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September 14, 2006

Riding the gas price yo-yo...

While out making my rounds Wednesday, I saw gas for $2.44 a gallon -- and that was on the Illinois side.
On the Iowa side, I saw it under $2.25 at several places. It was going for as little as $2.20 a gallon, according to quadcitiesgasprices.com. Those prices are about 75 cents a gallon less that we were paying a month ago.

Election Day must be coming.

I suppose that's kind of cynical. I also suppose lots of other people feel pretty much the same. Gas prices yo-yo up and down, seemingly without rhyme or reason. They vary sharply from place to place, seemingly without rhyme or reason. The only certainties are that over time the price keeps going up sharply, and that when the yo-yo hits bottom, "bottom" is always a little higher than the last time. One more certainty: Oil company profits soar by billions through it all.

Anyway, the effect is that $2.20 gas seems like a great bargain now, instead of the frightening outrage it was when we first saw it barely 18 months ago. We're easily conditioned

The thought that the drastic drop in what we're dropping at the gas station is a bit of pre-election manipulation comes in part because other answers are, well, not very satisfactory.

Recent big finds in the Gulf of Mexico won't hit the market for years. Imports aren't falling. No new refineries have come on line. The Middle East is just as unstable -- or more so -- than it was last year. One oft-offered explanation is that the drop is seasonal, brought on by the end of the summer travel season.

But that holds no water either, given the history of weekly gasoline prices to be found on the Department of Energy website. Here's a brief look at the last six years. The numbers are averages for a gallon of regular gas in the Mid West region.

-- 2000: August peak, $1.43; second week of September, $1.55. No seasonal break there.

-- 2001: August peak, $1.65; second week of September, $1.62. Down three whole cents.

-- 2002: August peak, $1.38; second week of September, $1.36. Down two pennies.

-- 2003: August peak, $1.71; second week of September, $1.63. Down nine cents.

-- 2004: August peak, $1.85; second week of September, $1.79. Down six cents.

-- 2005: August peak, $2.59; second week of September, $2.88. Big jump. Katrina's to blame. (wink, wink)

-- 2006: August peak $3.03; second week of September, $2.41. Down 62 cents on the average, and even more in specific markets. Wow!

Now, there's a seasonal break the like of which has never been seen, either in actual pennies or in per centage terms. How can that be, if prices were being set by something other than greed? Perhaps someone can explain the market forces that made a 20-25 per cent cut possible.

Until then, I'm going to keep an eye on those August peak prices, which have gone up quite nicely, if you're an oilman who's chummy with the crowd in the White House and in Congress. And I'm going to keep assuming that the oil crowd is merely doing its buddies in Washington a little election-season favor by temporarily loosening the thumbscrews on an unhappy and restive electorate, which is turning a baleful eye on incumbents.

Here's a couple of more stats: The oil and gas industry has made
$12.5 million in campaign contributions so far this election cycle
. Of that, 83 per cent went to Republicans. In the 2004 cycle, the industry contributed $25.6 million,of which 80 per cent went to the GOP.

Connect the dots, as they say.

Posted by jcb at September 14, 2006 09:00 PM


One more certainty - the states make more than oil companies in gas taxes. Come on - what is wrong with an American company making a profit? The reality is that taxes are 3+ times what the oil company profits are - and no one seems to care.

Oil company profits - and they are thieves.
Government taxes at a 300% rate - and no one notices!!!

Posted by: Anonymous at September 14, 2006 09:32 PM

Hi John:

My family has owned a gas station for 33 years. Gas is the only item where the price posted includes tax. The government has made a pretty penny through all this as well.

Who would recieve more hate mail; Exxon or Uncle Sam if gas staions tacked tax on at the end of the purchase and you saw it on your reciept?

Do you know that it is close to a dollar a gallon with state, federal and local taxes included. And local stations pay all the tax up front before the fuel is put in the ground.

Posted by: Gas Station Owner at September 14, 2006 09:45 PM

The federal gas tax (18.4 cents a gallon) is earmarked for the high and mass transit funds, with the breakdown being about 80 percent for the highway fund and about 20 percent for mass transit.

Most states' gasoline taxes also are earmarked for road and highway construction and maintenance.

There's a direct link between the fuel tax and the quality of the transportation system we all rely upon. the portion of price of gas that goes to oil companies most often isn't spent in ways that so clearly benefit all of us.

