Gas Prices??

    I almost never make a political comment. But having been born, raised and schooled in the Texas Panhandle where crude oil, refining, and petrochemicals are part of the culture I have some knowledge of the macroeconomics of gasoline.
    The cost structure of a gallon of gas goes like this:

• Crude Oil landed in Houston Texas - 73%
• Federal, State, and Local Taxes - 11%
• Refining the crude into a gasoline product - 10%
• Distribution, marketing, buying agreements - 6%

The price of crude is set on the commodities market(s). It's a futures trading economy. Today light crude (oil with a low wax content) closed at 127.97 / Bbl. There are many other "crudes," West Texas Intermediate is what we grew up on the late 50's and early 60's in Pampa, TX who's famous person was Randy Matson and the Pampa High School Marching band of which I was a proud Trombone player.
    So when we hear the current and potential leaders of our nation speak about the "windfall profits" of folks like Exxon/Mobile, we need to understand a bit of the microeconomics of gasoline production.

• Exxon/Mobil (and all refiners) have to buy raw materials in order to make finished products. They have to pay in US Dollars of course and they have to buy very large quantities. This is their business so they usually get really good deals, but the spot price drives their bulk buying. And they buy at the source, paying the transportation costs, usually in their own machines.
• Since 73% of the cost of a gallon of gas is crude, when crude goes up, gas goes up. Kinda a 1-to-1 connection, since the demand outstrips the supply, storage is not a good option.
• The prices of crude - being a futures market commodity - is driven by speculation. This is the purpose of a futures market. It's the way capital markets work. The way we want them to work. The way Adam Smith described how they shown work.
• Why the price rises is itself a hugely complex process, but basically it's because there is a sense of shortage, driven by fear of a sense of shortage. "Buy now, because it's going to get more expensive later."
• Exxon/Mobil's refining costs are driven mainly by the cost of capital to buy crude and other consumables, operations and maintenance (stuff break all the time), and labor. All of which have risen a bit. But since refining accounts for only 10% of the total cost structure, any increase in labor, operations or the cost of money is discounted by 90%.
• Since Exxon/Mobil buys most of its products in US Dollars in the US, and that dollar has itself been devalued, it takes more dollars to buy a barrel of crude today than last year. Resulting in higher effective crude prices

    So in the end the oil companies are not the evil doers our candidates would like us to believe. Any candidate, all candidates, from city council to the White House. As we who live in the County are fond of saying of the Peoples Republic of Boulder City Council - "they were asleep in the macroeconomics class."
    Do the math, it starts with futures pricing, which is based on fear and flows to the tank of my shinny new Honda Civic. Thanks to a bit of foresight the Civic replaces a 1996 Suburban 4WD, small block 350, 1600 that sucked 14MPG on a good day going down hill. The oil companies are not our enemy. Any suggestion that our problems can be solved by "forcing prices down," is a simple indication that the speaker did not read Adam Smith, or any other economics book.
    As Pogo said, "Yep son, We've met the enemy and he is us." - Walt Kelly, on a poster on Earth Day, 1970.