A story in the Arizona Daily Star complained, “Drivers in 22 states are paying more than the national average of $3.91 per gallon [for gasoline].” The context implies that prices higher than the average in 22 states is somehow unusual and ominous. But think about it, is it unusual that prices in about half the states are above average and prices in about half the states below average? Maybe the authors don’t know what the word “average” means and would hope that all of us would be paying below average prices. In a normal distribution without any exceedingly low or high outlying values, the average should be near the middle (close to the median value).
The story was really about President Obama feeling the heat of rising gasoline prices. In his radio address, Obama said he wants to end $4 billion in annual tax breaks for the oil and gas industry. That tax break is mainly the oil depletion allowance, established in 1913. The tax break was given to partly offset the risk of oil exploration and encourage oil companies to conduct more exploration to replace the depleting reserves of producing wells. If the depletion allowance is removed, the added cost of doing business will increase. Guess who will pay for that at the pump? By the way, Department of Energy announced it has given $21 Billion in (not tax) subsidies to the alternative energy industry in the form of loan guarantees. The Wall Street Journal has an analysis here.
Oil companies have been making what seem like large profits. Investors Business Daily puts it in perspective:
Exxon earned $10.65 billion on $114 billion in revenue. Shell’s $8.78 billion profit came on $114.84 billion in revenue. Chevron’s expected top line of $66.62 billion will likely yield a bottom line of $5.69 billion. These are not outsize margins — roughly 9% after taxes in the case of Exxon, less than 5% for Shell and 8.5% for Chevron.
In comparison, Apple made $6 billion on revenue of $24.7 billion, a profit margin of almost 25% in the first quarter. Google’s profit margin for the same period was nearly 27%. Too high-tech for you? McDonald’s makes 20 cents on the dollar.
Gasoline prices depend on supply and demand, and over the short term, the expectations of what supply and demand may be. Political turmoil tends to raise prices because of the uncertainty on the supply side.
Federal policies have put many areas off-limits to exploration and production. And, there is threat of more withdrawals. For instance, the Fish & Wildlife Service may list the dunes sagebrush lizard as an endangered species. This could shut down, or at least hinder, exploration and production of oil in southeast New Mexico and West Texas, including production in Texas’ two top producing counties. And, the EPA ruled that Shell Oil cannot proceed with exploratory shallow-water drilling on vast tracts that it has leased from the Federal government in the Beauford and Chukchi Seas north of Alaska, claiming the exploratory drilling may violate the Clean Air Act. Shell did not consider the emissions of an ice breaker that may be required during these operations. Where is all that global warming when you really need it?
Obama is contributing to the uncertainty. In his January State of the Union speech he called oil “yesterday’s energy.” In March, at a speech at Georgetown University, he said that he wanted to accelerate the production of oil and gas in the U.S. In April, he said he wants to stop “subsidizing yesterday’s energy sources.” The implications of the EPA’s effort to control carbon dioxide emissions is another source of uncertainty.
Taxes also have an impact on the price of gasoline. See map of gasoline taxes by state here and map of diesel taxes by state here. Federal taxes are 18.4 cents per gallon (cpg) for gasoline and 24.4 cpg for diesel fuel. You will see that 17 states have taxes higher than the national average.
For more information, see Gasoline Prices and the Obama Energy Policy