Here's a chart comparing state gasoline taxes. The total tax -- federal and state combined -- is 40.1 cents in Iowa; 54.5 cents in Illinois. Local option taxes may add a couple of pennies here and there, but "close to a dollar a gallon" seems a stretch.

Posted by: jcb at September 14, 2006 10:35 PM

These big gas companies deserve the money. Why should we use these tax's to fix our roads and pick up our garbage. The big gas companies would be a much better choice to have this money. I am sure that they will be very generous with their profits.

Posted by: Mr. Big at September 15, 2006 07:28 AM

So John, you have no problem for blasting the oil companies for making less than 9-cents a gallon, but seem very comfortable with the taxes being more than 6-times that amount?

Not too many companies work on a 3.2% profit margin.

What, are you going to start blasting Hy-Vee, as I can guaranty you that there profits are far greater than 3.2% of the product price!

Posted by: Anonymous at September 15, 2006 07:33 AM

JCB, you're supposed to play along when they talk about how the taxes are "close to a dollar" and how the oil companies really aren't making much money on a gallon of gas.
Why do gas prices go up? It's a refining capacity problem ... it's just the market ... a hurricane blew through within a 150 miles of an oil rig. It just gets old hearing the excuses.
Anyone want to bet the prices go up in late November/early December?

Posted by: Anonymous? at September 15, 2006 08:11 AM

jcb, I was always under the impression that a lot of the taxes on gasoline were percentages. Is that not the case with state and federal taxes? Maybe it is just our local governmental bodies here in good ole Galesburg that uses the percentage based taxes.

Posted by: Robbie at September 15, 2006 08:13 AM

That tax chart got me thinking. While I'm out here in CA and NV, I'm getting killed with gas prices. Lowest I found for 91 octane was 3.20 yesterday. I would have figured that it was largely because of tax, but taxes are just .06 higher in CA than IL. So, I wonder where the extra .73 comes from?

Posted by: Huck Finn at September 15, 2006 09:37 AM

anon @ 7:33 - where do you get your statistics? last time I checked oil companies didnt sell gasoline by the gallon, they sold oil by the barrel. which as you may or may not have noticed has went up quite steadily in prices. your numbers just seem to come out of no where. who makes 9 cents profit? and how is that 3.2%? 3.2% of what??? c'mon, not only are you too cowardly to provide a name, but you can't even justify your information...

mr big - lol

anon @ 8:11 - what we realyl need to watch is how our heating costs are going to go through the roof. they are saying a 100% increase in prices in some areas. that will hurt way more than gas going up or down.

Posted by: Robbie at September 15, 2006 09:56 AM

Sorry John. I was wrong on the dollar per gallon but I knew you would correct. Point still stands that people would be alot more equally focused on where to place anger if the tax was added at the end like everything else. I know it goes for "good" with the roads and all but no one wants to talk about how much we are over taxed and the government has done a good job of hiding things where we don't think about it.

As far as oil companies and profit. The profit has to go to buy more oil to create gas. It's sort of like sellling your house and having the equity. And then what? You still have to take the equity and buy a new house. Unless your going to live in a cardboard box.

SO profits are reinvested in updating and fixing refineries, complying with new federal regulations, and buying new raw material. They say it would cost 1.3 billion to build a new refinery today with all the EPA regs. We haven't built a new one since 1976. If you want consistantly lower prices than you need more production capacity. Spikes occur now because you have different blends going to different regions and not all the refineries can produce all the blends for all the regions. Artificial scarity created by the government regulations.

I haven't even gotten into the global market and how that effects the price of oil. China and India used to use 15 million barrels a day 10 years ago. Now combined it's 40 million a day. And the US has gone up in usage as well. This ONE example of probably five I can think of. Simple put price is set by suppply and demand.

Here is my question John. How is the gas price drop going to affect the national mood going into the election? They say OPEC is worried about a barrell of oil sliding back to $50 dollars a barrell.

Posted by: Gas Station Owner at September 15, 2006 10:07 AM

Robbie -- Illinois is one of the few states that, in addition to a flat per-gallon tax, also collects a sales tax on gasoline. Since the sales tax is a percentage tax, the state also benefits when the price goes up.

Anon at 07:33 AM -- Robbie's already asked the question: Where are those numbers coming from?

Huck -- I think California is one of the states that, because of air pollution issues, requires specially formulated gasoline. I'm sure that's the first explanation that would be offered for the disparity you're seeing. Whether that accounts for the entire 73 cents is probably a matter of dispute.

