Gas Hits $3.28 Per Gallon; Profits Revealed

by Donal Fagan

March 17th, 2008 10:18 AM

gas hits 3 28 per gallon profits revealed

Who profits most when you pay $3.28 for a gallon of gasoline? Taking their cues from the mainstream media, many people blame oil speculators for driving-up the prices. According to CNNMoney, they don't actually get a cut of the price. Some traders profit by correctly predicting the change in prices, but others balance that by losing money. Meanwhile, only about seven to 10 cents of the retail price goes to gas stations; which make more money selling legal drugs (caffeinated beverages, artery-clogging, obesity-reinforcing snack foods; cigarettes, lottery tickets, etc.). Federal taxes account for 18 cents; state taxes average 22 cents/gallon. Shipping and storing fuel costs between 23 and 26 cents/gallon. Refiners like Valero, Sunoco or Frontier charge about 24 cents/gallon, but get squeezed when oil prices rise quickly. That leaves crude oil suppliers like BP, Chevron, ExxonMobil, Petroleos Mexicanos, Petróleos de Venezuela and Saudi Aramco. They take the lion's share: roughly $2.04 per gallon. And now that gas is averaging $3.285 a gallon, they make even more. But then, it's one of those risk reward deals. And these calculations don't include the cost of U.S. military efforts in oil-producing regions. Or an eventual federal bailout when one of the D3 goes belly-up. Or a lot of other things, really.

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Donal Fagan on Mar 18, 2008

Pch101: It’s hard for bubbles to emerge if demand is consistent and prices are at equilibrium. IOW speculation thrives with inconsistent demand. Suddenly people decide that oil, or tulips, or Beanies, are more desirable (or less). Speculators profit from the changing prices. So unless there is collusion between the producers and the traders, your speculation premium is ultimately a demand premium, whether the demand is rational or not. In the case of Beanies, the speculators controlled supply, and created a crazy bubble market for something of little intrinsic value. For oil traders to do the same, they'd have to be working with OPEC.

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Pch101 on Mar 18, 2008
So unless there is collusion between the producers and the traders, your speculation premium is ultimately a demand premium, whether the demand is rational or not. I don't believe that anybody said otherwise. I have yet to hear any rational analysts claiming collusion between the traders and the oil companies. In traditional economics, "demand" is defined as demand for the good itself, based upon the utility that can be derived from using it or selling it to someone else. The speculators are not demanding the product per se, but are betting on price movements. They are currently a large enough force in the market to affect prices to some degree. The issue here was whether a component of the oil price is due to speculation, and it's pretty clear that some of it is. The good news for consumers is that when the bubble bursts, those speculators will get wiped out and the price will fall a lot, as is the case when other bubbles burst. There will come a point when oil prices will be due for a big slide, as the greater fool theory steps aside in favor of the market asserting its authority. Is your point that we are impotent because we are overextended? Our military is too small? We lack moral courage? What? Impotence is a measure of failing to achieve our goals and the message that this failure sends to the world. Clearly, Iraq is unstable and the US did not accomplish what it set out to accomplish. This failure erodes the US' image as a superpower , which is bad for US foreign policy. The only way that this could be changed would be for the US to turn things around and win the war, i.e. establish a stable government that can maintain peace within the country and maintain its sovereignty. If the US can't do this, then it needs to leave, because staying only reminds everyone (but Americans, apparently) that the US failed. The sooner that the US can move forward, the better it would be for the US.

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Landcrusher on Mar 18, 2008

PCH, It seems we are therefore not militarily impotent, by your definition. Building a country is NOT a military goal. Keeping order in a country is NOT a military goal. The military very effectively took out the regime in power. That IS a military goal. Now all you have to do is define what our goal in Iraq is (any commentary on why so many people cannot get on board with that would be appreciated). We can then, perhaps, figure out whether the perception of US weakness is accurate, why it is so, and what to do about it.

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Donal Fagan on Mar 18, 2008
The issue here was whether a component of the oil price is due to speculation, and it’s pretty clear that some of it is. But the only reason speculators have their toe in the door is because the demand, the putative demand, is volatile. If the demand falls, speculators will still make money by betting on lower prices. What component of falling prices will you attribute to speculation?

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