How Much Should Gasoline Sell For?

Over the years there has been continual runs at the oil companies about how much gasoline should sell for. In some ways it is similar to the continual griping about mutual fund fees. There is one similarity in the cases. People don’t know, they don’t like it and they assume they are being taken advantage of. The oil industry is not clarifying the information. Like the Fund industry, they should set out where the money goes.

If you want to displace bad information you need to provide good information.

Here is a fairly straight-forward thought experiment about gas prices. It is only reasonably accurate in Ontario, but the ideas behind the method work everywhere.

The Toronto gas price is $1.299 per liter of regular gas on May 20. So where does that money go when you buy gasoline?

I have next to no specific knowledge but I can assume that in general, the retail price pays for the following:

  • The crude oil used to make the gasoline
  • Transportation from the oil field to the refinery
  • Refining and storage
  • Transportation to the service station
  • Service station operator mark-up
  • Federal Gas Tax
  • Provincial Gas Tax
  • In Ontario, 13% Harmonized Sales Tax (HST) on the whole thing
  • Credit card charges

Let’s start with what we know for sure. Federal Gas Tax is $0.10 per liter, Provincial Gas Tax is $0.14 per liter and HST is 13%

I have made assumptions about the rest but, because there are so many assumptions, I am hoping that the errors offset each other. I learned that building models. Ten guesses are better than one.

I assume dealer margin at $0.05. If you buy 60 liters, the dealer makes $3.00 before overhead. If you buy 1,000,000 they make $50,000 and that won’t go far to pay overhead. You better buy some things in the variety store section. $0.05 then is not a terrible guess, I think. If anything it is low.

Transportation to the service station or maybe to a distribution center and then to a station. I would need to know how many liters on a truck and whether the dealer price is the same regardless of how far away from the station the refinery or distribution point might be. If I guess 40,000 liters traveling an average of 200 miles each way, then with the cost for the driver to dump the fuel in each station and do paperwork, I think 3 to 5 cents is reasonable. $0.03 in this formula. Again, probably more.

Refining is a hard one for me. I think that refineries are highly operationally leveraged. Huge fixed cost and almost zero variable costs. I also think they are very efficient. I think refining will therefore be a small number. Say $0.01 including temporary storage.

Transportation from the field to the refinery is again unknown to me but as with the refinery, an efficient system. Blending the cost of pipeline sometimes, ships sometimes and even trains and trucks, I think $0.04 per liter.

At this point we have 24 cents for the governments and 13 cents for the refiner/distributor/dealer, 37 cents for all expenses other than crude oil and with HST and debit and credit card charges to add-on at the end.

Crude price is volatile and usually expressed in American dollars. Fortunately the $C is about the same so I am ignoring the currency difference. I need a formula to convert crude oil price in barrels to cents per liter of gasoline.

Most price complainers, including journalists, are feeling the answer, not thinking it. Here is a clarifying question for them. How many liters of gasoline come out of a barrel of crude oil?

There are 159 liters of crude oil in a barrel, but the gasoline equivalent is a harder question.

How much of the barrel turns into gasoline and how much turns into other things? Some of the other things are more valuable than gasoline (high test gas, jet fuel, chemicals, and plastics) and some less, (fuel oil, butane, propane, bunker C, tar, asphalt, and the like.) So we have a cost allocation problem. A difficult and probably seasonal one at that. I have decided to make a simplifying assumption to average out all the fractions and their values and get an equivalent liter of gasoline.

Take the current price ( US$94.00) of crude oil and take 80% of it (US$75.20) and then change the answer to Canadian cents. which becomes C$0.752.

To summarize:

  • crude oil cost $0.752
  • refining, transportation, and service station dealer margin, $0.13
  • federal tax $0.10
  • provincial tax $0.14
  • total cost of $1.122,
  • HST of 13%, $0.169
  • for a total of $1.291

I assume credit card charges average maybe 1%. To get that right you need to know the price of and the mix among credit card, debit card and cash sales.

At 1% the retail price then needs to be $1.304.

QED. The price in Toronto today of $1.299, makes some sense.

What you get for your money:

  • $0.41 of obvious tax. (.10 plus .14 plus .17 HST)
  • $0.752 worth of crude oil (some of this is tax. Probably 25% or more. call it $0.20)
  • $0.01 for the banks
  • $0.13 for the folks who explored, drilled the well, took the oil out of the ground, moved it, refined it, moved it again, operated a clean and efficient station and took the abuse from the uninformed. And they all pay income taxes on their share of the 13 cents.

Governments everywhere get almost five times more than the oil companies, pipeline operators, truckers and the dealers combined. That leads to a question about whether some politicians are hypocrites.

How can we take an MP or MPP seriously when they are disingenuous enough to complain about the price of gasoline? Even to the point of wanting a royal commission to investigate. They are taking the big share of the money.

I would be happy for someone to show me where I am substantively wrong in this thought experiment. Especially someone who knows what they are talking about.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Follow on Twitter @DonShaughnessy

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