The Texas 18th District Blog

Before I go into the email let me make a comment.  I read an article by Dr Walter Williams a few months ago where he responded to someone asking: why do we hear about the price of oil per barrel dropping and it takes a few days before we see the drop in gas price at our local pump.  His response, when an oil company buys it at say $140 per barrel, they want to sell it at a price that will recover some of that price before they drop the gas price to reflect the purchases at the new lower price.  Now the email.

“By: John David Powell

I hang around educated and talented people. Each individual has at least one university degree. Most read, watch, or listen to more than one news source every day. They span generations with ages ranging from the 20s to the 70s.

Yet, not a single person among them knew the answers to some basic questions
pertinent to the growing discourse regarding the rising price of oil. A few knew some of the answers, and some knew a few of the answers. To be fair, I had to look up the answers, or else I would have been among the shoulder shruggers.

For instance, how big is a barrel?

Answer: 42 gallons. So, now you know that when the price for a barrel of crude oil hits  $140, that’s the same as $3.33 a gallon.

What nation supplies the most crude oil and petroleum products to the United States? 

Answer: The United States. According to the Energy Information Agency ( www.eia.doe.gov> >), our country supplied 41 percent of the oil we consumed in March of this year.

What nation, other than the U.S., supplies the most crude oil and petroleum products to our country? 

Answer: Canada. Our northern neighbor accounts for 12 percent of our nation’s oil and 20 percent of all the oil we import. 
The rest of the top five include Saudi Arabia (7 percent and 13 percent); Venezuela (6 percent and 11 p ercent); Nigeria (6 percent and 10 percent); and Mexico (5 percent and 8 percent).

How much oil do we import from Persian Gulf countries? I’m glad you asked.
Persian Gulf countries accounted for only 16 percent of our foreign oil imports each year from 2005 to 2007. In fact, our Persian Gulf imports declined most of this decade, from a 15-year high of a little more than 1 billion barrels in 2001 to 791.9 million barrels in 2007.

What’s the difference between crude oil and petroleum products?

Answer: Crude oil provides, among other products, gasoline, diesel and jet fuels, heating oil, liquefied petroleum gas, lubricants, asphalt, plastics, synthetic fibers, detergents, fertilizers, ink, crayons, bubble gum, deodorant, tires, and heart valves.

One barrel of crude oil (which is 42 gallons, remember?), yields about 19.6 gallons of gasoline. The other 22.4 gallons go into the products just mentioned.

How much of the cost of oil goes into the price of gasoline?

Answer: A bunch. We consumed about 390 million gallons of gas a day last year in our cars, trucks, recreational vehicles, boats, farm implements, and construction and landscaping equipment. Back when crude was $68 a barrel (that was just last year), it accounted for about 58 percent of the price of a gallon of gasoline. The rest of the price came from refining costs (17 percent), federal and state taxes (15 percent), and distribution and marketing (10 percent).

By the way, the price of crude accounts for about 77 percent of the cost of gas at $4 a gallon.

Here’s a little something you may not have considered. What products that you buy on a regular basis are sold with tax included?

Answer: Gasoline. For everything else, you add the tax at checkout.

The folks in California pay 63.9 cents a gallon in state and federal fuel taxes, the most in the nation. That’s just the base, though.  Motorists there also pay an additional 6-percent state sales tax, with some paying another 1.25-percent county sales tax plus applicable local sales taxes. Same in Illinois, where Chicago motorists pay 12.75 cents per gallon
on top of the 57.9 cents per gallon in state and federal taxes. Some Illinois motorists also pay a 6.25-percent sales tax.

Politicians, pundits, and other TV talking heads don’t like to provide these answers, because facts get in the way of positions that pander to the mob.  We don’t point fingers at Canada, because it’s de rigueur to paint the Saudis with the broad brush of blame. Folks float the idea of a moratorium on state and federal gasoline taxes without explaining its minimal impact on gas prices, or without mentioning the $3 sales tax some motorists pay on top of a $50 fill up. Policymakers don’t explain that oil trades in the dollar, which is weak vis-a-vis the Euro, because that would require solutions for strengthening the greenback.

And, it’s easier for simple minds to convince simpler minds to impose windfall-profit taxes on pension funds and owners of Individual Retirement Accounts who invest in oil companies than to take on credit card issuers charging double- and triple-digit interest rates to the millions of people using plastic to pay for food and fuel. Talk about irony.

And, we sure wouldn’t want to impose a windfall-profit tax on someone who goes from making $56,000 a year as, say, an Illinois legislator, to $165,000  year as, say, a U.S. senator, an increase of nearly 200 percent (not counting book deals or real-estate related loans).
SO YOU THINK YOU KNOW OIL: MAYBE NOT”

Also every additional barrel of oil produced affects the world amount available.  So if we produce several million more barrels it increases world supply thus lowering world price.  Even though we may use all of the additional oil we pump there will be less world competition for what is available making life a little easier for other countries.

When our politicians condemn Exxon-Mobil for making big profits, remember that you are an owner of Exxon-Mobil if you have a mutual fund, 401K, 403B or some other retirement fund.  Even unions own shares in their pension funds. 

If a small company makes a 10% profit it distributes it among a small group of shareholders.  If a large company earns a 10% profit it is a bigger number but it too is distributed among a larger group of shareholders so the net effect isn’t a whole lot different.

I think the tax breaks the politicians talk about (corporate welfare) are actually the depletion allowance and the tax return deductions for espenses related to drilling holes that turn out to be dry.  Depletion is the same as depreciation expense on a factory machine.  Uncle Sam doesn’t want you deducting the cost of the machine when you buy it.  He lets you deduct a little every year while you use the machine.

I am not an oil industry veteran so if you have any information that would supplement  or correct what I have said, please feel free to comment.

Let’s work together to put John Faulk in office. We need to elect members of Congress with financial backgrounds.

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