Gas Station Owner -- Re: the world market. Here's a sampling of per-gallon prices being paid in various places. Chinese motorists, for all the huge increase in demand there, get gas for about $1.50 a gallon. European prices seem stratospheric -- that's the impact of heavy taxes imposed to discourage consumption and to bolster general revenues.
(For the more curious OPEC's site has an enormous amount of info that may help understanding of the forces at play in the world market.)

Re: Profits -- profits are what's after over after expenses are accounted for -- presumably expenses include the money spent on maintainance and exploration.

Re: listing taxes separately on a receipt -- that'd be fine with me, though I see a lot of pumps with a sticker on them listing how much of the price is taxes. Not exactly hidden information.

Re: the national mood -- Gasoline prices, with the possible exception of Iraq, are the primary source of unease and unhappiness among the electorate. Everybody gets hit on a real regular basis.

A lot of unhappy people will be casting ballots in November, likely in a mood to strike at whoever they can, and that will be incumbents and the party in power.

Sharply lower gasoline prices will to some degree take that issue off the table though some voters will deduce they are being manipulated. (Anon at 08:11 AM, I'd certainly bet prices are going up not long after Election Day.)

A couple of questions for you: Does the amount you make vary much with the rise and fall of prices at the pump?

Do you have any choice about where to buy your supply? Or, put another way, if someone was going to launch a gas station in the Q-C, what would be the options of obtaining a fuel supply?

Posted by: jcb at September 15, 2006 11:33 AM

Here's a handy-dandy tutorial that answers all your questions (well, most of 'em) about how gas prices work, for those not inclined to play the cynical partisan blame game.

Posted by: paladin at September 15, 2006 12:31 PM

Oil company profits last quarter were approximately 9-cents per gallon. At a $2.80/ gallon (fair average for the last quarter) - that is 3.214%.

Approximations, yes...but close.

I hope that this helps,
Anoymous 7:22

Posted by: Anonymous at September 15, 2006 01:28 PM

Paladin, according to that tutorial, the Oil company makes no profit, yet those companies are recording record profit margins. Also, it talks about competition as a price driver. If the Oil companies aren't making any money and the gas stations are claiming little profit on gas, how can competition be a price driver?

Posted by: Anonymous? at September 15, 2006 01:28 PM

I report, you decide, but guess who are the biggest beneficiaries of gasoline sales? Don't rely on an anonymouse like me, trust the taxprof.

Posted by: paladin at September 15, 2006 03:59 PM

John, You're certainly not alone in connecting the dots between both natural gas and oil prices plummeting just as the mid-term elections approach.

I suppose the proof will be to watch what happens to the prices a few months AFTER the elections.

And as you say, the yo-yo theory is correct, with each peak higher than the previous.

Posted by: TID at September 15, 2006 06:53 PM

John, there wer eelections in 2000, 2002 and 2004...so only now the politicians discover that the manipulation of the gas prices is the way to go?

Further, how does the US Government (or politicians, or one specific party?) manipulate these prices, when we have so little of the 'supply.'

Posted by: havinfun at September 16, 2006 08:08 AM

Oil companies make money all along the supply chain. But remember, there are also costs along that same chain. It costs money to explore, to get it out of the ground, to build refineries and to refine it, and to transport it.

They make money by selling the crude, by refining it for others, and for transporting it.

They make more money on some barrels of oil than for others. Crude purchased on $20-30 contracts makes them lots of money. Crude bought for $60-70 contracts make them very little.

It's all part of Economics and Marketing 101.

Posted by: Watcher at September 17, 2006 12:02 PM

My thinking is that since we've been having these "energy crises" since the Carter Administration, if there was any way the Democrats could leverage the "obscene oil companies profits" meme to their advantage, it would have happened long ago.

For Democrats, this would be a win-win situation. It would play up to their frothing anti-corporation and extremist environmentalist base, plus pander to the rest of us who have to buy gas.

No, if there was any "there" there, the Democrats would have exploited it by now. That's just a fact.

Posted by: paladin at September 17, 2006 05:04 PM

Speaker of President Jimmy Carter, too bad more Americans didn't listen to him. He was right about our over-dependence upon foreign oil, and here we are, a million SUVS and HUMMERS later just starting to talk about developing renewable energy from new sources. We truly are a gluttonous nation, spoiled, deep in debt and likley unwilling to conserve. Our current President needs to challenge us more, or step aside and let Barack Obama take over.

