As I was pumping $5.96 per-gallon diesel into my pickup’s tank the other day, I marveled at how quickly the dollar digits raced by, on the pump’s display. I began to ponder what costs go into each gallon of fuel. This sent me off on a web-wandering search for some relevant data on what drives fuel prices. Most of that can be summed up in one word: Government.
Liquid fuels are some of the most highly regulated and heavily taxed commodities in the world. The reasons for this are obvious: They are highly concentrated forms of potential energy. Think of them like liquid gold or liquid dynamite. They have the power to accomplish great things. Whoever controls these fuels — and the commerce in them — effectively controls modern society. And of course, governments like to control nearly every aspect of our lives. So by controlling fuel, starting from leases and drilling through refining and distribution all the way to your local pump, they assert their control and extract their multiple “pieces of the action.” Ah, the Mafia must be envious!
Taxes
The amount of tax — state and Federal, combined — that is tacked on to each gallon of fuel is now more than the 49 cents per gallon that I was paying for fuel at the pump en toto, back when I was in high school. The magnitude of that accumulation of taxes seems both absurd and obscene to me. These tax increases were added gradually, so they largely went unnoticed by the Generally Dumb Public (GDP). As always, the GDP remains oblivious to what drives prices, the full extent of taxation, and even the nature of money itself.
According to the American Petroleum Institute:
“The federal excise tax is 18.4 cents per gallon (cpg), and state gasoline fees and taxes range from a low of about 15 cpg in Alaska to as much as 68 cpg in California and around 59 cpg in Illinois and Pennsylvania. On average, state taxes and fees average about 39 cpg and when combined with federal taxes average 57 cpg at the pump. Sales taxes along with taxes applied by local and municipal governments also can add to gasoline prices in some locations.”
But it is not just these direct taxes that fuel the price of fuel. There are also indirect taxes and various fees and fines, including corporate profit taxes, inventory taxes, taxes on the sales of capital equipment, and even taxes on the electricity used to run the pipelines and refineries. These taxes all add up! Now, let’s consider some other costs:
Production costs
Production costs include the expense of drilling, but even before that comes the costs of exploration, permits, environmental studies, and so forth. Then there’s the lease: That is paying for the privilege of taking a gamble on getting a lease on a piece of land to drill on. A lease on public drilling land is another form of tax. Then there are the costs of the drilling rigs themselves and labor costs for the drilling crews, and of course insurance… lots of insurance: Liability insurance is enormously expensive, given the mess crested if there is ever an accidental spill. Then there is insurance on the equipment. And Workmen’s Compensation Insurance, and so forth and so on. Again, all of these add up.
The oil refineries have enormous costs, which also include regulatory costs. (See below.)
Transportation costs
Next, there are transportation costs for the vast network of crude oil and natural gas pipelines. Those require a lot of money for maintenance and monitoring. If you’ve ever traveled through oil country, then you’ve undoubtedly seen the fleets of white pickup trucks. You see them everywhere. Some of these trucks belong to the oil companies themselves. But most of them belong to the legions of oilfield service companies, such as Halliburton, Schlumberger, Saipem, Weatherford, and Baker Hughes. Some of those oilfield service technicians maintain the equipment at the wellheads and all up and down the pipeline infrastructure. But others are there just to meet OSHA and EPA requirements, for various safety checks. Some of those guys are out there counting ducks, for the US Fish and Wildlife Service.
As refined fuels leave the refineries, there is another set of pipeline infrastructure, that is even more heavily regulated than those for piping crude oil. The higher volatility of refined fuels means even more scrupulous health and safety inspection, and higher security, and on and on. Next comes distribution, by rail or by truck. Those have their own sets of costs and regulations.
Regulatory costs
One aspect of fuel production that you might not have considered is the cost of regulation. There are armies of petrochemical engineers, safety engineers, and report writers, whose main job is checking off regulatory boxes. There are geologists, environmental safety specialists, worker safety specialists [1], wildlife biologists, and umpteen other experts and worker bees who are all on the oil company payroll — or subcontracted out — just making sure that all of the regulations are met, and the meetings attended, and the umpteen reports are dutifully filed — all to stay on the right side of The Regulators.
Then there is that annual pump calibration tax stamp, on your gas station’s fuel pump. That is one last little Piece of the Action that must be paid to your state government, before you can fill up your tank.
In all, the level of regulation and taxation in the liquid fuel industry is just astounding.
Inflation
In the background, quietly and insidiously, is the hidden tax of inflation. Year in and year out, inflation is always there, nibbling away, cutting into profitability and savings. When the currency unit itself is self-destructing, then everything denominated in that currency is also under La Mordida — “The Bite.”) Presently, inflation is about 15%, annually. (Officially, it is 9.1%, but everyone knows how bureaucrats fiddle with their figures.) So, on top of all of the other taxes, there is this hidden tax of inflation that affects everyone in the fuel production and distribution chain, right down to you — the guy squeezing the fuel pump handle. Inflation is robbery in slow motion, and we are all getting robbed. The beneficiary of inflation, not surprisingly, is the government that sees its debts easier to repay, from tax receipts that keep growing, and tax brackets that keep creeping upward. Most people have not thought through the long-term effects of bracket creep: In the unfolding era of mass inflation, we will all become “millionaires” (on paper), and eventually, we will all be taxed at the top bracket. But a gallon of gas or a gallon of milk may cost you $25. We’ll be starving millionaires.
The Bottom Line
So, to get back to my $5.96 per-gallon diesel cost… How much of that goes to the government (directly or indirectly), how much goes to general overhead costs, and how much of it goes to profit and then thence paid to the shareholders of the oil companies?
In my estimation, here is the math on $5.96 per gallon, for diesel fuel:
- General production, transportation, and overhead costs: $4.50 per gallon
- The governments’ various Pieces of the Action: $1.25 per gallon
- Gas station profit: 12 cents per gallon.
- Oil company profit: 11 cents per gallon.
So, ponder then, how the government makes ten times as much as the oil companies, but then has the temerity to complain about “high profits” [2] earned by the oil companies. – JWR