I’ve been wrestling with a thought experiment for the last couple of months and I think I’ve finally made some headway in resolving it.
This all started when a barrel of crude oil was hovering around $100 per barrel. Round numbers like that make doing the math on this problem a lot easier. From what I’ve read the best refining processes in the US can yield roughly 22 gallons of automotive gasoline from a barrel of crude oil. The price of oil differs around the globe, but there is generally less than ~$2 per barrel in deviation. So crude oil pumped in West Texas might bring a dollar or two more than it would in the North Sea.
There are numerous costs added into the equation between the time the oil arrives at the refinery and the time we buy the gasoline at filling station. There’s the cost of the refining process, the delivery, the marketing; there are numerous additives blended into the fuel, both to make their emissions less toxic, and to aid in their combustion within the engine. In California and several other states there are summer and winter varieties of fuel which, depending on the mean ambient air temperature, reduce the emissions’ impact on air quality.
The Federal government charges an excise tax on gasoline, as do many state governments. These add up to about $0.36 per gallon in California. There’s another $0.25 per gallon sales tax in California. That adds up to roughly $0.61 in taxes
So getting back to the original formula there are 42 gallons of crude oil in a barrel. At $100 per barrel, that comes out to about $2.38 per gallon for crude. That same barrel of oil will yield about 21.6 gallons of gasoline. So, with oil at $100 a barrel, the cost of just the raw the ingredient of gasoline, crude oil, composes $4.63 of the cost of a gallon of gasoline.
I’m looking at my commodities ticker right now and it says West Texas crude is going for $117.83. I drove by a gas station this morning and it said $3.84 for 87 regular unleaded, of which I’m paying fifty-five cents in excise taxes. I don’t get it.
Okay, some of those are June calls, the speculation market for what the price will be sixty days from now. Well, assuming it takes the oil two months to get from the ground to the pump, the prices for January and February were $92 and $95 respectively. That would still mean the raw materials cost in gasoline is $4.38.
I found this great page on the California DoE website that breaks down the price of gasoline. Among other things, it states that the constituent price of the oil in one gallon of gasoline for the week of April 21, 2008 is $2.80. It also lists the refinery cost and profit for the same period as $0.28.
So, assuming the refineries are paying $2.80 for the crude oil in a gallon of gasoline, how much does a barrel of that oil cost them?
So, 42 gallons in a barrel at $2.80 per gallon means the barrel of oil costs $117.60.
Wait, what? It looks like the Department of Energy of the State of California is getting this number just by dividing the price of a barrel of oil by 42.
I am so confused.