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Graphic Element, Right Gutter
Washington Watch

CAN WE HAVE $2.50 GASOLINE WHEN OIL SELLS AT OVER $130 PER BARREL?

COME ON, YOU KNOW THE ANSWER: NO!

AND IT STILL DOESN'T REFLECT ITS REAL COST--THE ECONOMICS OF OIL


At the same time that a barrel of crude oil is selling at over $130.00 per barrel, commentators act surprised that oil is hitting $4.00 per gallon.

But this makes no sense. To understand why, you need to understand the relationship between a gallon of gasoline and the price of crude.

There are 42 gallons in a barrel of oil. But only about 50% of a barrel ends up as gasoline. (Another six gallons of other stuff is then added during the refining process.)

Even this is a rough estimate, as different types of crude will yield different amounts of gasoline. Venezuelan crude reportedly only yields 5%. Most others are between 30% and 70%, so 50% is a reasonable figure.

Therefore, $65.00 of barrel-cost is going into 27 gallons of gas. That's almost $2.50 before the gasoline is refined or retailed. Then there's the cost of the additives, the "other stuff" that is blended with the gas. Then there are federal and state taxes, which add, on average, north of $.50.

So, a gallon of gasoline can't cost much less than $4.00 at these wholesale prices.

But think of it another way. This figure excludes numerous costs that economists label "externalities": environmental impact, the illnesses that result from the environmental impact, the military costs of assuring that oil flows from the Middle East.

The marketplace doesn't require the manufacturer to incorporate these externalities. When "externalities" are figured into the cost, gasoline costs a heck of a lot more than $4.00 a gallon--we've heard figures as high as $10/gallon.

Government is needed to force polluters to incorporate these costs into their price--and often doesn't, of course. If these costs were incorporated fully, the price of renewable energy would look a lot better.

But the current political pressure is to reduce the price of oil any way possible. An easy shortcut is to ignore the environmental cost (much less the other external costs which have always been ignored).

A truer economic approach would be to price products with all of their external costs internalized. Many conservative economists (but no conservative politicians) have picked up on this and are now advocating a carbon tax. Obviously, such a tax would not reduce the price of gasoline.

But where are the liberal politicians to explain that the failure to do so reflects a marketplace failure--and one that goes way beyond oil?








This page was created 06-25-2008, however the content may have been pre-existing on a different page.