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.


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