The Increase in Gasoline Prices – Robert Novak Gets Something Almost Right

Ben Stein must pay a lot for gasoline:

At my local gas station in Beverly Hills, self-service – yes, self-service – high test is now $3.22 a gallon, so I believe that the concern is real.

The day the New York Times published his op-ed, I was purchasing gasoline at a nearby service station that charged only $2.69 a gallon for unleaded premium. But why have gasoline prices increase so much in the last few years? One story notes:

“As the demand goes, so does the price of oil and gasoline,” says [Eric] Bolling. Roughly half of what you pay in America – 44 percent – is determined by the price of crude oil; another 15 percent is for what it costs to refine that oil and get it to you … Regardless of where you fill up,nearly a third of what you pay at the pump is taxes: Federal and state … So, you get what you pay for. And while some costs – crude oil, distribution, taxes – change, some things do not.

The pundits at Capital Gang were in a heated discussion a few weeks ago when Robert Novak claimed:

There’s a lot of Saudi bashing from all parts of the political spectrum, when in fact, Saudi Arabia has very little to do with the whole question of what the price of gas and oil is. And I just love the fact that the president says we have to build oil refineries. We haven’t built any oil refineries in this country in what, 30 years? And so we can build the oil refineries, but Nancy Pelosi says it’s not good. So it’s all demagoguery, I think, from the left wing conservationists.

Novak in effect is making the claim that the increase in gasoline prices is due more to an increase in refinery margins than an increase in the price of crude oil. While might scoff at the notion that something that represents only 15% of the price at the pump is responsible for much of the increase in gasoline, but there maybe a little to what Novak claimed.

Using this data from the Department of Energy, I constructed the following graph of the components of gasoline prices, which include the estimated price per gallon due to crude oil prices, taxes, the margin for refineries, and the margin for distribution. Average prices for a gallon of gasoline rose from just under $1.52 as of March 2000 to just over $2.24 as of April 2005. This almost 50% increase in the nominal price compares to an approximately 13% increase in the overall consumer price index over the same period of time. Note that neither taxes nor the distribution margin even rose as much as the overall consumer price index, while the refinery margin doubled. Of course, given its low weight, its dramatic percentage increase only translated into a $0.24 per gallon price increase. Crude oil prices rose by 65%, which translated into a $0.44 per gallon price increase.

Of course, this data is only the accounting of the increase in gasoline prices and does not give the cause of variability of gasoline prices. Saudi bashing is indeed silly as they have not caused the upward shift in oil demand. If gasoline prices remain high, I suspect market incentives will induce companies to build new oil refineries even if the Bush-Cheney energy bill does not pass. And I’m not sure why Mr. Novak is surprised that new refineries were not built when gasoline prices were low during the 1990’s.