Fuzzy Math Keeps Oil Price High

With more fuel-efficient cars on the highways, more domestic oil being tapped, and the global price of a barrel at recent low levels, the price of a gallon of gas at the pump should logically be coming down. Right?

The numbers would suggest that’s right-thinking: The price of a barrel of oil is currently experiencing the biggest monthly decline since December 2008, selling for less than $90 and expected to drop below $80 in June—compared to an all-time high of $145 on July 3, 2008.

Consumer costs should have plummeted by now.

Not exactly, reports the Natural Resources Defense Council, and here’s why: Not surprisingly, big oil—and its stockholders—have gotten used to the profits that come with high oil prices. Last year, according to the NRDC, the top five publicly traded oil companies pocketed more than $137 billion in profits.

Using an average price per gallon of $3.85, the report breaks down exactly how oil companies make sure to get their cut from each and every gallon. From that $3.85:
  • Production costs = 46 percent
  • Refining costs =15 percent
  • Taxes = 10 percent
  • Distribution, marketing and retail = 4 percent
  • Transport costs = 1 percent
  • Profits = 24 percent

It’s those double-digit profits that incentivize oil companies to keep prices at the pump high, no matter what’s going on in the oil fields.

Given current numbers, it would seem that the price of oil in the U.S. should keep declining. American oil production is expected to boom, growing by 1 million barrels per day by 2020, with some suggesting that number is conservative. In the past three years, the number of rigs in U.S. oil fields has more than quadrupled to 1,272. If you include working natural gas fields, the U.S. now has more rigs at work than the entire rest of the world.