Are Gasoline Prices Really All That High?

Basic economics teach us that a change in price of any good, service, or commodity can be the result of changes in supply and demand factors, taxes, inflation, or any possible combination of the three determinants. 

Our media outlets and government want us to believe that the greedy oil companies are responsible for the rise in gasoline prices.  Ok, let’s see how greedy these major, integrated oil and gas companies really are.  According to Yahoo Finance, the net profit margin of these greedy oil and gas companies is 7.9%.  What does that percentage mean?  Well, for each dollar of sales generated by these companies, only 7.9 cents goes to the company.  Wow!  You mean with all the risk that these companies take, they get to only keep something like eight cents on the dollar.  Yes, that is exactly what is occurring.  Let’s put this into perspective.  Federal, state, and local taxes account for approximately 20% of gasoline’s price.  Now, with this fact in mind, for every $1 of gasoline sold at the pump, governments take 20 cents.  But wait, oil companies take all the risk and get to keep only 7.9 cents but governments get 20 cents.  That is exactly correct, which is why the government does not want you to know this fact.  By the way, back in 1950, governments took only 1.5 cents on every dollar sold at the pump.

Ok, what about the inflationary impact on gasoline prices?  In 1950, a gallon of gasoline went for $.30.  Today, adjusted for inflation and government taxes, a gallon of gasoline should be $3.48, which is what I can purchase it in my area of the country.  So, when one adjusts for inflation (thank you Fed) and taxes (thank you government) but excluding supply and demand influences from China and India, the price of gasoline at the pump is definitely not out of line.  I guess the questions should be, why are gasoline prices not higher, due to demand pressures for oil coming from China and India?

So, the next time, when the media and government sources take political aim at the oil companies, remember the above exercise; and, of course, remember that the root cause of higher oil prices are indeed caused by our government increasing its take from 1.5% to 20%, monetary inflationary policies of the Federal Reserve System, and demand pressures from China and India.