Gasoline Economics 101

 

Gasoline Economics 101

         So, right off the bat, as the daily news reports, correctly, I assume, that the price of gasoline has risen to over $3.00/gallon, I wonder how many readers threw the paper down, blaming President Biden. I am absolutely sure that some moron used the words “Keystone Pipeline” in a diatribe, although that “pipe dream” (see what I did there?) was years from any meaningful impact on gas prices.   

        As I have (too) often had to remind the uninformed and/or Economics challenged, the federal impact on fuel pricing has actually diminished since the federal gas tax was set at 18.4 cents/gallon in 1993. Since it was not indexed to inflation, it has remained at that figure even though with the US Consumer Price Index increases from 1993 to 2020, it should be 1.79 times higher than it is, just to match inflation. For the math challenged let me simplify. Just to keep pace with inflation the federal gas tax should be over 33 cents/gallon.

        For those too young (or too old) to remember, gasoline prices have fluctuated over time for various reasons from OPEC production squeezes to off-line refineries, to hurricanes. Etc. Let’s deal with the non-market fluctuations first, in other words State fuel taxes.  The below graphic shows the unchanging federal tax and the federal tax for each state.

  If you’re angry about fuel taxes, I suggest you contact your state representatives. Clearly, the Fed isn’t the primary taxing entity nationwide as far as fuel prices are concerned. Moreover, note the variation from California (where 23%) of gas tax is federal to Alaska, where 54% is federal.

        But, enough already, with the tax aspect of gas prices. Why are prices up right now? Adam Smith explained it all in “The Wealth of Nations” (1776), waaay before the gasoline engine was even invented. Gasoline is a commodity and, as such is subject to the basic laws of supply and demand. Since there is also limited storage capacity relative to the huge volumes of gasoline we consume, automobile fuel is very susceptible to price fluctuations as demand lags or surges, causing either surplus or shortage.  

        For most of 2020, many of us were in varying degrees isolation and reduced driving with that extending, but diminishing, into mid 2021 (today). Nationally and, in fact, world-wide, gasoline consumption has been well below historical averages. For 2020 the US as a nation consumed more than 10% less gasoline than the 5-year previous average. Accordingly, producers/importers limited production to match demand and prices remained relatively stable. However, now with vaccines and the subsequent resumption of more and more normal lives, especially including travel, the demand for gasoline has escalated. Demand now exceeds supply and will for a short while. Predictably, prices rise due to shortages. What does government at any level have to do with that? Not a damned thing.

        And as an inserted political commentary, if Congress had any real balls at all, they’d increase federal gasoline/diesel tax to the level it would/should be if it were CPI indexed, and the infrastructure issue would be eased by the influx of around $25.5 billion in increased revenue! (average annual fuel usage of gas and diesel at an extra 15 cents per gallon)

        Now is probably a good time to also lay some responsibility on retailers. When they have supply tanks half full and supply lags, leading to a wholesale price increase, they raise their price at the pump in anticipation of what it will cost to refill them, realizing the consumer is probably unaware of the wholesale cost fluctuations. Even if the fuel in their half full tanks was wholesaled to them at $1.20 per gallon, and they are retailing it at (as a hypothetical) $1.85, with a profit of perhaps 15 cents a gallon (national average for net profit), the moment the retailer realizes his cost to refill those tanks is going to increase, he us likely to raise the price on that remaining gas to meet the wholesale price increase. But after he has refilled at the higher price, he will continue selling at that price even if the wholesale price drops, until he can refill at a lower cost. Welcome to retail. But, before you fire-bomb your local station, consider that, at a volume of 4,000 gallons/day their net profit is around a paltry $100 daily.

        The other reality many Americans fail to consider is that there was a world-wide “oil glut” from mid-1985 to 1999, with accompanying low oil prices. The Iraq war, the great Recession, Arab Spring and accompanying world events drove oil supplies down and, accordingly, prices for refined gas up between 2003 and 2014. 2015 saw a rebound in crude oil supplies and price at the pump eased back down. The 2020 global pandemic was simply another event causing supply and demand to get out of synch, with the usual effects on price. This, too, shall pass.  

        American consumers would be wise to take a look at the nations of Europe and their gasoline prices.     

  The EU requires that all member nations levy at least an equivalent of $1.61 US per gallon. Most tax more than that minimum. The UK, for example, charges $2.60 /gallon (.65-euro equivalent/liter). This seems astronomical to us, but I point this out to show that even if US fuel tax was only half that of Europe’s minimum (80 cents per gallon in round figures) the revenues generated for much needed infrastructure would be largely paid for by users.  If mandatorily aimed at and limited to infrastructure, this would generate another $136 billion annually, off budget, adding nothing to the national debt. Oh well, what do I know?