The Facts about Gas Prices and Oil Profits

Please spare a moment for this hilariously illiterate piece of “analysis” from the Union of Concerned Scientists, which apparently gets its best material from the Union of Half-Educated Sophomores.

The subject is gasoline retailing and the villain is Big Oil. And the shocking headline repeated by Doug Newcomb of Wired (whose editors really should know better) is this: Two-thirds of the cost of a gallon of gas is . . . oil. Gasp, shock, awe, etc. Newcomb quotes Joshua Goldman, the author of the UCS study: “I was actually surprised to learn how little gas stations make from selling gas.” You know who is not surprised to learn that gas stations earn only a few pennies on the gallon? People who work at gas stations. I myself uncovered that particular nugget way back in the summer of 1991, when I was enrolled in a fascinating econ seminar called “Working at 7-Eleven.” Goldman may not have my special academic insights as a former member of the smock-wearing elite — he probably doesn’t even know how to clean a Slurpee machine — but the fact that gas stations make very little money from selling gas is common knowledge. (How common? Even Matt Yglesias knows!)

UCS writes:

Your gas money doesn’t support your local gas station, nor does it benefit you financially, even if you own oil company stock. Most of the money you spend at the pump goes directly to one place: oil companies.

You have a choice when it comes to your oil use: Continue pumping your money into oil company profits or invest in fuel efficiency and keep the profits in your pocket instead.

This will take some unpacking. It is true that about 68 cents on the dollar of gas sales goes toward oil costs, but that is not the same thing as “pumping your money into oil company profits.” That 68 cents on the dollar is revenue, not profit. Oil companies could be posting profits of $0.00 and the cost of oil would still account for the majority of the cost of a gallon of gas. As it turns out, gasoline is made out of oil. Oil and gasoline are pretty much the definition of undifferentiated commodities, so it is no surprise that in a very competitive market the profit margin for selling them is low. If you do not know the difference between revenue and profit, you should not be writing in public.

The question of how much profit an Exxon or a Chevron actually makes off a gallon of gas is a complicated one; the short answer is: nobody knows. Exxon’s “downstream” earnings — the money it makes selling gasoline and other refined petroleum products — run about 7 or 8 cents a gallon. Critics point out that this figure does not include the money that Exxon makes from crude-production operations, and that is fair enough. In total, Exxon makes about 8 cents on the dollar for everything it does, soup to nuts: Its profit margin for the past 20 quarters averages 8.26 percent. That is, it is worth noting, a good deal lower profit margin than Wired parent company Conde Nast generally achieves, according to the company’s CEO, Charles Townsend. Apple’s profit margin runs about three times Exxon’s. Chip-maker Linear Technology’s profit margins routinely run four times those of Exxon. Energy is a high-volume business, not a high-profit-margin business. But regardless of the size of the margin, how much revenue goes where tells you nothing about profit.

The UCS argument that the structure of the gasoline industry ensures that fuel purchases do not “benefit you financially, even if you own oil company stock,” is also ground-poundingly absurd. UCS elaborates: “Say you have $20,000 invested in ExxonMobil, the largest publicly traded oil company in the world. If you spent $1,700 on gas from ExxonMobil over the course of a year, your fuel purchase would yield far less than a penny in stock earnings. Even if you had $1 million invested, you would still get less than one cent in return after spending almost $2,000 on gasoline.” Or, as Newcomb puts it: “The UCS says that even drivers who own shares in an oil company and buy that brand of gas won’t see a bump in their stock portfolio because of their loyalty.”

I myself do not own a car and rarely buy a tank of gas, but I do invest in oil companies on the theory that — pay attention, here, Goldman and Newcomb — lots of other people buy gasoline, billions of them, in fact. That my gasoline-buying habits have a very small impact on the performance of my oil stocks is the very definition of the fact that is trivially true. As for brand loyalty, somebody ought to let Newcomb in on the fact that Exxon-branded gas stations do not really have anything to do with ExxonMobil, which began selling off its U.S. gas stations back in 2008 and at the moment does not own a single gas station in the United States. They kept the Exxon name, but Exxon sold them to distributors and local oil companies, and is doing so in Europe as well. Why? Because — this is news to the people at UCS and Wired — it’s hard to make much money retailing gas. “[The] fuels marketing sector continues to be challenging, with reduced margins and significant competitive growth,” Exxon’s Premlata Nair told the Washington Post, five years ago. Five years is like 60 in Wired years, right?

Did UCS even consider the math behind its own argument? Did Wired? If $1,700 in gasoline purchases generates $1,156 in revenue for an oil company but far less than a penny in revenue for somebody who owns $20,000 worth of stock (or 225 shares in Exxon), what could that possibly mean? That revenue elves are running off with the money? That Exxon shareholders are suckers? What it mainly means, of course, is that there are lots of shares of Exxon stock on the market: 4.5 billion shares outstanding and a market capitalization of nearly $400 billion. So, yeah, your piece of the action on $1,700 worth of sales when you own 0.000005 percent (five millionths of 1 percent) of the company is apt to be quite small. Ingenious observation, guys! It also means that (cf. those profit margins cited above) getting oil out of the ground and into the high-test pump is not cheap. Your conclusion might be that you should buy less gasoline. Or your conclusion might be that you should buy more Exxon shares. It depends on what your goals are.

Also: If you ordered a hamburger and learned that 68 percent of the revenue went to a beef rancher, would that make you feel better or worse about your hamburger? Isn’t the point of things like local farm coops to send more revenue to the producers?

The economic illiteracy continues, both at UCS and at Wired. “Fuel efficiency is really what’s going to put more money back in your pocket and put more money back in our communities,” Goldman tells Wired, and Newcomb worries that “very little of the remaining cash goes into the local economy.” Can we please lay aside the primitive superstition that in the developed world in the 21st century there is such a thing as the “local economy”? Let’s say we took the Brooklyn farm coop approach to gas, and a quaint little store on my corner had a oil well in the back, a DIY-refinery in the garage, and a hand-lettered chalkboard outside advertising its artisanal gas. The bearded hipster inside runs the whole thing. Local economy, right? But I assume he lives in a house or an apartment, which is bound to be made of concrete and steel not locally sourced. He probably has a cell phone and a computer and may even shop at Trader Joe’s or Whole Food or — angels and ministers of grace defend us! — Walmart, thus sending the money I spend at his shop far and wide. You know who has a “local economy”? North Koreans and hunter-gatherers. Autarky is no way to live. Somebody should explain comparative advantage and gains from trade to these gentlemen.

And how exactly is fuel efficiency going to “put more money back into our communities”? I took a little walk around my neighborhood this morning, and I did not see a single Prius factory.

Finally, neither party seems to appreciate the importance of UCS’s “finding” that, after oil, the No. 2 contributor to the cost of a gallon of gasoline is taxes. UCS writes: “Of the remainder, 14 percent of the money spent on gasoline goes to taxes that help pay for roads and transportation services, 10 percent to refining costs, and 8 percent to distribution and marketing.” Think on that: For refined petroleum products, taxes cost more than refining, but less than petroleum. Which one of those seems out of whack?

This UCS “study” is almost entirely empty of intellectual content, reducible to: If you spend less money on gas, you spend less money on gas. It is a juvenile example of dressing up baseless preferences as empirical observation. UCS describes itself thus: “The Union of Concerned Scientists puts rigorous, independent science to work to solve our planet’s most pressing problems.” Wired describes itself as a literate magazine. Neither organization’s reputation should escape this kind of sophomoric intellectual fraud undamaged. Both of them have made the world a little dumber today.


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