Posted by: values matter at September 18, 2006 03:41 PM

John, nice theory, but as the stats show...prices did not fluxuate in the election years of 2000, 2002 or 2004.

So all of a sudden politicians now have the ability to manipulate gas prices?

Posted by: Anonymous at September 20, 2006 09:11 PM

Anon 09:11 PM -- The factor that wasn't in play in 2000, 2002 and 2004 is the pressing need of an unpopular ruling party to catch a break somewhere -- where better than on energy prices; $3 a gallon gas and record oil company profits are don't set well with voters.

Whether politicians -- and their friends --"all of a sudden" have the ability to manipulate energy prices is open to debate, I guess, if you discount California and several other states that paid through the nose while Enron played its games.

This particular administration, does however, have deep and close ties with domestic energy companies and the Saudi Royal Family. Despite lawsuit after lawsuit, we still don't really know what VP Cheney's secret energy task force talked about or what policies it recommended.

The many vague vageries of the market offer less than definitive explanations. -- OPEC's September market report says that one of the reasons for dropping prices is that "easing geopolitical developments calmed market sentiments." (Most of the "geopolitical developments" I'm reading about these days don't seem "easing" to me, but never mind.)

So this year, there is pressing political needs to drive down energy prices substantially, and there is an administration with ties and contacts to win some cooperation.

Maybe the lower prices really are the magic of the market at work; maybe it's just magicians playing election-season tricks.

Which it is will become clear soon enough. I'm betting gas will be flirting with $3 a gallon again within six months after Election Day.

Posted by: jcb at September 20, 2006 10:54 PM

So, the Administration manipulated the price hikes over the last year, then, to ease the tension and benefit the Republicans - immediately had them lowered in time to benefit the Republicans at the polls.

Incredible ability for an Administration that has challenges even selling the (absolute) fact that Social Security needs overhauled, cannot deal effectively with the healthcare situation or the slam-dunk issue of border enforcement.

Of course, there handling of the Iraq war is questionable, at best...yet they were able to manipulate a worldwide market of gas.

If only they could put these great talents to work elsewhere!

Posted by: havinfun at September 21, 2006 07:42 AM

I am tired of the half measures on this issue. I went to a town hall meeting held by Obama about a year ago - he mentioned that something needed to be done in the area of alternative fuel sources. He insinuated something on a grand scale. Unfortunately, I have not seen any new information from him on this issue. A monumental/revolutionary change is needed. If we are going to progress as a society - If our children are going to have a better life than ours - we need to embrace the ideas that are on the frontier of the energy debate. The goal should not be merely to lower gas prices - it should be to lower energy costs across the board. Paying pennies for all our energy needs instead of hundreds of dollars. We are arguing over whether Illinois should have an additional tax on gas - we should be discussing what Illinois could do to forward the cause of alternative source fuels. Virginia has a law that requires all stations to offer fuel that is 10% ethanol - I would support a policy that requires all stations in Illinois to offer E85. That is not the end goal - but it would be a start. Moreover, research in this area would create thousands of jobs. We have to shatter the old paradigm and embrace unconventional solutions.

Posted by: Rob Mellon at October 5, 2006 11:00 PM

Rob, our politicians have been vowing to make our country "energy independent" since the first energy crises happened on Jimmy Carters watch. We're talking about a 30+ year span of all talk but no action on the part of our wonderful elected officials, both Republicans and Democrats. Why do you think that is?

This summer, when I went down to Kansas to visit relatives, I noticed that my hometown (population less than 10,000) was building an ethonol plant. I asked my cousin, who is editor/publisher of the local newspaper, why an ethonol plant, since Kansas isn't much of a corn producing state. Cousin Dave said that the good people of Kansas were tired of waiting for Washington to lead our nation to energy independence, so took matters into their own hands. Sez Dave: the whole Middle East and Washington DC can go to hell for what we care, we will have our own home-grown energy source.

I know he's my cousin, my family and my blood, but I'd say his were words of wisdom.

Posted by: paladin at October 6, 2006 01:36 PM

If you believe that the government is causing the price to drop then you must also think that they are responsible for the stock market rally also. Lets hear your thoughts on this QC.

Posted by: Anonymous at October 12, 2006 09:47 AM