More fuel comments

Of course, the reason the oil companies are posting such huge profits is because they aren’t paying NYMEX prices for crude.  I don’t know the exact number, but I’m sure Exxon has deals with the Saudi government (and BP has deals with the USA) that allows them to buy crude on long term contracts that are probably in the $25-30/barrel range.  That’s why no one would buy Hugo Chavez’s tar sands at $50/barrel (especially when you only get about 2/5 gas from it and it costs more to refine.)

The NYMEX price is the “Spot Price” on petroleum.  That’s the excess that none of the oil companies wanted.  Of course, as supply goes up, the excess demand goes down.  Think of the California Energy Crisis of a few years ago.  Normally, you buy electricity at $0.05-$0.10/KWH, but if you don’t have the contract, you have to buy the excess, which at that time was $0.35/KWH.  California governor Grey Davis decided to lock in the state of California at that rate.  He blinked, and Edison with media support watched Enron crumble and the spot market on electricity dwindle.

No one wants locked into oil at $60/bbl, so they’re waiting it out.  Depending on the length of the contracts, NYMEX oil prices will have to go down, or else the unbought suppy will flood the commodities market.  I imagine the oil corporations have been slowly buying up discount contracts to keep them ahead of the curve, and may be paying as much as $40/bbl for recent contracts, but just like stocks, you don’t play to beat averages, you play to keep up with them.  They’d rather pay $50 for a contract than have you compete on the open market with them.  Thanks to their war chests getting larger, the oligopoly can afford to use monopoly pricing to keep competition out until it breaks.

Only the OPEC states are a third player, and they are in a game of chicken with the oil companies over who will blink first, because they know they will need to buy eventually or face competition.


Fuel Price Formula

I saw a presentation that gave me a breakdown on prices per gallon of gasoline.

The numbers aren’t the thing, but here’s the formula:

#getting price per gallon of gasoline

brent.price(per_barrel) = $62
gallons_per_barrel = 42
cracking = 3/5 *

base_price_per_gallon = brent.price(per_barrel) / gallons_per_barrel * cracking
= $2.36/gallon

#nominally fixed costs per gallon**:
distribution_marketing = $0.18
refining = $0.33

total_fixed_costs_per_gallon = distribution_marketing + refining
= $0.51

# taxes
federal_tax = $ 0.18
state_tax(washington) = $0.34 ***

total_tax_per_gallon = federal_tax + state_tax
= $0.52

# formula
base_price_per_gallon + fixed_costs + tax = price_before_profit
= $3.39

* Light Sweet Crude refines about 60% into gasoline. We’ll assume that the remaining 40 percent is wasted. It’s actually turned into heating oil, chemical products, etc. The profit for the remainder could be considered a (generous) balance for pollution.

** These fixed costs were taken from the presentation. The specific numbers could be different. Transportation cost is not included, considered part of the price per barrel. Feel free to change them to what you think is more accurate.

*** Washington state tax on gasoline will be raise to $0.36 / gallon on July 1, 2007 and to $0.38 / gallon on July 1, 2008 unless there is a change (increase) before then.

**** There may also be some incidental costs that are not included such as ethanol and detergent mixing.

Refining costs have gone up quite a bit in the last few years because hurricanes (esp. Katrina, Rita in 2005) and inefficiencies due to aging refining capacity.
Taxes on gasoline (at least in Washington) have also skyrocketed, raising $0.02 per gallon every year from 2005-2008 and 7 cents per gallon in 2003.

So if I wanted to compete with Exxon-Mobile-Texaco-Shell-Chevron, BP-Amoco-Unocal-Union76, Phillips-Conoco (insert your conglomerate here, they’re all intermixed the same way as media (e.g. a cable channel being jointly owned by ABC-Disney, NBC-GE, CBS-MTV, Comcast, Cox, etc.), I could buy gas at $3.39, remarkably close to the price at the pump — if I owned my own refinery and gas station, but the government would never let me because of “environmental” reasons.