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Video: Gas prices continue to climb

By John W. Schoen Senior Producer
msnbc.com
updated 5/8/2007 7:34:48 PM ET 2007-05-08T23:34:48
COMMENTARY

With gasoline prices topping $3 a gallon again, a number of readers, including Greg in Louisiana, are wondering about a proposed one-day "gas boycott" that has a goal of taking $2.3 billion in oil company profits. Aside from circulating some questionable math, organizers of this event stand exactly zero chance of having an impact on gas prices.

Rumor has it a gas boycott will be in effect on May 15, 2007. Have you heard of this? ... The e-mail stated, "Do not buy gas on May 15. In April 1997, there was a 'gas out' conducted nationwide in protest of gas prices. Gasoline dropped 30 cents a gallon overnight. … There are 73,000,000-plus Americans currently on the Internet network, and the average car takes about $30 to $50 to fill up. If all users did not go to the pump on the 15th, it would take $2,292,000,000 out of the rich oil company’s pockets for just one day. So please do not go to the gas station on May 15, and let’s try to put a dent in the Middle Eastern oil industry for at least one day."
—Greg M., Lake Charles, La.

Spring seems to be a time of year that brings out irrational behavior in many of us. Congress talks about balancing the budget. Chicago Cubs fans revive hopes of winning the World Series. And American drivers who are passionate about pump prices begin organizing a gasoline “boycott” aimed at “sticking it to Big Oil.”

Unfortunately, even if this boycott were to live up to the hopes of its organizers — including everyone who has forwarded this e-mail in the past few weeks (you know who you are) — it would have zero impact. None whatsoever. But before we get to the reasons why, let’s do a little fact checking.

Let's start with the price impact of that alleged “gas out.” In the first week of April 1997, the average price of a gallon of gasoline nationwide was $1.248. By the end of the month, the weekly average was $1.24. If there was a one-day drop of 30 cents a gallon, it doesn’t show up in the statistics compiled by the Department of Energy. (We realize that many readers who are passionate about pump prices believe that this government agency is just a shill for the oil industry, ready to cover up what’s “really going on.” But humor us just this once.)

Some of the other numbers in this widely circulated mail don't add up either. There are more like 200 million-plus Web users in the U.S., not 73 million. And the $2.3 billion daily revenue figure assumes everyone fills their tank every day, which they don't.

But even if these numbers were correct, it wouldn't matter.

The real problem with this idea is that — as some versions of this e-mail helpfully suggest —these "boycotters" simply top off their tanks May 14 or wait to fill them up May 16. All that does is shift sales from one day to another. Any money “lost” from lower gasoline sales on May 15 will be made up with higher sales on the days before and after the “boycott.”

To have a real financial impact, you’d have to figure out how to get people to keep their cars off the road for the whole day — cutting actual consumption. Of course, you’d also have to shut down ambulance services, police cars, fire trucks, delivery vans, etc. And don’t forget all those other gas-powered devices: Every landscaping crew would have to take a holiday on one of the busiest days of the year.

But suppose that, through some magical force of nature, you managed to shut down every gasoline-powered vehicle and device for one day. Let’s look at how much money would be involved and what would happen to it:

Based on current demand of about 386 million gallons a day, at $3 a gallon, the total value of gasoline sold daily in the U.S. comes to almost $1.2 billion. But that’s the total retail value — the pot of money that’s divvied up along a chain of oil producers, pipeline operators, refiners, wholesalers, truckers and retailers. Let’s follow the chain and see who gets to keep what.

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Crude oil
The biggest chunk of change — about 53 percent of the pump price of each gallon of gasoline — goes to pay for the crude oil used to make it. So in theory, $624 million of the “boycott” would “hit the pockets” of oil producers, whether domestic or foreign.

The problem with this part of the boycotters’ plan is that, just like drivers topping off their gas tanks before and after May 15, refiners work off stockpiles. So if all U.S. refiners bought $624 million less crude oil on Tuesday, they could just buy a little more on Wednesday to bring their stocks back up. Even if they somehow canceled delivery of oil they’d already contracted to buy, any oil not delivered to U.S. refiners would be sold to other customers.

True, if you suddenly took 10 million barrels of oil off the market for a day, you might knock the spot market price of crude down a notch. But much of the oil sold every day is priced under long-term contracts. So if your 10 million barrels went undelivered for 24 hours, you wouldn’t change the price that a refiner had already paid for it. Even if, for some reason, that 10 million barrels went unsold, it would still be sitting in the ground with an oil producer's name on it, ready to be sold later — possibly at a higher, and more profitable, price. 

Taxes
About 19 percent of the pump price of each gallon represents taxes. So the next big chunk of cash from a day’s worth of unsold gasoline — about $228 million — would come out of the budgets of federal, state and local governments, not oil industry profits. Since that money is used to pay for programs and purchases that have already been approved, you’d have to make up the difference by raising other taxes, or cutting spending, or some combination. 

Refining
Now comes the part that makes most would-be boycotters see red: the refiners' cut. Another 19 percent of our $1.2 billion in daily gasoline purchases pays for the cost of making the gasoline, including the refiners’ profits. That money also goes to pay refinery workers’ salaries, new equipment, maintenance and all the other costs of running a business.

So just how much goes to “line oil refiners’ pockets?” According to researchers at the investment firm Friedman, Billings and Ramsey, the average profit margin for converting a barrel of crude oil into gasoline in the first quarter of this year came to $15.75 — or about 37.5 cents per gallon. (In the oil patch, there are 42 gallons in a barrel.)

With gas prices at $3 a gallon, that's about 12.5 percent margin, or about $150 million a day — not a bad profit for a day's work.

But how does that compare to what other companies make? Google and Bank of America recently reported net profit margins of 29 percent; handbag maker Coach Inc. had a net margin of 24 percent and Coca-Cola reported a net margin of 21 percent. Of the 200 largest companies in the S&P 500 index, 82 had profit margins higher than 12.5 percent, according to figures from MSN Money.

Wholesalers and retailers
Though retailers bear the brunt of pump price rage, they actually get the smallest piece of your gasoline dollar. About 9 percent of the retail pump price pays for distribution and marketing, which includes the cost of shipping gasoline to wholesalers, who take a cut and then ship it to your local gas station.

Very little of the retailers' cut goes back to oil companies. Something like 80 percent of the gasoline consumed in the United States is sold by 112,000 convenience stores, according to the National Association of Convenience Stores. Even though they may display an oil company logo, less than 3 percent of U.S. gas stations are owned by a major oil company. After factoring in all expenses, including credit card fees, the average retail profit per gallon is roughly 1 cent, according to the NACS. Some stores lose money on gasoline to boost foot traffic to the store and increase sales of soda and chips.

An alternative fuel boycott
Still, if it will make you feel better, go ahead and drive by the gas pumps May 15. But don’t kid yourself into believing that it will do anything to “stick it to Big Oil.”

Why not, instead, make May 15 “Fuel Economy Awareness Day” — urging drivers to check the mileage they’re getting and review suggestions for improving it? Better yet, make May 15 “Shop For A Higher Mileage Car Day.”

Because the only way we’re going to have any impact on demand — and price — is to reduce the amount of gasoline consumed per person. And the best way to do that is to improve the efficiency of cars on U.S. roads. If you doubled your average mileage, you would cut consumption in half.

Now that would put a big crimp in gasoline sales and almost certainly send pump prices tumbling.

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