Many will remember Bob Barker and the Price is Right game show. Contestants had to guess the price of regular, every-day consumer items to win cash and prizes, the ultimate Grand Prize was very often a BRAND NEW CAR. Since I do not spend a great deal of time in the grocery store I would not make  a very good contestant on “The Price is Right”. Not-withstanding, I do feel that I have learned a good deal about consumerism and market pricing having worked several years in the retail and wholesale marketplace.

This article is not meant to be a tutorial on free market capitalism but rather an individual thought piece on America‘s current market conditions, which in case you have not noticed is pretty dismal.

The Obama administration is doing everything possible to divert our attention away from the real state of the Union. Any good magician will tell you that in order to work an effective trick you need to learn the art of distraction. You get the audience to focus their attention away from where the “magic” is taking place and by slight of hand, and misdirection, you are able to fool an audience into believing you have magical powers. In Obama’s case he is attempting to divert the attention of the American people away from his failed policies and the dismal economic conditions brought about by those policies, by focusing the public’s attention on other things like demonizing BIG BUSINESS aka ‘capitalism’.

Since taking office Obama has made it very clear, to anyone who is actually listening, that he intended to rid America of her dependence on fossil fuels. His policies to date reinforce his position. Not to get sidetracked but I need to lay a little ground work before continuing with this thought piece.

I, like many other conservatives, enjoy listening to conservative talk radio, Rush, Hannity and Levin, the latter being my current favorite of the three. It was during one of Hannity’s programs that I heard Hannity speaking to a young lady from Nevada who identified herself as Krystal Heath (@KrystalHeath on twitter) She, being one of Sean’s twitter brigade, was being interviewed by Sean on the air. As a result I subscribed to her blog and twitter feed. Krystal’s latest blog post inspired me to tackle this topic of market pricing and capitalism in general.

Like I said this article is meant to be a thought piece and I am hoping that others will pick-up on what Krystal started and continue to add to the thought process.

From her article:

Fueled by Coke

For decades, Americans have gathered together at parties, picnics, and sporting events toting strollers, dogs, and coolers full of that all popular beverage… Coca-Cola (or some wanna-be derivative thereof).  Whether in bottles or cans, caffeinated or not, none can deny that soda (or “pop” or “Coke” for my non-East Coast friends) has become a staple in our culture.

Now before I go any further, I should clarify.  I like soda.  I really do.  I have to limit myself with soda like some people limit themselves with alcohol.  Usually on weekends, I grab a cold Coke bottle from the fridge, sit on the porch, and indulge.  And I love it.

But then there’s those times when you go to out to eat… and you begin to wonder if soda is really worth what you’re paying for it.  Or, maybe you already know, it’s not.  It’s really not.  Particularly if you’re going for a fountain soda.

It has been estimated that the profit margin on fountain soda is 90%.  NINETY PERCENT!!!  Let me put it another way… if you paid $5 for a soda at that restaurant, they just made $4.50 off you right there.  BOOM.

But hey… it’s free refills right?  We can splurge once in a while, and it’s no big deal.  Nobody’s protesting fountain soda profits… and we’d probably laugh at them if they did.

Let’s look at this a different way though.  Brace yourself…  the profit margin on a gallon of gasoline?  In 2006, an estimated 2.5%.  Or, using math similar to the last equation… if you paid $5 for a gallon of gas, the “big oil” company that sold it to you just made $0.125.  TWELVE and a HALF CENTS.  Fast forward to 2012, and Fox Business‘ John Stossel found that the average profit on gasoline is a meager $0.05 per gallon.  PER GALLON.

This appears to be odd no? How could a sweetened water product costing less to produce sell for a greater profit margin than oil which has to be drilled for, extracted from the well, shipped or piped to a refinery where it is then refined into useable fuel oil, shipped to a fueling station?

From the way Obama and the left leaning media have demonized oil companies you would think the reverse of the above illustration would be the norm. Oil companies would be making the WHOPPING 90% profit and a sweetened tap-water product would earn the meager 2.5% if we really wanted to be FAIR.

Shouldn’t the company that takes on the greater expense of producing and delivering a product receive the higher pay? Doesn’t the liberals constantly beat us everyday that everyone should get equal pay for equal work? What if someone actually has to WORK HARDER than their neighbor to earn a living? Shouldn’t they get paid more? Not in Liberalland!

