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Don't Blame Oil Companies For The High Price Of Gas

Jun 20, 2008
Oil companies are an easy target for the current high gas prices we are now facing in this country.

But, let's examine the facts:

$1 would buy you a lot of goods and services in 1950. Today; however, what you bought for $1 in 1950 now costs $8.78. The price of gasoline in 1950 was about 30 cents a gallon. Adjusted for inflation, gasoline prices ought to be about $2.64. This assumes taxes have remained the same.

The problem is that taxes haven't stayed the same.In 1950, taxes on a gallon of gasoline was roughly 1.5%. Taxes on a gallon of gasoline today make up about 20% of the price of gas.

That 30 cents a gallon in 1950 should cost you about $3.13 today. But this assumes supply and demand has remained constant. It hasn't. China and India are probably the most visible examples of this. China and India are quickly rising to the top of the "food chain" in terms of consumption, and they are requiring more and more energy every year.

The last oil refinery built in the United States was completed in 1976. Government regulation has has forced this issue for more than 30 years. This is likely why building a refinery right now will have little immediate impact on the price of oil. It is, as they say, "too little, too late". Buying oil from countries who have nationalized oil fields puts a risk premium into the price of oil that we must buy from them.

Lastly, about 9.5% of the price of gasoline goes to the oil companies. A whopping 20% goes to Federal, State, and local taxes. A very small percentage goes to privately held gas station owners and the rest is used up in the cost of production and getting the product to market.

Politicians often tell us about "greedy" oil companies. But if "windfall profits" were the real issue, why not go after other industries who have larger profit margins than oil companies?

For example: The profit margins for the [Periodical] Publishing industry is 24%, the shipping industry has 18% profit margins, application software boasts 22% profit margins, the tobacco industry rakes 19%, water utilities operate at 10.2%.

What can we do about all of this? Well, we can cut back on distribution of oil and gas. But, that will cause a problem (naturally) because demand is going up, not down. We can take away more of the oil company's profits. They already operate on pretty thin margins, so they will likely have to jack prices up even higher to compensate for a "windfall profits" tax. Then, they'll really be the bad guys won't they?

A third option is to just let them be. Don't blame the oil companies. Demand fewer coercive laws, regulations, and demand lower taxes.
About the Author
David C Lewis, RFA is a financial consultant and provides objective financial information about life insurance, SPIAs, bank CDs, stocks, and other topics related to retirement & financial planning.
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