Mind on Money: Ideology clouds gas price discussion
Marc Ruiz, Times Columnist
The question caught me by surprise. As we were pulling my extremely thirsty beast of a pick-up truck into a local gas station to fill up on $4.29 gasoline, my wife asked “Do you think that gas tax Biden is talking about will help bring these terrible gas prices down?”
For those who haven’t heard, earlier this week President Biden proposed a vague “windfalls profit” tax on the “oil and gas industry” in response to continued consumer stress at the gas pump going into the November election.
As we revisit this conversation with my wife, it’s important to understand she is pretty much the opposite of “progressive” and is situated politically comfortably right of my more libertarian world view. So, to hear her expressing curiosity, as opposed to the outright dismissal, of anything coming from the Biden White House was bit of a shock. Was the $150 I was about to spend at Speedway driving her to madness?
“Well”, I replied, “the global market for crude oil is really complicated. Oil has to be drilled, transported, refined and shipped to the gas station before it ever gets to us. I can’t imagine that pulling money from that process and moving it to the Federal government would help much”.
“No, the government doesn’t deserve any more money she replied”. Satisfied, she went onto talk about something else. I got out and engaged in the misery of visiting the gas station.
The question, however, did get me thinking. The process of buying a gallon of gas is really, really, complicated. The amount of infrastructure required to extract, move and refine oil is nothing short of a miracle of the modern world, having taken decades and decades to evolve to its current state.
Furthermore, while we as consumers tend to think of oil as oil, not all oil is created equal. The oil and gas industry uses six different classifications when producing and processing oil based on chemical composition. Each type is better suited to some products versus others, and some is not suitable for use in the gas we buy at the pump at all. Each type also tends to come from different regions of the world.
The gasoline products we buy at the pump are refined from a type of oil referred to as Light Sweet Crude, coming largely from eastern Canada, fracking in the US and the Middle East. As can be imagined, all oil markets want this type of oil, but not all refineries in each oil market are set up to process this grade of base commodity, further complicating the subject.
Once oil is pulled from the ground it must be transported to a refinery for processing. In the US, this process is done largely by pipeline and railroad, in many overseas markets oil is moved by pipelines, and then huge tanker ships.
Once the oil arrives at a refinery, the refining process itself is then also a miracle of modern technology, as the oil is “cracked” apart for separation into different components and then distilled into usable products. This procedure obviously takes highly specialized infrastructure and labor to complete in a cost effective and safe manner (have you seen Whiting?).
Then after the oil is refined into gasoline, it is again loaded into a tanker trailer and delivered to the gas station, typically by semi-truck, where it can be pumped into our gas tanks, currently at abysmal cost.
In this whole equation, the price of the crude oil itself, which is determined by complex global commodity markets, is responsible for roughly 60% of the price we pay at the pump according to the American Petroleum Institute (November 2nd). The remaining 40% is split between refining, transportation and yes, taxes, as governments of some type get paid at multiple points in this process as well.
Confused yet? I am, and if I further complicated this simple overview with all the factors that go into getting us a full tank of expensive gas, it would fill a Purdue engineering education.
So, a couple questions of my own. Does all this extracting, moving and refining sound cheap? Of course not, it’s obviously a very capital-intensive process involving material risk at many steps. Secondly, when the President holds a press conference and says he wants to tax the “oil and gas industry”, who does he mean? The company that pulls the oil from the ground, the pipeline company that moves it to the refinery, the refinery that creates the gas, the trucking company that brings the gas to the station or the small business gas station that sells it, just hoping we will stop in a buy a cup of coffee during our stop?
Obviously, a windfall profit tax is a political response to a real world problem, and is certainly not a real solution to anything. If we can take the ideology out of it, Americans have always been able to find solutions to our real-world problems. Unfortunately, if we can’t take the ideology out of the conversation gas prices are likely to continue contributing to overall inflation, and the pain it causes across our lives as consumers and investors.
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc atmarc.ruiz@oakpartners.com.
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