Why gas is so expensive

It's not runaway greed or overregulation. It's the world we live in. It's a price that can be seen in a single gallon of California gas.

By Andrew Leonard

Read more: Technology & Business, California, Environment, Andrew Leonard, Economy, Energy Policy

May 29, 2008 | I can't decide whether to frame or burn the receipt from a Chevron filling station in Berkeley, Calif., that documents how much I spent to fill the tank of my 12-year-old Nissan Quest minivan on Sunday morning. At $4.09 a gallon for regular unleaded, the total came to $65.68. That's the most I've ever paid for a tank of gas, so I feel inclined to treat the paper record with respect. But a couple of weeks from now, if recent trends hold true, my unwanted milestone will be eclipsed again, and the receipt transformed into a trigger for nostalgia. Four-dollar-a-gallon gasoline? Ah, those were the days.

On Tuesday gas prices hit record highs in the United States for the 21st day in a row. Many Americans are understandably upset and angry. Partisans on both sides of the political aisle believe they know why this is happening. The left blames greedy, customer-gouging oil companies; the right pillories environmentalists for blocking the construction of new refineries, preventing offshore oil development and opposing drilling in the Arctic National Wildlife Refuge.

But there's much more going on here than good old greed or restrictive environmental regulations. Explaining the high price of gasoline at my local pump requires taking into account surging demand for oil in China and India, the falling value of the dollar, the impact of commodity price speculation by energy traders and a whole constellation of factors exerting steady downward pressure on supply. Those include the Iraq war, political instability in Nigeria and anti-American intransigence in Venezuela and Iran. There's also the ever-popular peak oil thesis: As the production of existing oil fields in Russia, Mexico, the North Sea and possibly Saudi Arabia inexorably declines, discovery and exploitation of new sources of oil are becoming steadily harder and more expensive.

Even the people who have spent their entire lives studying the price of oil don't know for sure how to weigh each factor for responsibility in the total equation. Perhaps the safest thing to say is that it's all in there, in my $65 receipt. Kidnappings of oil executives in Nigeria and the nationalization of Exxon-operated facilities in Venezuela. Chinese economic growth and hedge fund manipulation. ANWR and air quality. The price of gas in the United States is a consequence of global economic growth, rising standards of living, greed, politics and the stresses induced by 6.5 billion people going about their business on a planet with limited resources.

Sound complicated? It most certainly is, which is one reason why we should avoid the temptation to simply blame greedy oil companies or radical environmentalists. But it's also strangely simple -- the world, and its manifold dilemmas, can be seen in a single gallon of California gas. Let's take a closer look.

On May 26, the average price of a gallon of regular unleaded gasoline in California was $4.09 (remarkably, exactly what I paid on May 25). A variety of taxes account for 66 cents of that total. The federal government and the state of California both charge separate 18-cent excise taxes. State and local sales taxes account for roughly 29 additional cents. There's also a 1-cent "state underground storage tank" tax that funds the cleanup of groundwater-polluting tanks.

In mid-May, 19 cents of the total price of a gallon of gas in California could be chalked up to the "refinery margin" -- the costs of refining crude oil into gasoline along with the slice of profit extracted by the refinery operator. Over the course of 2008, that number has fluctuated, from a high of 48 cents in late March to the current low. Another nickel or so of the price of each gallon accounts for the "distributor's margin" -- the costs of getting the gasoline from the refinery to the filling station, marketing the gasoline and the profit cut taken by the retail dealer.

The drop in the refinery margin from 48 cents to 19 cents over the last two months suggests that refineries are having trouble passing on the full costs of the most recent increase in crude oil prices to their customers. Refineries are caught in a bind. Even as Californians are cutting back on consumption, the cost of crude is continuing to rise. But if the refineries continue to raise their own prices for gasoline at the same rate that the cost of crude is rising, they run the risk of depressing demand even more.

The disjunction between the enormous profits to be made drilling for oil and the much tougher business of transforming that oil into gasoline and selling it can be confusing, especially when the same company is handling both parts. My gallon of gas was purchased from a Chevron gas station -- which is not surprising, considering that Chevron controls 25 percent of gasoline refinery production in California.

In 2008, Chevron recorded its largest first-quarter profit ever: $5.17 billion. But according to the San Francisco Chronicle, Chevron's profits from refining and selling gasoline in the United States were actually down 99 percent in the first quarter of 2008 from a year earlier, and "during the previous two quarters, the company actually lost money making gas." That $5 billion in profits is derived primarily from extracting the oil out of the ground and selling it on the open market where prices are set.

The relatively small percentage of the price of a gallon of gas that goes toward refinery profit margins pokes some holes in the notion that environmental regulations -- at least as applied to refineries -- are a primary villain in inflicting high gas prices on the public. According to this theory, which seems to get more media time with every nickel jump in the price of a gallon of gas, "extremist" air quality regulations combined with legal harassment by environmental activists have inhibited refinery owners from building new refineries.

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