So What Is The Profit-Margin For Refining Crude Oil Into Gasoline?
As of 1999, for every gallon of gasoline refined from crude oil, U.S. oil refiners made an average profit of 22.8 cents. By 2004, the profits jumped to 40.8 cents per gallon of gasoline refined. In the specialized California market where the gasoline must conform to the requirements of the California Air Resources Board, refinery margins were even higher. In fact, this helped Exxon, the largest company, report a profit (as of February 2008) of $40.6 billion. Nevertheless, one financial tracking institution reported that the profit-margins have now dropped to about 29.6 cents a gallon or around 60 percent lower than a year ago.
Generally speaking, since there are so many variables to consider, precise cost breakdowns are difficult to ascertain. According to the Energy Information Administration (EIA), however, which issues the “Official Energy Statistics from the U.S. Government” the average cost at the pump for a gallon of gasoline is broken down as follows:
- 74% - Cost of the crude oil
- 11% - Taxes
- 10% - Refining costs
- 5% - Distribution and marketing
In a simple illustration, let’s assume an oil company is paying $100 for a barrel (42 gallons) of basic crude oil. Their cost for a gallon will be about $2.38. At a gasoline-pump price of $4.00 per gallon, 44 cents has to pay for taxes and 20 cents for distribution and marketing expenses. This leaves $3.36 for the oil companies. Out of that total they have to pay for the cost of the gallon of crude oil itself which was $2.38 and also the 40 cents to refine it into gasoline. This leaves $0.58 profit per gallon of gasoline. As noted, however, depending on which report one looks at, this profit-margin can range anywhere between an estimated 30 to 60 cents per gallon.
Oil Companies Caught In A Double Bind?
The oil companies, however, express much grief that they are actually losing their profit-margin because as crude oil prices continue to rise over $100 per barrel, they are finding it increasingly difficult to pass any substantial portion of their added costs onto the consumer. Like everyone else, they claim, the oil industry is going through a traumatic period. On one hand they must strive to satisfy their shareholders. But, on the other hand, to keep the investors happy a business must grow to increase profits which, they claim is getting more difficult to do. They are caught in a double bind, experts say. While the price of oil is increasing, the consumption of gasoline in the U.S. is falling. In this regard, although crude oil prices more than doubled in the past year, the oil experts say, wholesale prices for gasoline have risen only 39 percent.
Unfortunately, despite the U.S. attempts to reduce oil consumption (3.3 percent in March 2008), that reduction in consumption will be significantly offset by the increased demand for crude oil from developing nations like China and India. And because nearly three-quarters of the cost of gasoline at the pump is traceable to the cost of the basic crude, despite our lessening demand, the price for gasoline will keep rising, a factor mostly driven by the increasing global demand for that all too precious crude oil.