Angst at the Pump

The article linked above provides a good explanation of the price we pay for gasoline. We see this kind of analysis repeated on social media, in corporate/legacy news media, and elsewhere. However it does not tell the whole story. For example, the article breaks down the price of gasoline into four parts: the price of crude oil, taxes, distribution and marketing costs, and refining costs, but does not say which category includes the cost of transporting crude oil from the wells to the refineries. They also present the price analysis as a current snapshot in time, and ignore how the situation has changed since the US gave up its net energy independence a year or two ago. To better understand gasoline prices, we need to drill down (pardon the pun) into some details.

First, the article mentions that the price of crude oil is the largest factor in gasoline prices, correctly points out that crude oil prices are driven by the laws of supply and demand, and notes that these market forces act on an international scale. It states that the US is the country producing the most oil, but fails to mention that withdrawal of federal land from exploration, drilling, and production limits US oil production. They also omit the effects of transportation costs and availability, and how canceling or slow-walking approvals for pipelines effectively blocks or impedes the US from using oil produced in Canada. And they do not explore the financial pressures that prevent large and small oil producers from accessing capital to support operations or investments. All of these factors reduce the supply side of the supply/demand equation, driving up crude oil (and gasoline) prices.

Second, the article outlines some of the federal and state taxes that add to the cost of gasoline in the US. There have been rumors of a tax rebate or a tax “holiday” to give consumers some price relief, but nothing has materialized. Notably, there does not seem to be any discussion of permanently reducing the tax burden. Politicians seem addicted to tax revenues, so this is no surprise.

Distribution and marketing come in third. Other than regulatory constraints and permitting challenges, the biggest unmentioned factor in this part of the gasoline price may be a shortage of trucks, drivers, and storage/transfer capacity. If the article is correct in saying that no new refineries have been built in the US for many years, this would aggravate the cost of distribution from refinery to consumer simply because of growing and evolving patterns of gasoline use at some distance from the fixed locations of refineries.

The fourth factor is refining costs. No new refineries have been built recently in the US, the country has been exporting crude oil and importing refined products, meaning additional steps (and costs) in the transportation and distribution sectors. Refining costs are also complicated by boutique gasoline blends required on a geographic or seasonal basis. Why no new refineries? This question was apparently beyond the scope of the analysis.

Some politicians and some of the chattering class in the news media claim that US and state government policies have no responsibility for the rising cost of gasoline in the US, nor do politicians have any way to influence those prices other than to invoke additional restrictions on various parts of the process. However, government policies reduce land available for exploration, drilling, or production. Government policies block pipeline transportation of crude oil, making some supplies unavailable to the US and forcing other supplies to be transported by truck or train at higher cost and higher risk. And government policies distort market forces that would ordinarily provide a more holistic approach to managing costs and risks. Please keep these things in mind when you go to the ballot box in future elections.

We noted that the linked article provided only part of the story. However, this blog post covered only a limited amount of additional information. For example, we did not touch on how hydrocarbons play vital roles in modern materials, pharmaceuticals, and food production. We did not discuss climate change, environmental effects, renewable energy, nuclear energy, conservation efforts, transportation alternatives, or transitions from one energy source to another. The picture is large and complicated, and these are all interesting parts of what the political and news media types tell (or don’t tell) us, so keep an open mind and don’t hesitate to ask questions.

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