American Elephants

Demolishing Demagoguery, Exposing Lies, Explaining the Price of Gas: by The Elephant's Child

According to polls, most Americans believe that the high price of gasoline is due to “oil company greed.” That is unfortunate, and wrong. This is called the BIG LIE. If you repeat erroneous information often enough , people will believe it. President Obama chooses to demonize “Big Oil”and to talk incessantly about the huge “subsidies” that Big Oil gets. He wants them removed. Congress turned him down, primarily because they are not subsidies, but the same kind of tax write-off that most companies get to compensate for the cost of doing business.

Did you know that ExxonMobil, for example, pays far more to the federal government than it get in profits? In addition to the massive income tax bills, energy companies are required to pay “royalties” and “bonus bids” for the right to explore for and produce oil and gas on federal lands. Rising oil and gas revenues have provided a “windfall”of new revenue for the federal government. For the fiscal year 2000, the taxpayer’s total return from royalty payments was $4.95 billion, $10.7 billion in 2006, and exceeded $20 billion for fiscal year 2008.

Oil is a world commodity. The price of oil is a futures price, based on what they expect the price of oil to be for the next tanker truck, or next oil tanker. The guy at your neighborhood gas station has to pay for gas the next tanker truck will bring, not what he paid for the last one, because in  a volatile market it will be different. Nobody knows what the future price of anything will be, but they have to plan ahead anyway. Some like to call the futures contracts that people buy and sell — speculation, and sneer at speculators as evil people. Some people are gambling, but most are simply buying contracts to protect themselves from future price hikes.  When you have a lot of turmoil in the Middle East where much of the world’s oil comes from, the future price goes up because they are worried about Iran threatening to block the Straits of Hormuz through which much of the oil must pass. Syria is a worry, and Iran is trying to build a nuclear weapon.

(click to enlarge)
This chart shows you how much the Private Oil Companies (remember that most oil companies are huge state-owned outfits) pay in income tax (in blue) compared to their profit margin (in yellow).

Econbrowser has done a remarkable job of assembling a bunch of maps to explain why the price of gas is different in one place than it is in another. Here in Washington State we pay over 55¢ per gallon in gasoline taxes— higher than most, and the price at the pump is well over $4 a gallon and rising. But even after you subtract the gas taxes, the average cost is still different. Do click on this link to see the five maps that explain so much about the cost of gas. It is well worth your time, and you will understand more and worry less, or at least worry less about the wrong things, and you’ll be  less susceptible to political demagoguery.


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[…] is my roundup of what state mandates and taxes add to the cost, but I’m not sure that I clarified anything. […]


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