Is the price of gas related to the price of oil? Or is there more to the situation than meets the eye? While I may not have all the answers in this post, I welcome and would love any ideas from those with more knowledge on oil and gas prices. But let us look at May 2008 and the week ending June 10. And here are some basic observations that I could derive from a few different oil and gas producers.
Okay, the price of a barrel of oil closed Friday, June 10, 2022, at approximately $120.50 per barrel. Has oil been much higher in the past, and how does that compare to the last major financial situation in which the economy was in free fall? Let’s look at May 2008 and then adjust that price per barrel for inflation. On May 1, 2008, a barrel of oil was $127.50, and adjusted for inflation would be approximately $171.25 per barrel with an annual inflation factor of 2.13% or 34.28% for the entire 14-year period. Okay, now we see that oil was over $50 a barrel more expensive in May of 2008. So, the gas price per gallon should also be more after adjusting for inflation as well?
As of Friday, June 10, 2022, AAA stated on CNN that the average price for a gallon of gas in the US was $4.99, see CNN Article. But what was the price of gas in May 2008? Well, the average price for a gallon of gas in 2008 was $3.79 a gallon, and that adjusted using the same inflation rate as oil would equate to a $4.70 per gallon price. So the gas price from 2008 until last week was fairly comparable, although oil was $50 a barrel higher and the price adjustment for a gallon of gas was lower by $0.29 in 2008.
Okay, we now see that oil was much higher per barrel in 2008, but what goes into the price of a gallon of gas, and what makes up that per gallon price? As independent operators own most gas stations, they have their profits at any price, and in 2003 it was on average seven to ten cents per gallon. Then we have state and federal taxes to contend with. The federal tax is about $0.40 a gallon, and the states vary greatly, but the average state tax is $0.22 per gallon. For a more detailed breakdown of the cost of gas, please visit COST OF GAS. Then the majority of the rest of the gas costs are the oil and its refining into gas. Then, a 47-gallon barrel of oil can produce between 11 and 12 gallons of gas. See Gallons per Barrel.
So, if the gas price has its major costs being the cost of oil and its refining, then gas is approximately 4.14% of the price per barrel of oil. But in 2008, the gas to oil price was lower at 2.74%. Okay, so maybe the price of oil is not directly related to the price of gas because if you applied the same 4.14% of today’s gas price to 2008, the price of gas should have been $7.10 a gallon back then or $3.30 a gallon today using the 2008 adjustment.
So now we see that today’s high prices for a gallon of gas may not be directly related to the price of a barrel of oil. This could mean that oil companies are not making as much money or could even be losing money. But that is not the case at all. Exxon has a 218% increase in profits from 2021 to 2022 for their last quarter. Chevron saw a 70% increase. Shell a 43% increase after writing off billions from their Russia exit in the quarter. BP increased earnings per share from $1.35 to $1.92, or a 138% increase in profits after writing off $24 billion in losses associated with its exit from Russia. And finally, Conoco-Phillips saw a 480% increase in profits
Now, I know that there are probably aspects of this process I am unaware of or have missed, and as I stated at the beginning, I welcome any comments. But on the surface, it seems that profits may be more to blame for current gas prices than the price of oil. There is little the government can do at this point unless they examine the oil company’s price structures and see why in this economic situation, gas is where it is at, and their profits are where they are at.
If you want to read an older post on how to save money on gas, visit HERE. Please contact me directly if you are in or near the Metro-Nashville area for more financial assistance. If you prefer someone closer to you or are outside the middle-Tennessee area, contact a qualified fee-only Registered Financial Consultant (RFC) near you.
