Monday, May 30, 2011

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.

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