State and federal taxes key factors in price of gasoline

October 07, 2006|by GEORGE MICHAEL

What's up with gas prices? Or is that, what's down? First gasoline goes way up, then back down again. Who sets the price for a gallon of gas anyway?

The one constant about gas prices is that they are constantly changing. There are some basic costs that stay the same thatimpact the price of gas and some costs that vary greatly depending on market psychology. Ultimately it is the delicate balance between supply and demand, including anticipated future supply, which dictates the price.

The first part of a gallon of gas is the crude oil. Recently, crude dropped from $78 a barrel to below $60. A barrel of crude is 42 gallons. Dividing the current $62 price for a barrel by 42 gallons yields a cost for the raw oil of $1.47 a gallon. This is the biggest part, about 60 percent of the price of a gallon of gas. Most of this goes to OPEC countries such as Venezuela, Iran and Saudi Arabia.


Refining the oil and transporting it to consumers is part of the process of getting the gas we need. Oil refining is a large and capital-intensive industry and is very complex.

The distillation process produces other byproducts many of us need such as kerosene, home heating oil, jet fuels, diesel fuel and other products. A 42-gallon barrel of oil yields about 18 to 20 gallons of gas with the rest going to those other products. Regrettably, we have not built a new refinery in the U.S. in 30 years. We are very vulnerable to natural disasters such as hurricanes, as we were reminded in 2005.

This is a big problem for gas markets. Speculators - those who buy futures contracts on gas - bid up the price of oil and gas based on anticipated shortages. There is little margin for error in gas production. It won't take much to send these current low prices spiraling back up once again.

As long as we refuse to drill for oil here in the U.S. and refuse to build new refineries, we will be vulnerable to supply disruptions, which lead to price volatility.

After refining, the oil is transported to a distributor or wholesaler. The current wholesale price for a gallon of gas is around $1.55 a gallon. This price changes on a daily basis, reflecting such things as current inventories and anticipated short-term consumption by businesses and consumers. The price is lower right now than normal cost factors would dictate because of the dumping of excess supply by oil wholesalers.

Speculation about the fear of shortages this summer drove the wholesale price of oil higher than it might otherwise have been. Do you remember those dire forecasts back in early June about all the terrible hurricanes that were going to hit the U.S. this year? Futures contracts went way up.

Since the shortages did not materialize, speculators have to cover the oversupply and are dropping their prices so as not to get stuck with overpriced gas. For the moment, we are reaping the overdone market from the spring and early summer.

According to Phil Murray at Murray's Citgo in Williamsport, the retailer (gas station owner) on average makes between 5 to 15 cents per gallon depending on when he made his order and the price of gas being charged by his neighbors. This works out to a markup of about 3 percent on the price of gas. During market declines, dealers have a chance to do better, recovering from the price squeeze they experienced when prices were going up.

Out of their gross profit, station owners must pay their rent, wages, property taxes, utilities, credit- card costs and liability insurance. The wholesale to retail markup in the gas industry is one of the lowest in any business. It is very competitive. Murray noted that if he doesn't match the price of his local price competition, he will see a drop in sales. He also noted that you can get a greater return on your money on a CD in a bank with a lot less risk than selling gas.

Now here is where it gets interesting. State and federal excise taxes are added to the pump price of the gas. The combined excise tax in Maryland is just under 42 cents (actually 41.9) on every gallon of gas you buy. That's $6.30 on a 15-gallon fill up. That is huge. Government did nothing to produce the oil but takes in a nifty 42 cents a gallon.

Everyone in the U.S. pays the same federal tax of 18.4 cents per gallon. Each state sets its own state excise tax. In West Virginia, the excise tax is 20.5 cents per gallon but is 31.5 cents in Pennsylvania, the third highest in the nation. Maryland, at 23.5 cents, makes the top 16 in this tax. Georgia has the lowest rate ,at 7.5 cents per gallon.

It is important to keep in mind the next time you fill up that state and federal governments are collecting five to 10 times as much in "net profits" as the oil company for each gallon of gas you buy. Yet politicians pompously complain about greedy oil companies.

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