How Gas Prices Work
It is widely known that the gas companies don't get that much money in profit at the pump. The breakdown of gas prices is roughly 65% crude oil, 10% refining, 23% tax and 2% profit. And yet, gas companies make money hand over fist. How does this happen?
What you need to know is that the gas companies are in total control of their product. Every bit of gas you pump in to your tank goes through at least five steps before it gets to your car: Exploration, Excavation, Refinement, Distribution, Retail. Each part of the process is done by a profit-seeking company at some % markup.
Suppose gas costs $180/barrel and we assume a 20% profit margin of each company along the way. That number is completely hypothetical and overly simplistic as different amounts are made at different stages, but for the purposes of this demonstration it will do. By the time it goes through each intermediary company and finally reaches the pump that barrel is worth $373.25. So $193.25 has been made by the companies along the way. Then the gas station sells the refined fuel for 2% profit, earning the gas company $7.46/barrel profit.
That seems reasonable, doesn't it? There is one little-known problem though: the gas company owns every company that ever touches that barrel. That means in our hypothetical 20% markup example, the gas company makes over $200 on that $180 barrel of oil.
For those who like cited sources, I'm afraid I can't link you to any for the above information, because my source is a friend and former high level exec at one of the major oil companies, and I choose to maintain his anonymity. Still, you can't beat first-hand knowledge.
A History Of Gouging
After Hurricane Katrina, gas prices everywhere soared. In Toronto they reached as high as $1.30/L. Later in 2005 the Canadian Centre for Policy Alternatives (CCPA) did an in-depth study on the matter, and in their report concluded that given the cost of a barrel of oil at the time, gas should have cost $0.90/L. The report went on to say $1.10/L would be profiteering, and $1.25 is simply gouging. They did another study in 2007 that demonstrated the prices were again at gouging levels, and had been for months.
Over the last year gas prices have settled down to where they should be based on the current cost of oil and the current markups of the intermediary companies, but they made billions of dollars in unfair profit in the interim. The Government is not at fault for high gas prices, but they'll never do anything about it because they make a large fortune from it in taxes. For the price of gas to come down, those markups have to shrink.
But Wait - There's More!
Gas isn't the only thing that comes out of those oil barrels. One of the products that comes from oil is called Bitumen, which is the main ingredient in asphalt; it's what holds it all together. It starts sticky, then dries non-sticky. It is also sold at a ridiculous markup, which is currently stressing asphalt producers and driving up the cost of roadwork.
Another thing that comes from oil is motor oil, which your car conveniently needs to run properly. Oil is also a main ingredient in plastic, which is found just about everywhere. Oil is important, but the gas companies shouldn't be holding us hostage with the cost of gas.