How Government Causes Your Gasoline Prices to Be High

The subject of high gasoline prices is on everyone's mind (h/t Mike Marnell).  The Department of Energy produces well known statistics  (also here) that break down the national average cost of gasoline:

Taxes: 14%

Distribution and Marketing: 10%

Refining: 5%

Crude Oil: 71%.

Of the 86% other than taxes, the percentage due to profit varies.  Sunoco is less profitable than Exxon, for instance.    Exxon makes 8.2% post-tax profit on sales, so when you go to Exxon you pay 8.2% x 86% = 7.1% in profit to Exxon and 14% in government taxes.  If you go to Sunoco you pay 1.2% x 86% or 1%.  At Exxon, taxes are twice profit, at Sunoco they are 14 times profit.   Note that these numbers are not risk-adjusted. In 2009 Sunoco lost money.  To be fair, returns should be adjusted for legitimate risk of loss.

If you parcel out the federal and state average tax and look at New York State the picture is worse. The Tax Foundation reports that as of January 1, 2011 New York had the second highest tax on gasoline in the country: 47 cents per gallon.   The federal tax is 18.4 cents per gallon. The total is 65.4 cents per gallon.  The AAA's Daily Fueld Gauge Report indicates that on May 30, the average price per gallon in New York was $4.03.  That means that taxes are closer to 16.23% rather than 14%.  Thus, in New York the breakdown looks like:

Taxes: 16.23%
Distribution and Marketing: 9.7%
Refining: 4.9%
Crude Oil: 69.2%

Thus, in New York Exxon shareholders do worse than nationally but because of low profits, Sunoco's shareholders do about the same as nationally.  Exxon makes 8.2% x 83.77% or 6.9% profit compared to government's 16.23% share. That is, Exxon's shareholders make 42.6% of what is taken in gasoline taxes (not counting sales and income taxes).  Sunoco's shareholders make 1.2% x 83.77%  or 1%. Sunoco shareholders get one sixteenth of what government takes.

Even more importantly, the explanation for Exxon’s profits is not higher prices. If it were, Exxon would lose business to Sunoco because of the higher prices. But Exxon's prices are not appreciably higher than Sunoco's, and Exxon has been more profitable than Sunoco for a long time. Rather, Exxon’s higher profits are due to better efficiencies, economies of scale, better reserves and the like.   

Recently my local congressman, Maurice Hinchey, proposed to tax oil companies' profits because of rising gasoline prices. But 14% of the price is due to Hinchey and his fellow congressmen, while only 8.2% in the case of Exxon or 1.2% in the case of Sunoco benefits shareholders.  By taxing profits Hinchey would aim to penalize efficiency. This could make Exxon less eager to minimize price. If it is the low cost producer, then its raising price will enable Sunoco and other producers to raise their prices. Hence, Hinchey's economic illiteracy, his eagerness to raise taxes, could make gasoline more expensive across the board. By penalizing efficient producers Hinchey would make them less efficient, causing them to aim to raise prices.


This would be much like what Hinchey has done with respect to government.  During his tenure in Congress, Ulster County's economy has been a disaster area.  The reason is the economically illiterate policies that Hinchey advocates: his penchant for an environmental extremism that trumps economic welfare, and his pandering to wealthy trust fund babies and elite professionals in Woodstock and New Paltz, who are all too eager to grind the average working person's economic welfare under the heels of their Birkenstock sandals.

O'Reilly and Hannity and Colmes Drop the Ball on Oil Speculation

Dick Morris was on Hannity and Colmes tonight to discuss oil speculators' influence on oil prices. Last night, O'Reilly claimed that high oil prices are due to "greedy speculators" This is spin. If speculators are causing high oil prices, then the mechanism needs to be clarified.

For a subject this important, Hannity and Colmes and O'Reilly should have economists from the CATO institute and perhaps the Brookings Institution debate regulation of commodities speculation. Part of the discussion would explain what makes this situation different from the rest of the 300-year history of commodity speculation. Who are these shadowy speculators? What is the mechanism by which they supposedly drive up prices? Why doesn't real demand by consumers drive down the speculators' inflation of oil prices? Unlike the coverage on Fox heretofore, the debate would need to be specific, clear and avoid double talk.

Dick Morris is a nice fellow but he lacks understanding of economics or of futures markets. I don't doubt that markets can become inflated as we saw with the tech bubble and housing, but such asset holders risk a crash. There is every reason to think that this would happen and, if so, there would be no need for regulation.

Regulation is the wrong idea, but there is nothing wrong with debating it. In particular, such a debate would clarify why speculation has or has not caused the price increase in oil and why the market will not correct on its own. Morris did not explain this. He could barely say the word "futures contract" and I doubt if he could define the term. There has been futures trading since tulip bulbs went through a price bubble in 17th century Holland and then crashed.

Futures holders must sell their oil when the future contract expires. If consumer demand has been reduced because of high prices, when the contracts expire the oil price will decline.

If this basic pattern is to be violated, O'Reilly, Hannity and Colmes owe it to their viewers to explain the reason clearly instead of putting spin on it like saying "greedy speculators" or having an economic illiterate like Morris say that "paper trading" is causing price increases.

Hey Hey, Ho, Ho, Maurice Hinchey's Gotta Go!

It is time to defeat Congressman Maurice Hinchey. He has been riding high in a gerrymandered district that goes as far west as Ithaca and includes Ulster and Sullivan Counties. According to Heather Yakin in the Times Herald Record Congressman Hinchey yesterday called for a price control ("cap") on gasoline prices to be set at $2.59 a gallon. Those of us who remember the 1970s gas lines (see photo above) caused by government rationing know that Hinchey is out of his mind. As a Congressman, Hinchey himself likely would have a special deal on gasoline or just tell an aide wait in the two-hour lines. Those who need gasoline the most will not be able to get it, while the politically connected, like Congressman Hinchey, would enjoy an ample supply. Congressman Hinchey need not need be concerned if oil exploration firms do not seek new sources of oil and poor people cannot get gas because of the "cap", or if people who have access to the gasoline do not economize. Hinchey's proposal is selfish, vicious and anti-environmentalist since those who have access to the gas will squander it due to the artificially low price.

A glance at the map of the 22nd Congressional district delineates the extent to which Congressman Hinchey has benefited from unethical and anti-democratic gerrymandering by New York State's corrupt political establishment. The district includes eight counties (Broome, Delaware, Dutchess, Orange, Sullivan, Tioga, Tompkins and Ulster). Only Sullivan and Ulster are completely in Hinchey's district. The twenty-second district's absurd shape illustrates how Congressman Hinchey has enjoyed the fruits of New York State's political corruption. He has run unopposed for years.