You see all this talk about fairness is all a smoke screen to divert our eyes from the real problems facing our society, and that is the REDISTRIBUTION of WEALTH or government intervention in free market capitalism.

Let’s get back to Krystal’s article because she made some excellent points I would like to emphasize here.

She writes: “In case you didn’t quite get that… let me show you again…

$5 for a fountain soda at your favorite restaurant (8-16oz.) = $4.50 in profit to the owner

$5 for a gallon of gasoline (128 oz.) = $0.75 in profit to owner

Here’s one just for fun… a gallon of fountain soda at $5 per 16oz?

$40 = $36 profit to owner (good thing our cars aren’t fueled by Coke)

 

(note to self: at least not yet but who knows what the government will mandate in the future, they are already forcing us to put high fructose corn syrup in our tanks aka ethanol so why not Coke?)

That’s what I call perspective people.  We will willingly dish out a $5 bill for a mere 16oz. of flavored, carbonated water which the world has in abundance.  Then, we gawk like the world is coming to an end if the Shell station wants $5 for 128oz. worth of fossil fuels!

And later in the article she writes this:

My point is, before you go jumping all over someone for making money, do some research.  How much are they really making?  Don’t believe everything you hear.  And most definitely, don’t believe everything the media tells you.

We have heard Rush, Sean, Mark and now Krystal all say the same thing, do not listen to the media because they have an agenda. The politicians too have an agenda, and trust me it is not looking out for our best interests, it is however in finding ways to enrich themselves at the expense of the American people.

How much should gasoline cost then? How much profit should an oil company make? How can we be sure they are only making their ‘FAIR SHARE”? That my friends is a very good question. And I took Krystal’s advice and did my own research.

Oil company profits are not all earned at the fuel pump so it is a bit more complicated than simply looking at the price of a gallon of gasoline. Since petroleum-based products are used in so many other products which are also sold to the consumer the oil companies are able to profit from these other industries as well. In the case of oil companies let’s see just what all that BLACK GOLD produces shall we? Yes we shall.

A partial list of products made from Petroleum (144 of 6000 items)

One 42-gallon barrel of oil creates 19.4 gallons of gasoline. The rest (over half) is used to make things like:

Americans consume petroleum products at a rate of three-and-a-half gallons of oil and more than 250 cubic feet of natural gas per day each! But, as shown here petroleum is not just used for fuel.

OMG! Now that my friends is a lot of products and that is just a tiny fraction of all the products manufactured from a barrel of oil. For those who are mathematically challenged the list represents 0.024%.

Since oil companies are able to offer their product across many sectors of our economy, and many products are petroleum-based, the oil companies are then able to offer gasoline, a relative by-product of oil refinery, at a very affordable price.

Or are they?

Why then are gasoline prices rising so rapidly?  The answer may shock and surprise some of you. The short answer is your not so consumer friendly government. That’s right I said it. Since I do not believe the liberal media I decided to seek the answer to that question myself. Here is what I found.

From WhatitCo$t$.com:

With the high cost of filling your gas tank today, you might be interested in understanding the process and the real costs associated with getting the gasoline at your local station from the crude oil at the refineries.

The following is a brief overview of how the refining process works and how profits margins are calculated.

Four Major End Uses

According to the U.S. Department of Energy (D.O.E), the refining of crude oil produces such widely used end-item products as reformulated (sulfur-free) and conventional gasoline, kerosene-based jet fuels, lubricants such as motor oil, as well as home-heating fuel, kerosene, asphalt and road oil. Most of these products are used primarily in four different ways.

They can be burned, as is the case for gasoline, jet fuel, and diesel fuel to provide the energy for driving automobiles, trucks, airplanes, ships, etc.; to heat a building; to supply the energy for driving electric-generating turbines; and to create petrochemicals and products such as plastics, polyurethane, and a myriad of other petroleum-based goods for the consumer.

