A Mathematical Look at How Gas Companies Rip Us Off

Brian Carr

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The fact that since the first of the year crude oil has slid over 16% while the national average price of gasoline has fallen only 5% really bothers me. So, on that note, I've decided to do a little bit of research and a whole lot of math in order to try and figure out what the heck is going on.

First off, let's assume that we're working under the premise that the price of crude oil makes up about half of the price of gasoline. After doing some research, this seems to be a pretty standard and accepted idea.

On January 1, the national average gas price was $2.33 per gallon while the price of a barrel of crude oil was at $61.25. In sticking with the theory that the price of oil makes up half of the cost of gasoline, the $61.25 per barrel equaled $1.165 worth of gasoline.

As of January 16, the price of oil had fallen to $51.21 - 16.4% lower than the price on January 1. According to the above theory, the price of oil on January 16 should now equal $.974 worth of gasoline:

(1 - .164) * $1.165 = $.974

Assuming the non-oil 50% of gasoline (taxes, additives, advertising, salaries, etc. ) was a fixed cost - not that unreasonable - the new price of gasoline should be $2.14 per gallon, roughly 8.2% lower than it was on January 1:

$1.165 + $.974 = $2.139

Unfortunately, the national average price of gasoline on January 16 was $2.22 - only 4.7% lower than what it was on January 1.

This leads me to one of two conclusions:

  1. The “fixed" costs actually increased by 6.9% as oil prices went down, or
  2. The system is rigged so there is enough lag time built in for oil and gasoline companies to take advantage of the arbitrage.

Considering the billions of dollars in profits these oil companies take in, in addition to the fact gasoline prices shoot up at the first hint of a rise in the price of oil, which of the two scenarios seems more likely?

Please visit Daily Fuel Economy Tip for more commentary about gas prices as well as plenty of tips to help you save on gas. The better driver you are, the more gas and money you'll save. It's a win/win situation!


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