I thought it would be interesting to take a journey back in time to evaluate the cost of refined petroleum in 1996 and compare that with the cost of gasoline at the pump now. So, here we go . . .
Note: The first price reflects January 1996, the second August 2005.
Belgium $3.95 $5.74
France $3.93 $5.54
Germany $4.07 $5.88
Italy $3.89 $5.75
Netherlands $4.32 $6.50
United Kingdom $3.20 $5.95
United States $1.27 $2.49
Source: U. S. Department of Energy
So, then are we talking about Adam Smith’s invisible hand? Probably, with a little help from that bane of government, taxation. Basic economic theory holds that the cost of a product is directly proportional to the supply (or availability) of that product, and the demand for quantities of the product. As demand increases, given that supply remains constant, prices will increase. If demand increases and supply decreases, prices will really increase. Is that what’s going on here?
I would not be surprised to learn that oil producing countries have reduced production as a means for achieving greater profit; it’s the cost of doing business in a world that maintains a high demand for petroleum products. On the other hand, while people generally, and Americans in particular are complaining about the cost of gasoline at the pump, there has been no significant decline in the sale of gas guzzling automobiles, which include not only the SUVs, but also the high dollar luxury cars. Still, according to the information (above) provided by the Department of Energy, Americans are paying a fraction of the price for gasoline than people living in Western Europe. But if the price for a barrel of sweet oil is relatively constant, at say $65.00, why does gas cost significantly more in Europe than it does in the United States?
The answer is: taxes. Most European governments are socialist regimes, which are famous for taxing the dickens out of commodities to produce revenues that will support social programs. In the United States, if we were to take away federal, state, and local taxes, the present cost for a gallon of gasoline would be well under $2.00. Given the above, it doesn’t take a mental giant to realize that it would be better to live in the US (tax wise) than to live in one of the other countries indicated in the above chart. Still, there are people in the US who are really hurting as a result of the recent escalation of gas prices. Truckers are seeing their profits eaten up in gasoline costs, and airline fares are on the rise.
Nevertheless, it is not likely that gasoline costs will decline now that they are where they are, and in fact, some pundits have suggested that by this time next year, the average cost for a gallon of gasoline will increase to $3.00. But is this even a significant jump? Let’s extrapolate. Let’s assume that the average driver in the US puts 20,000 miles on his speedometer in a year. Let’s also assume that the average vehicle achieves 18 miles per gallon of gasoline. That means that the average consumer would purchase 1,111 gallons of gasoline annually. In 1996, this would have meant an annual expenditure of $1,411. Today, that same consumer would spend $2,766. If the price of gas goes up to $3.00 a gallon, then the consumer would spend $3,333. Naturally, those who earn their living in the transportation industry, especially independent trucking interests, can expect to pay a significantly higher annual amount for refined gasoline but as with most businesses, these increased costs will be passed along to consumers in the retail price of goods.
I would not be surprised to learn that oil producing countries have reduced production as a means for achieving greater profit; it’s the cost of doing business in a world that maintains a high demand for petroleum products. On the other hand, while people generally, and Americans in particular are complaining about the cost of gasoline at the pump, there has been no significant decline in the sale of gas guzzling automobiles, which include not only the SUVs, but also the high dollar luxury cars. Still, according to the information (above) provided by the Department of Energy, Americans are paying a fraction of the price for gasoline than people living in Western Europe. But if the price for a barrel of sweet oil is relatively constant, at say $65.00, why does gas cost significantly more in Europe than it does in the United States?
The answer is: taxes. Most European governments are socialist regimes, which are famous for taxing the dickens out of commodities to produce revenues that will support social programs. In the United States, if we were to take away federal, state, and local taxes, the present cost for a gallon of gasoline would be well under $2.00. Given the above, it doesn’t take a mental giant to realize that it would be better to live in the US (tax wise) than to live in one of the other countries indicated in the above chart. Still, there are people in the US who are really hurting as a result of the recent escalation of gas prices. Truckers are seeing their profits eaten up in gasoline costs, and airline fares are on the rise.
Nevertheless, it is not likely that gasoline costs will decline now that they are where they are, and in fact, some pundits have suggested that by this time next year, the average cost for a gallon of gasoline will increase to $3.00. But is this even a significant jump? Let’s extrapolate. Let’s assume that the average driver in the US puts 20,000 miles on his speedometer in a year. Let’s also assume that the average vehicle achieves 18 miles per gallon of gasoline. That means that the average consumer would purchase 1,111 gallons of gasoline annually. In 1996, this would have meant an annual expenditure of $1,411. Today, that same consumer would spend $2,766. If the price of gas goes up to $3.00 a gallon, then the consumer would spend $3,333. Naturally, those who earn their living in the transportation industry, especially independent trucking interests, can expect to pay a significantly higher annual amount for refined gasoline but as with most businesses, these increased costs will be passed along to consumers in the retail price of goods.
But while truckers have few options, most of us do indeed have choices to make. We can pay the increased costs and shut up, or we can take a serious look at the so-called hybrid automobiles that are being produced in limited numbers. Again, however, consumers should be aware that as the demand for hybrid cars increase, given the limited supply of those vehicles, their prices are likely to . . . yep, increase.
Now, hasn’t this been a fun exercise in reality?
Now, hasn’t this been a fun exercise in reality?
UPDATE: My friend has a spy in Saudi Arabia, who reports that of that $65.00 per barrel of crude, the Saudis claim $63.00 of net profit. That's right, folks. It costs the Saudis about $2.00 to pull a barrel of crude oil out of the world's greatest cat box. Note: This update was added in order to make everyone feel better about our close relationship with the Saudis. Hah!
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