Gasoline and diesel fuel are both produced from crude oil. The cost of oil, more than any other factor, drives the price of gasoline. Oil prices are largely driven by global demand and not solely by demand in any one country. That said, the U.S. became the largest producer of global crude oil in the world in 2018 when White House policies were much more friendly towards domestic production. As a powerhouse with natural resources, Joe From Texas believes that with the right policies in place, the U.S. has the ability to influence prices downward by increasing the supply. Additionally, he believes that domestic production, as opposed to relying on imported oil, is vital for the security of the U.S.
Although prices had been somewhat stable for many years heading into the pandemic, the shutdowns that occurred during that time greatly lowered demand and, as a result, worldwide production was lowered. As COVID-19 restrictions lessened and demand began to rise, production was increased. However, it took some time for production to catch up. At the same time, under the Biden administration, the U.S. has made it increasingly difficult for domestic producers to plan for the long-term because of hostile policies toward oil & gas and uncertainty as to whether those policies will either be alleviated or if they will get worse.
Globally there are two major groups of oil producers: OPEC and non-OPEC. OPEC (Organization of the Petroleum Exporting Countries) is comprised of 13 countries: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, UAE, and Venezuela. All of these countries operate their oil business as national oil companies, or NOCs. OPEC countries make decisions, including crude oil pricing, as a group based on factors such as what is good, in their view, for employment and income in their countries. OPEC countries produce roughly 40% of the total global oil production.
The non-OPEC group consists of investor-owned oil companies, or IOCs. This group includes publicly traded companies, and they produce about 60% of all global oil production. Unlike OPEC, they operate independently without central coordination. Because of their focus on increasing shareholder profit, IOCs typically operate at or near full capacity. OPEC countries, on the other hand, typically do not operate at near or full capacity, and they are generally able to produce more oil when demand rises.
The financial markets are another factor in oil prices. As an example, we all know that airlines are huge consumers of fuel. In order to attempt to lock in lower prices moving forward they may buy futures, or options, when they believe prices will be going up. Conversely, oil producers may sell futures to help secure higher prices. Unfortunately, the trading of oil futures can sometimes lead to the possibility of price manipulation. Earlier in 2022, Glencore Plc, a large multi-national commodities trading company, pleaded guilty to a number of charges, including price manipulation in U.S. fuel-oil markets. Action to engage in such activity is illegal because the manipulation of prices almost always tends to be a negative development for consumers.
There are generally two grades of crude oil used as benchmarks for oil prices: the West Texas Intermediate (WTI) and North Sea Brent. WTI comes from the U.S. and is the benchmark for U.S. prices. North Sea Brent comes from Northwest Europe and is the benchmark for international prices.
Russia is the 3rd largest producer of liquid fuels and petroleum in the world. When Russia invaded Ukraine earlier this year, this action had a definite impact on the global market price. Although this effect may have been short-term without sanctions, the sanctions against Russia by the U.S. and other nations appear to have led to a longer-term impact. Sanctions have affected oil markets globally by “hypothetically” making it more expensive for nations to access that oil.
Refining capacity and refining costs are always a factor in determining gasoline and diesel costs at the pump. It is important to note that the U.S. does not have a shortage of refining capacity as President Biden has stated. If this were true, we would notice shortages and long lines for gas. On the other hand, it is true that most refining companies in the U.S are working at or near capacity. As demand has risen coming out of the pandemic, they have had a difficult time in staying ahead of demand.
Other factors in the final price of gas at the pump include distribution costs, which is the cost of transporting the product until it arrives at the gas station or other final destination, and taxes. Taxes can run as high as 80 cents per gallon in some states.
According to the U.S. Energy Information Administration, the factors above break down as follows: Crude oil accounts for about 60% of the cost of gasoline, refining is 17%, distribution and marketing is 11%, and taxes account for 12%.
