A big cause of the high price of gasoline

Here is a test question for you: The next time you find yourself irritated by the price of gasoline, you need to remind yourself of how much — or little — of that nearly $4 per gallon charge is the oil company’s profit. How much is that profit, anyway?

As a frame of reference, start with the amount of profit for government carved out of the purchase price — roughly 50 cents per gallon from various taxes imposed. So what do you think the oil company’s profit is? (Assume an integrated major oil company that even owns the filling station, so we don’t have to separate producer, refiner and retailer profit. That is, we identify profit for the whole oil/gasoline industry out of the purchase price.) Would Big Oil make a profit of 60 cents, 70 cents, $1, $1.50?
No. Try 25 cents.

That is correct. With an industry-wide average net profit margin on the retail sale price of about 8 percent, the net profit on your gallon of gas is about a quarter, give or take a penny or two depending on the size of the oil company. (About 3 cents net goes to an independently owned station, leaving 22 cents for Big Oil, but the total is still a quarter.)

An accurate understanding of oil industry profit levels dramatizes that it is misguided to accuse the oil industry of price gouging. Beyond the cited 8 percent profit on sales, the industry’s return on investment is right at the average across all of American industry — about 25 percent. And these profit indices were much lower during the recent lean years in the oil business.

Indianapolis Star