Lots of attention being paid to steadily rising prices for gasoline.  Many believe a $4 or $5 a gallon price will weigh heavily in this year’s election.  In this context it may be useful to look at a few facts about gasoline prices.

For starters the cost of gasoline is largely determined by the cost of crude oil about 73% of the price at the pump.  Next largest part is taxes which are about 11% of the price followed by refining and other production costs at 10% and last by distribution 6%.  The price of crude oil in the USA usually refers to the price for West Texas light sweet crude, currently a bit above $100 a barrel, or Brent, which is crude produced in the UK sector of the North Sea and typically sells about $10 a barrel more than the Texas crude. 

The important thing to remember about these two reference prices is that they represent the cost of producing the crude from the wells in those two areas. However, since they are reference prices, they are also used in setting prices for less expensive to produce oil such as in Saudi Arabia where it costs less than $3 a barrel to produce.  A barrel contains 42 galllons which yield 21 gallons of gasoline at the best refineries.   Obviously the Saudis profit much more from each barrel sold than do producers in the US or UK.

The next cost factor, taxes, represents a wider range of cost.  While in the USA taxes account for 11% of the cost of gasoline they weight much heavier on prices in Europe where price per gallon averages around $8, double the average price in the USA.  The cost of the crude and refining are more or less the same while distribution runs a bit more.  Thus the main reason for the much higher price is taxes which constitute a very important tax revenue for the European countries.

The high price for crude spurs the search for alternate fuels.  However, that search is constrained by the fact that major producers such as Saudi Arabia can lower prices substantially and still make money, i.e. they could lower prices to $10 a barrel and still make a bundle. 

The lowest cost alternative at present is oil from oil sands or technically “bitumen.”  It can be produced at a cost of $28 per barrel.  This oil, however, has considerable by-products that are considered to be bad for the environment. 

The concern with rising gasoline prices is not just the “pain at the pump” it causes consumers. Since transportation is a large cost for all economic activity, the sharp increase in gasoline prices could nip our tepid recovery in the bud.  I say “tepid” since the 2-3% increase in GDP over the last 12 months pales in comparison to the 8-10% growth in GDP seen in previous recoveries.  While less than spectacular, even this modest growth could be damaged by higher gasoline prices.

President Obama seems to be oblivious or deaf to the problem.  The only short term solution to the price increase is to increase the supply of crude oil. Obama stopped the expansion of the Keystone Pipeline from Canada which would greatly increase supply.  He has now called for increased taxes on the petroleum industry.  Beside putting a damper on developing more oil supply, this increased cost will be passed on to the consumer in even higher gasoline prices.

The president calls the higher taxes for oil producers an “end to subsidies” for the companies.  The ultimate in double speak, calling cost deductions from gross income “subsidies.”  Under this definition the deductions for mortgage interest and R&D expenditures by companies are “subsidies.”  A subsidy is usually defined as a payment or funding as the administration gave to the now defunct Solyndra solar panel maker, not a tax deduction or credit.

If no dramatic action is taken we can look forward to even higher gasoline prices as worldwide demand continues to stretch supply to the limits.