We are all aware that the cost of gasoline has risen; however, we don’t always stop to calculate exactly how much that can cost us over time. The following demonstrates just how much increases in the cost of gas can impact a typical driver: The Energy Information Administration (EIA) published price of a regular gallon of gasoline in February of 2016 was $1.76. In April of 2020 it was $1.84. In November of 2020 (election) it was $2.10. Following the election, the price per gallon went up each consecutive month (except for two) reaching $4.92 a gallon in June of 2022. If a commuter drove 20 miles each way to work and back five days per week times 50 weeks per year, he/she would travel 10,000 miles just commuting. If they consume 1 gallon of gas for every 25 miles, they would use 400 gallons of gasoline. 400 gallons at $2.10 (2020 election), their fuel cost would be $840 (400 gallons x $2.10). In June of 2022, the fuel cost for those same 10,000 miles would be $1,968 (400 gallons x $4.92). That is a 134% gasoline cost increase over 19 months just to commute.
Although most of us as consumers of gasoline tend to focus on the price of gas, the cost of diesel also impacts our everyday lives, but in less obvious ways. If you think about the products that we all use on a daily basis, including the food we consume, most of those things are transported by diesel powered trucks. Diesel also powers most farm equipment. While gasoline prices jumped about 134% between November 2020 and their high in June 2022, diesel prices jumped about 136% during the same time-period. The price of diesel was $2.43 in November of 2020 and rose to $5.74 in June of 2022. Although there are multiple reasons why food costs have risen, the cost of diesel fuel is certainly a contributing factor. The following example will help clarify the significance of these costs: if a farmer were to plant and harvest 1,000 acres of corn this year using conventional tilling, and this equipment burned an average of 5 gallons of diesel per acre, the fuel bill for that crop would have been $28,700 (5000 gallons x $5.74) in June of 2022 versus $12,150 (5000 gallons x $2.43) in November of 2020, a 136% increase. We all know that the farmer can’t afford to cover those costs, so he passes them along to all of us in the cost of the final product. When you consider that the trucking companies that transport the corn, just like the farmers, have higher costs that they also must pass on, we can begin to understand how rising fuel costs impact our pocketbooks in more places than just the pump.
In his section on energy, Joe From Texas outlined his thoughts on some solutions to address domestic energy production. If you have not already done so, please take a look at that section.
Did you know?
Petrochemicals derived from oil and natural gas make the manufacturing of over 6,000 everyday products and high-tech devices possible. A few of these products include: ballpoint pens, clothing, computer keyboards, credit cards, eyeglasses, footballs, iPad/iPhone, perfumes, pharmaceuticals, skate boards, sunglasses, surf boards, toothbrushes, upholstery, vinyl flooring, and wind turbine blades.
The total volume of products refineries produce (output) is greater than the volume of crude oil that refineries process (input) because most of the products they make have a lower density than the crude oil they process. This increase in volume is called processing gain. The average processing gain at U.S. refineries was about 6.3% in 2020
A barrel of oil contains 42 gallons and produces just under 45 gallons of refined products. Of this, 42.7% is gasoline, 27.4% is diesel, 5.8% is jet fuel, 5% is heavy fuel, 4% is asphalt, 3% is light fuel, 2% for hydrocarbon, and 10.1% for other.
The list below contains examples of a few of the thousands of products that are made daily with petrochemicals derived from a barrel of oil. All of the following can be made from just one barrel of oil:
Enough gasoline to drive a medium-sized car over 450km (280 miles).
Enough distillate fuel to drive a large truck for almost 65km (40 miles). If jet fuel fraction is included, that same truck can run nearly 80km (50 miles).
Nearly 70 kWh of electricity at a power plant is generated by residual fuel.
About 1.8 kg (4 lbs) of charcoal briquettes.
Enough propane to fill 12 small (14.1 ounce) cylinders for home, camping, or workshop use.
Asphalt to make about 3.8 L (one gallon) of tar for patching roofs or streets.
Lubricants to make about a 0.95 L (one quart) of motor oil.
Wax for 170 birthday candles, or 27 wax crayons.
But that’s not all. After producing all of the products above, there are also enough petrochemicals leftover to be used as a base for one of the following:
· 39 Polyester shirts
· 750 Pocket combs
· 540 Toothbrushes
· 65 Plastic dustpans
· 23 Hula hoops
· 65 Plastic drinking cups
· 195 One-cup measuring cups
· 11 Plastic telephone housings
· 135 Four-inch rubber balls