Straight Talk about the Price of Oil & Gasoline

By Bob Cordes

The Price of Oil:  We’re all aware of the huge profits oil companies are making right now.  We have no concern about their profits at any other time.  Back in the 1980s, a barrel of oil was priced at about $15 per barrel.  Some low producing wells were shut down because it cost more to operate them than the production was worth.  Oil companies were having a hard time of it and there were many mergers. 

The price for oil has crept steeply in the past five years.  About three years ago, it entered the $70/bbl range. And now, demand throughout the world is very high.  In recent years, China and India have become large users of crude oil.  But a barrel of oil still goes to the highest bidder, whether it comes from Mexico, Libya, Canada, or Saudi Arabia.  That’s business.  About half of what our country uses comes from about five US states and some offshore areas.  But we buy lots of oil from other countries.  And there is a shortage on the market.      

Who’s Responsible?  Responsibility for the price of oil is found everywhere.  It’s not only the oil companies and their expenses to produce it.  It’s you and I, and also law-makers, environmentalists, world demand for oil, lack of alternative-fuel power plants, large amounts of capital needed for research and development of alternative energy sources, restrictions on coal, wasting of energy, and so forth.   We’re all responsible for it.

There is very little conservation of energy until money gets into the equation.  If it gets to be pricey, we’re suddenly interested.  We don’t want to get rid of our gasoline-powered lawn mower.  And air-conditioning and a nice warm place are cherished by us whether shopping in a store, driving a vehicle, or at home.  And we take those trips, all of us.  It wasn’t “necessary,” yet I went to a granddaughter’s spring band concert 125 miles away, that’s a round-trip of 250 miles.  You’ve done the same.    

How They Make Gasoline:  A barrel of oil has been standardized as containing 42 US gallons since about 1866.  (Barrels of chemicals and food have 55 US gallons.)  Let’s just say a barrel of oil sold for $104.  That’s $2.50 per gallon of oil, but it is “crude.”  It won’t work in your car’s engine until it has been “refined.”  But first, it has to be transported by ship or pipeline to a refinery.

Transportation is no simple matter.  And you would be amazed at the distance crude oil is sent across the country enroute to a refinery.  Oil from Louisiana and Wyoming is routinely shipped to places such as Chicago and Michigan.  Transportation and refining cost money.

At the refinery, the oil companies burn gas (not gasoline), most of it produced by them, in large Crude Unit heaters.  Those furnaces heat the crude oil to about 650-degrees Fahrenheit as it flows through pipes subjected to flames from the gas burners.  But that furnace does not provide the finished product.  It takes more pumps, towers, catalytic reactors, heat exchangers, etc. to come up with a finished product of a certain octane and cleanliness.   

But, oil is not like water (where everything vaporizes to steam at 212 degrees).  Crude oil contains products of different boiling points. The refiner can not only produce gasoline. He has lots of by-products and needs to sell them.  He therefore needs large processing equipment and uses temperature and pressure to produce not only gasoline, but diesel, fuel oil, asphalt, propane, butane, etc.

 Getting the Gasoline to You:  The gasoline is stored in large refinery storage tanks of 100,000 bbl. capacity, and more, until it can be shipped.  The eventual refinery gasoline product is in most instances pumped through pipe lines, probably across several states (which all have their fees) to a terminal near you.  Truck drivers will fill transport trucks with the gasoline at the terminal.  Each truck has a visible "flammable" placard with the number 1203 (gasoline) indicating hazardous materials. The gasoline is delivered to your service station. 

 A 42 gallon barrel of oil provides only about 20 gallons of gasoline.  Some other barrel products are seven gallons of diesel, three gallons of fuel oil, and four gallons of jet fuel. 

 Recall our hypothetical price of $2.50 for a gallon of crude oil.  Now let’s start adding on the cost of labor, operation and maintenance of equipment, various taxes, complying with regulations, marketing, some profit and other expenses.  And remember $2.50 per gallon was for oil at $104 per barrel.  Gasoline doesn’t come cheap and likely never will again. 

 It’s Really Not a Surprise:  True, gasoline prices are up but so are prices for groceries, medical care, insurance, restaurant meals, and many other items.  Analysts call it “inflation,” a sharp and sudden rise in prices from a too great expansion in credit, paper money, and other items which affect us financially.  The domino effect sets in somewhere.  The increase in gasoline prices affects the farmer using gasoline in his truck.  The farmer raises his prices, etc., etc. The domino effect. 

 Actually, when adjusted for inflation, crude oil is at the same price it was in 1980.  Gasoline prices did eventually come down when inflation was brought down to a lower number. 

 Part of inflation’s cause is the materialism of our society which is reflected in the expansion of credit.  Many of us buy whatever appeals to us and put the cost on a credit card.  That is OK if you have the financial means to pay the card off every month and control your purchases.  But, the number of people carrying charges from month to month on credit cards has begun to bite many of them in the rear end.  Yet, banks and businesses continue to send us pre-approved credit cards.  If you haven’t had a credit card shoved at you that way, some merchant has probably urged you to take out a credit card when you get to the check-out counter. 

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