Attribution: Business Week

Driving into work the other day I heard that crude oil scheduled for August delivery was priced at $145.77 per barrel. Given that oil has increased in price nearly 10 fold over the past few years, I found myself wondering just how the math works out on the cost to produce an average gallon of gasoline. Despite my hypothesis that the government could screwup a two car parade, the Energy Information Administration came through and had actual answers to my questions.

Tthere are 42 gallons of crude in every barrel. Not all crude oil is created equally, so there are various yields of gasoline and other products per barrel, but the consensus is that 19.6 gallons of gasoline come from each barrel of crude oil on average. Simple math now tells us that the cost of the raw material in August for future delivery to the 167,500 retail gasoline distribution locations in the US is $7.44 per gallon. Yikes!

The price of gasoline at the pump also takes into account Refining – after all, that oil didn’t just magically turn into gasoline – at around $0.476 per gallon. The gasoline has to get from where it was to the filling station and we have to see commercials about how the petroleum companies are doing good to the environment; that’s not free either, around $0.28/gallon. Finally, the government, Federal and State, need to take their cut which is $0.399/gallon except in California where it’s more!

So, accounting for lag between August delivery, refining, and distribution, we should expect to see prices around $8.59 per gallon by the end of the year. And that’s a cheery Christmas present, isn’t it? And, oh by the way, if we don’t see these sorts of prices, someone, somewhere is manipulating the system rather insidiously.