Beginning The Refining Process

First – a word about the refining process. Simply stated, because crude oil is made up of a mixture of hydrocarbons, the first step in the refining process is to separate the different types of hydrocarbons from the mix. This is accomplished by heating the crude oil in a process similar to that used in a “moonshine-still”. During the course of the distillation process different products are boiled off and extracted at different temperatures. For instance, at the lowest temperatures, less than 360 degrees F., the lighter products are recovered such as butane, naphtha, and low octane gasoline. The yield at this stage is about 20 percent gasoline and about 50 percent residual crude. As the temperature rises to 650 degrees F., distillates such as jet fuel, kerosene, home heating oil and diesel fuel are recovered next.

End Of The Process

Finally, at the more sophisticated refineries, the residual oil that is left, the heaviest and least valued of the crude is processed even further at temperatures over 1000 degrees F. to extract even more of the lighter products, principally gasoline. By using these extra steps in the process, gasoline yields of around 60 percent can be obtained with only about 5 percent residual. Additional processing of the gasoline from that point can, among other things, remove the sulfur content and for some of the gasoline, produce a higher octane, which because of this extra processing will cost you more at the pump.

(note to self: government regulations require refineries to take this extra more costly step.)

So we already see even at the onset how government forced mandates raises the cost of a gallon of gasoline at the pump. Oh but it gets even worse. The article continues:

Seasonal And Regional Production And Markets

Keep in mind that because of many variables, including different taxes levied, seasonal changes and different blends required in the refining process, the cost of obtaining a gallon of gasoline for the Virginia market will be less than for a gallon of gasoline sold at the pump in California. In California, where much of its oil comes from refineries within the state, special laws call for specific requirements for lead content and other additives as well as unique gasoline formulations to prevent smog and other environmental considerations.

These extra requirements relate to higher refining costs that will be passed along in the higher pump prices. Also, since the quality of all crude oil varies widely, it should be noted that the level or ease (and cost) of refining depends a great deal on the quality of the crude. For instance, premium crude oil from Texas, called West Texas Intermediate has the most desirable characteristics for producing the lighter products like gasoline while premium crude from Nigeria is easier to refine for middle distillates like home heating oil and jet fuel. In direct contrast, the refining of Saudi Arabian Light will yield about 50 percent heavy residual crude that must go through the more costly additional processing.

(note to self – another very good reason why we should be limiting the amount of oil we import from these costly nations)

The Gulf Coast is the leader in oil refinery capacity in the U.S. and has the greatest concentration of state-of-the-art facilities in the world capable of refining the heavier residual crude. This region supplies refined products to both the East Coast (more than half of the gasoline, heating oil, diesel, and jet fuel) and to the Midwest (more than 20 percent). As stated earlier, California operates its own reformulated gasoline program.

Okay so far the cost of gasoline has to increase because of GOV REGULATION requiring refineries to refine gasoline to a much finer quality. If we simply ran DIESEL fuel the refineries would not have to go through 2 additional processes to supply the market. The reason we do not see more diesel-powered vehicles on the road is a topic for another discussion but in short it is because of -wait for it- if you said Government regulation go to the head of the  class.

Oh but there is more:

Final Note

Unfortunately, despite the U.S. attempts to reduce oil consumption (3.3 percent in March 2008), that reduction in consumption will be significantly offset by the increased demand for crude oil from developing nations like China and India. And because nearly three-quarters of the cost of gasoline at the pump is traceable to the cost of the basic crude, despite our lessening demand, the price for gasoline will keep rising, a factor mostly driven by the increasing global demand for that all too precious crude oil.

That old free market devil is at it again, supply and demand. As America reduces oil consumption, the rest of the world is not and as a result more demand is placed upon the limited supply thus the prices rise. Once again our Government can do something to help ease the SUPPLY side of this equation by allowing us to drill for our own CRUDE OIL. More supply against an increasing demand means LOWER PRICES. But as of today Obama has no plans on increasing domestic oil production on federally controlled lands or under federally controlled leases, thusly our own government is standing in the way of market driven pricing by limiting supply so as to raise the costs to the consumer.

So then is the PRICE RIGHT? No because our markets are being interfered with by our own government. Companies have to abide by ever-increasing government regulations which adds to their costs of doing business, and since ultimately it is the consumer who determines how much they are wiling to pay for a product, oil companies, as well as other energy producing companies, are forced to operate on tighter and tighter budgets and ever decreasing profit margins. Eventually they will simply shut-down operations in this country and move to an environment more business friendly.

Of course we could always run our vehicles on Coke.

And that’s my view from the nest. How do you see it?

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