Big Oil Profits Not to Blame

The Ludwig von Mises Institute, a research and educational center of classical liberalism following the intellectual tradition of Ludwig von Mises, has a report on the economics of retail gasoline prices and the findings might surprise many who get their information mainly from CNN, the NYT and CBS.

My wife told me this morning that there had been a report on a TV news program about record profits of oil companies and she wondered how the government can allow this to happen. This from an intelligent, professional woman who is very conservative by any measure, but, like so many Americans, she is succumbing to the media's incessant clatter about oil profits, big oil, excessive profits, price gouging and the need for BIG Government to come to the rescue.

The cost of gasoline at the pump is a very complicated matter that includes world oil demand and supply, refinery capacity, regional blends of gasoline, transportation, taxes, local economies, inflation, the strength of the dollar, political alliances, commodities traders and on and on. The profit to the oil company that refines, transports and markets gasoline is a relatively small portion of the total cost per gallon. On average the profit margin for oil companies amounts to less than ten percent (9.4% nationally). At $3.78 per gallon, the profit to Big Oil is approximately 35 cents! When you fill your 20 gallon tank for $75.60, the oil company profits $7.15. Taxes in most states exceed 50 cents per gallon adding $20 to that same tank of gas!

When President Bush met with the Saudis last week he was told that they would not increase production of oil because that would not significantly lower the cost at the pump, and they are correct. The demand for oil in China and India quickly claims any excesses of oil on the market and keeps world prices high.

The solution to the energy crisis, as I’ve commented on before, is development of our resources here at home. This means telling our senators and congressmen to disregard the environmental pressure groups and allow drilling for oil and natural gas in ANWAR, the Gulf of Mexico, and the Bakken Formation in the Dakotas, building of new refineries, development of clean coal technology, and nuclear power for electricity to some of our major metropolitan areas. Using current and developing technologies, I believe that this could all be done with very little impact on our environment, but with major impact on energy costs and foreign dependence.