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.

When the Democrats Say They Want Universal Health Care, They Mean They Want to Kill the Feeble

My wife was just watching a television show which depicted an Oregon man who was dying of cancer. He asked his physician for a treatment of chemotherapy, but the physician demurred. The hospital sent the man a letter to the effect that although he could not be given chemotherapy because his condition was too advanced, he could take advantage of Oregon's "Death with Dignity" law and commit assisted suicide.  Besides the moral issues involved in suggesting to a patient that he commit suicide, the Oregon law has serious implications for future decades.

The Baby Boom generation failed to see any progress in its economic welfare because the Federal Reserve Bank debased the dollar and transferred much of the nation's wealth to financial interests.  The result is that there has been inflation, and the real hourly wage has not increased since 1970.  In the days of laissez faire capitalism, when there was no income tax, the average American's real hourly wage increased two percent per year. This continued through the 1960s, when government spending was less as a portion of GDP than it is now taking into account all three levels of government. After 1970, when restraint on the Federal Reserve Bank was eliminated because Richard M. Nixon abolished the gold standard, facilitating rapid government expansion, income inequality has expanded and the real hourly wage has been stagnant for the first 40-year period in American history.  America is no longer the land of opportunity because of the Federal Reserve Bank, high income taxes and big government, a system that has facilitated wealth transfer by staunching small scale capital development and transferring wealth from wage earners to property owners.

One effect of the Fed-generated  wage stagnation is that Americans no longer have the wealth necessary to provide themselves with health care.  Until 2009 the system had permitted the average American to retain the illusion that he would be able to afford health care.  The two Obama health care laws expanded access to health insurance by cutting Medicaid and establishing mechanisms that will increasingly reduce care. The average American will no longer be able to afford care at the level that his or her parents had it.  Although more Americans will be able to gain low-cost treatments of the kind that Michael Moore celebrated in his movie Sicko, when he extolled the Cuban medical system, fewer Americans will have access to the kind of care that Moore ridiculed: the sewing on of fingers that had been cut off in an accident.  Replacement of fingers is likely not available in Cuba and likely not available in countries with public health care systems. Such systems ration care using bureaucratically designed rules. They save money by reducing care of the type that Moore complained was absent in the American system.  In fact, the pattern is the reverse. Elaborate treatments are less likely to be available in a socialized health care system.

By expanding care and taking steps toward socialization of medicine, the Democrats have insured that Americans will receive reduced care.  As well, we can expect a second pattern.  The institution of murder in place of treatment, as we see with the Oregon law. The Democrats, in the name of providing universal care, are going to substitute murder for care, with Progressive Republicans marching in synch. This is necessitated by the  big government policies that have led to declining real hourly wages, the socialization of medicine, and the failure of Progressivism.

Arab Spring May Cause Instability

One of national democratization's effects was the intensification of warfare.  Under the medieval system wars were limited in nature and were chiefly of concern to aristocrats.  Protestantism, the democratization of religion,  led to the Thirty Years War that took place in Germany from 1618 to 1648.  As well, the excesses of the French Revolution led to Napoleon. His conquest of Europe was the first modern war.  The democratization of Germany following World War I led to Hitler and the worst war in history.  Since World War II American democracy has led to several wars, such as the Vietnam War, which involved more than three million deaths.

One reason why democracy leads to war is the galvanizing effects of war. A mediocre leader can inspire renewed commitment through war.  A failing leader can revive his popularity. Another reason is that democracy enhances public commitment to the state.  Whereas kings could fight only through contractually obligated vassals who had limited commitment to battle, there was no limit to a Frenchman's loyalty to the French nation, which he believed reflected his own aims and beliefs.

Neither Saudi Arabia nor Iran have seen democratization, but the Sunni-Shia conflict, which parallels the Catholic-Protestant conflicts of the 16th century and later (continuing into this century in Ireland), presents a context for potential total war, much like the Thirty Years War. The Wall Street Journal  reports that in aiming to limit democratization, Saudi Arabia is creating an informal alliance against Iran. The reason is that a Sunni majority in Bahrain governs a Shiite majority.  Saudi officials have approached Pakistan, Malaysia, Indonesia and Central Asian states to lend support to Bahrain's government against the Shiite majority who live there. Recall that a month ago Pakistani Prime Minister Yosuf Raza Gilani told Afghan officials to dump the US.  Now, Saudi officials are organizing an alliance that could thwart US objectives in the Middle East.

Religious conflict can be severe.  Even if the US is able to quell Saudi Arabia's current thrust to prevent democracy, the Middle East seems to be a region of Medieval levels of religious commitment. This may lead to instability in the oil supply.  Saudi Arabia's efforts to stop democracy in the Middle East are reminiscent of the Congress of Vienna and Metternich, who aimed to stop democratization in Europe. Here, though, there is the emotional issue of religious difference.

Added to the instability in global financial systems, due largely to the Federal Reserve, the instability in the Middle East says to me that commodity investments are here to stay.

Brother Can You Spare a Fraud: Rock Song about the Fed

H/t Mairi. Dan Litwin's song about the Fed.