WHY YOU PAY SO MUCH FOR GASOLINE AND OTHER OIL PRODUCTS

Whenever the prices of oil products such as gasoline (petrol), diesel
or heating oil rise, OPEC is usually made the scapegoat by some sections
of the media, politicians and the general public. “OPEC must raise output,”
the cry goes up. This is based on the incorrect assumption that the Organization
is responsible for high product prices. The point has been made many times
before, but it is worth repeating: OPEC is NOT directly responsible for
high gasoline or heating oil prices. The following analysis shows why.

Most consumers believe there is a directly proportional link between
crude prices and the prices of products such as gasoline and heating oil.
If product prices go up, then it must be because crude prices are going
up. In other words, OPEC is perceived as being directly responsible for
high gasoline or heating oil prices. Nothing could be further from the
truth. Although there is a link between crude prices and product prices,
it is neither direct nor proportional, and the main reason can be summed
up in one word – TAXES. Of course, end users of petroleum products are
not being told the truth.
These taxes imposed by the governments of the consuming nations vary
from country to country and region to region. Graphs 1-3 give a breakdown
of who gets what from a barrel of refined oil. Graph
1 shows that one of the regions with the highest levels of tax is
the European Union, where some 68 per cent of the final price is tax,
with 16 per cent going to refiners and marketers and the other 16 per
cent to oil exporters. Graph 2 shows
the situation in the G7, where 49 per cent of the price is tax, 26 per
cent goes to the refiners and marketers and 25 per cent to the oil exporters.
Graph 3 gives details for the OECD
countries as a whole, where taxes account for 48 per cent of the final
price, refiners and marketers take 30 per cent and the oil exporters get
22 per cent. In each of these cases, OPEC and other oil exporters always
receive the lowest amount.
A more detailed analysis of who gets what from a barrel of refined oil
is shown in Graph 4, which
gives the breakdown of what is known as the ‘composite barrel’ in the
major consuming countries from 1995 to 1999. As in the previous graphs,
the price of a barrel of refined oil is split into three – the crude price,
the industry margin and taxes – to show who gets what. And in the vast
majority of cases, it’s clear that the biggest chunk of the cost of refined
barrel goes not to the oil-exporting countries, but straight to the governments
of the consuming countries in the form of taxes. Let’s take a closer look.

Firstly, the most obvious factor that these figures show is the huge
differences between what motorists pay for products such as gasoline in
the industrialised countries. When gasoline prices go up, OPEC often gets
e-mails from some consuming countries, especially the USA complaining
about high gasoline prices – which is ironic because the USA has the cheapest
gasoline in the industrialised world! Just compare, say, the cost of the
composite barrel in 1999 in the US ($43.9/barrel) with the cost in Japan
(more than double the US price at $91.4/b) or even with the average cost
in the European Union countries (higher still at $95.1/b!). So even in
the USA, where taxes are much lower than in the EU or Japan, the level
of taxation per barrel is still highly significant ($13.8/b).
Secondly, if you’re a motorist in Europe or Japan, you have almost certainly
noticed that when crude oil prices fall, like they did to less than $10/b
in 1998-99, the price of gasoline doesn’t fall by a corresponding amount,
as you might expect. In fact, sometimes it keeps on rising! This graph
shows why: when crude oil prices fall, some of the industrialised countries
take the opportunity to increase taxes on gasoline, thus maintaining prices
at the same level or even higher. Let’s take the UK as an example. Graph
4 shows that UK prices for crude, which were $17.3/b in 1995, rose
to $21.1/b in 1996, then slumped to just $12.6/b in 1998, before rising
again in 1999 to $17.6/b. So you might expect that, if there were a direct
link between crude and product prices, gasoline prices would have followed
these fluctuations in crude prices. Not at all! Just look at the composite
barrel prices in the UK: in fact they rose constantly over the period,
from $109.1/b in 1995 to $127.1 in 1997 and further to $141.5/b in 1999.
The explanation is simple: every year, the UK Government increased its
taxation take on the refined barrel from $64.6/b in 1995 to $80.1/b in
1997 and then even higher to $96.1/b in 1999.
Finally, if you think gasoline or heating oil is expensive, take a look
at Graph 5. This uses figures calculated
by US oil industry analysts John S Herold to show the cost of a barrel
of crude oil and gasoline compared to other consumer products such as
milk or mineral water. It turns out that gasoline is extremely cheap in
comparison with many popular consumer items. So, while consumers may complain
when the price of gasoline rises, those same consumers are happy to pay
prices for other products which, in per barrel terms, are way in excess
of what they pay for gasoline. The point remains, however, that governments
of some industrialized nations make from taxes at least three times what
oil exporters get from imported oil. Even with more crude oil in the market,
a significant reduction of these high taxes is what will lower the cost
of gasoline and similar products. We all know in whose court the ball
is. Think about it.