Jack TenneyExtra Point

by Jack Tenney, Publisher

December 2014

Remind me again why the price of gasoline goes up and down.

Well, for openers there is the relationship between the price of oil and gasoline because gasoline is chiefly made of oil — the fossil variety plus some vegetable oil here and there. So the price of oil becomes the base cost of gasoline after adding the costs to turn the oils into gasoline and get it from there to a station near you. Federal and state taxes are added on a per-gallon basis and there you go.

Right: So oil, the commodity, has a price per barrel. But, of course, the cost to produce a barrel of fossil oil depends. You get it from Jed Clamplett’s backyard, where it just oozes, it costs less than oil extracted from the bottom of the North Sea through an oil rig, or fracked out of the sand and shale in North Dakota, Canada. The Saudis, kind of like Jed Clampett, have a cost per barrel roughly equivalent to the cost of a movie ticket.

By the way, a fluid barrel contains 31.5 gallons except when talking about oil where a barrel of oil is considered to contain 42 gallons. And, of course, you get all kinds of products from fossil oil — heating oil, jet fuel, asphalt, and like that. Every kind of oil except castor, plus kick-start stuff for plastics.

Figure it this way: When oil was $100 a barrel, the cost at the pump was, like, $4. Drop the price of a barrel of oil to $80 and the pump price goes to a thumb under $3. Do the math on the back of an envelope and it goes something like this:

Half the barrel of oil yields 20 gallons of gas (most websites suggest 19 but on the back of an envelope it’s easier to figure 20), so that would suggest that the oil cost of gas at the pump is $2.50 when oil is $100 and $2 when it’s $80. So taxes, delivery, pump markup, and wholesale price per gallon would be $1.50 at $4 and $1 at $3.

The taxes aren’t a percentage of the price, so the other half-a-buck pump savings is coming from where? When supply exceeds demand, price declines regardless of supplier costs. Possible, I guess.

Actually, gas prices may be like beef prices. Price rises encourage withholding beef from the market to build herds while price decreases encourage slaughter to build cash. Both reactions intensify the price movement. With oil, producers must increase production to maintain cash flow. If a producer was accustomed to $100 oil, one would need to sell 25 percent more when prices were $80, which just makes it more likely that prices would fall to $70.