil speculation are exempt from reporting requirements, the Federal Trade Commission is hampered in its ability to monitor trading and detect price manipulation. Among other things, the report recommends that this exemption, called the “Enron Loophole,” must be eliminated and that Congress should get a better handle on monitoring foreign energy trades.
The same analysts who believe price fluctuations are directly related to supply and demand have been happy to explain away recently falling prices by pointing to lackluster demand. But speculation seems even more plausible now in the wake of the financial meltdown. The same investors, many relying on the fluid credit markets and who pumped $60 billion into the energy futures market during 2008, have pulled almost half that amount, back out. A report by Masters Capital Management released in mid-September said, “These large financial players have become the primary source of the dramatic and damaging volatility seen in oil prices.”
Moonshine will continue to explore the complexities of petroleum pricing in the months ahead.
Sources: Energy Information Administration, Treehugger.com, Guardian U.K., Friends of the Earth, fuelgaugereport.com, tonto.com, California Air Resources Board, gasbuddy.com
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