With gasoline prices jumping every week these days, a lot of Answer Desk readers -- including Ian in California -- have the same question. Just who gets the extra money I'm paying at the pump?
Europeans pay more for gas, but they also receive additional services from the gas taxes. The extra money that we will pay as gas prices rise will not go to additional government services but oil companies or foreign governments. Who is getting the money from rising gas prices?
-- Ian R., Glendale, Calif.
Breaking down where your gasoline dollars go is not an exact science, but the list of players is a long one. You may be surprised to learn that not all of your money ends up in the bank accounts of Big Oil, gasoline retailers or Middle Eastern tycoons. (And we'll dispense with, for now, the more creative theories that pop up routinely in our inbox fingering everyone from President Bush to hedge fund “profiteers” to new car buyers in China.)
As of last week, the U.S. Department of Energy pegged the retail price of a gallon of regular gasoline at $2.33. As we’ll see (and readers can be counted on to point out every time we cite average prices), the price you pay will almost certainly vary from that number. For consistency, we use data from the Department of Energy; you may see slightly different numbers from trade associations and private energy research companies that do their own surveys.
So here’s where the money goes:
Gasoline is made from oil, so the rise in crude prices is the single biggest factor raising the price of gasoline. A recent study by the Federal Trade Commissionfound that “over the past 20 years, changes in the price of crude oil have led to 85 percent of the changes in the retail price of gasoline in the U.S.”
As of last month, crude oil costs chewed up about 54.2 percent of your pump dollar -– up from 40.7 percent last June, according to estimates from the Department of Energy. So based on last month’s breakdown, you’re spending roughly $1.25 a gallon just for crude oil.
There's no question that this is a great time to be an oil producer -- profits have surged along with crude prices. At this writing, crude prices are above $60 a barrel -- up from $40 a year ago. Much of the difference is pure profit for producers.
Still, not all of the money you pay for crude hits the bottom line of the private or government-run company that produced it. First, they have to pay the salaries of their employees, along with all the other costs of extracting and processing your oil and exploring for new supplies.
Then there are the "middle men" -- imported oil shipped by tanker often changes hands at different prices during the ocean voyage before it reaches U.S. refiners. The final price paid by a refiner also includes the cost of shipment, which goes to the tanker operator who delivers it.
And you may be surprised to learn that the biggest supplier of U.S. oil imports is -- Canada. Second on the list is Mexico. Less than half the oil imported by the U.S. comes from OPEC.
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Once you’ve paid for your oil, you’ve got to pay someone to make it into gasoline. Energy Dept. estimates put the refiner's cut at around 43 cents a gallon. Jacques Rousseau, an analyst at Friedman Billings and Ramsey, figures that, as of last week, average refiner margins were more like 30 cents a gallon. (Take your pick.)
In many parts of the country, you’re also required to have a special additive mixed in with your gasoline to make it burn cleaner in the summer months. The impact on pump prices is mixed. Many states now require the use of ethanol, phasing out a more costly additive called MTBE. Ethanol producers argue that their fuel is cheaper to make than gasoline, so the more of it you put in your tank, the lower the overall cost of each blended gallon. But the math gets a little murkier when you factor in the 51-cent-a-gallon ethanol subsidy that comes from our tax dollars. (So let’s leave the net cost of these additives for another column: call it a wash.)
Marketing and distribution
You wouldn’t think a gasoline retailer would have to spend much money marketing their product: it’s not like we have to be sold on the idea of buying gasoline. But in many areas, gasoline retailing is competitive, and the entry of major discount chains like Wal-Mart has made this market even more competitive. So at least some of your gasoline dollars go to retailers to convince you to buy their brand of gasoline. About 20 cents of every gallon went to marketing costs in 2002, according to a report that year from the API.
And since gasoline doesn’t flow directly from the refinery to your gas tank, there’s another chain of players -– including gasoline pipeline operators, wholesalers, storage tank owners and the guy who drives the tanker truck to your local gas station. Based on last week’s pump price, figure another 15 cents a gallon on average for the lot of them. If you live on the West Coast, where a shortfall in refining capacity means gasoline has to be “imported” from the other side of the Rockies, you’ll pay more. Transportation costs are a big reason gas prices vary so much from one part of the country to another.
These folks probably have it worst. They draw the biggest wrath from drivers, but as prices go up, they get a smaller share of the gasoline profit pie. In some cases, retailers even lose money on gasoline to keep prices low enough to coax you to their pump, hoping you'll come inside for a soda and a bag of chips, where profit margins are higher.
Slim profit margins have prompted most major oil companies to get out of this end of the business. About 7,000, or less than 7 percent, of U.S. gas stations are owned and operated by the five major oil companies, according to estimates from the National Association of Convenience Stores. The gross margin for retailers in 2003 (which includes the gas station’s operating costs) was less than 9 percent of the pump price, the lowest in 20 years.
Retailers also have to cough up the fee -- as much as a nickel a gallon -- that is paid to credit card companies when you charge a fill-up. Those fees have been rising as more and more people use plastic to buy gas.
So figure about 21 cents of each gallon goes to the players who hang around the pump.
Last -- but by no means least -– is the sizeable chunk of gasoline spending that goes to your government, the second biggest beneficiary of rising gasoline prices. First, you pay 18.4 cents a gallon in federal excise tax. States charge another 25.6 cents (on average, weighted by volume) for a total of 44 cents a gallon.
A lot depends on where you live. In Alaska, you’ll pay just 8 cents a gallon in taxes, according to the American Petroleum Institute. New Yorkers, on the other hand, fork over 42.6 cents for every gallon. The rest of us pay something in between -- another big reason pump prices vary so much from one part of the country to another.
So how come gasoline prices seem to go up faster than they come down? A number of state and federal agencies have looked into whether retailers “pass through” costs when prices go up faster than they pass along savings when prices go down. There’s no definitive answer. Some analysts suggest that retail price changes lag -- but eventually keep up with -– changes in wholesale prices. One Energy Dept. study found that when spot prices change by 10 cents, about 3 cents will pass through to the pump within 2 weeks and at least 6 cents after 4 weeks.
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