Economics of the Oil Industry

Note: There was a recent post on The Allburn Blog that sparked some comments. I had a few things bumping around the ol' noggin that I wanted to put there but the comment would've been quite unwieldy. Hopefully, we can continue the discussion.


Now, I have two things :


1) It's interesting that the same politicians *cough* liberals *cough* that are complaining about gas prices and our dependence on the Middle East are the ones that won't let us take prudent measures to fix them. Limited drilling in our own country makes sense, especially in ANWAR (the 2nd largest oil reserve ever found) and in the Gulf of Mexico (where other countries have been doing it with huge success for years. God forbid we do it though.)


2) The economics of the oil industry are really interesting. Interesting in the sense that they're not spectacular, people are ignorant about them, and people enjoy spouting nonsense about evil, greedy CEOs that make clothing out of thousand dollar bills and the skin of poor people. Through all of this, we need to keep in mind that these are the folks that find crude oil, obtain it, refine it, turn it into gas, ship it, store it, etc. They keep our entire economy moving. Pretty important service if you ask me.

With that...

By and large, the profit margin made by oil companies is lower than the average profit margin for many other goods/services. They receive "record breaking profits" that people whine about for many reasons, but mainly, it's because everybody uses gas. If you made $0.0001 profit on a product that the entire world uses, you'd be rich too. That doesn't mean they're reaming people.

Notice the date associated with this chart. Why wasn't the media focused on the evil bastards that run pharmaceutical companies? We were inundated with daily rants about gas profits.


Do you know the average profit that the evil oil villains makes on a gallon of $3.00 gas? About 8 cents.

Do you know the average profit that the government makes on a gallon of $3.00 gas for doing nothing? It varies by state and sources that you'll find, but I've consistently seen an average of 50-60 cents. Our good friend Andy is fortunate enough to live in a state that imposes the highest gas tax at close to 40 cents a gallon. That's before the Feds get their hands in the cookie jar. Now who's "price gouging"?

What's below is the most concise source for gas taxes that I could find. Note that this chart was from 2002. As such, be aware that taxes have increased with gas prices in the last few years. That's why the average is now reportedly 50-60 cents per gallon. Unfortunately, I couldn't find a more recent chart that was organized this nicely.

I am only pasting a snippet in which I highlighted some states of interest. Visit the link above for the entire chart.


How about if the government decides to give most of that tax back to the people to "control" prices? Has that even been mentioned? Why not? Why would we think of strong-arming businessmen with fascist economic regulation before demanding that gas taxes be lowered?

Let's say more government control is the path that is chosen. Let's look down that road for a second:

What happens if government regulation becomes so onerous that gasoline companies realize it's more worthwhile to pursue other ventures and quit making gas?

Answer: Either we all turn Amish or the government holds a gun to the heads of oil companies and forces them to work against their will.

Ahhhh, America.

I know people will want to tell me "that could never happen. It wouldn't get that far." However, I argue that if you agree that a 100% restricted economy is bad, then (generally) a 50% restricted economy is bad.

The best statement we can make (and about the only appropriate one) is to do what many intelligent readers are currently doing. Ride a bike. Walk to lunch. Buy a kick-ass Honda scooter that gets 85 mpg. It's completley unethical for someone to increase their consumption of gas (as America has continually) and simultaneously call for price restrictions out of selfishness.