RE: [A/S] Re: fuel pricing

["Oliver Filippi" <ofilippi@xxxxxxxxxxxx>]

I think those folks on the list who are looking for some logic as to fuel
pricing, relative to refining costs are searching for some logic which is
non existent.

Many years ago - before jet airliners, diesel and kerosene and home heating
oil were surplus byproducts of gasoline oil refining.  The crude oil
refining process is such that the refiner does not have infinite flexibility
as to the mixture of refined products he can make from a given crude feed
stock.  Since crude includes a whole bunch of different petro components,
the easy way out is to simply separate these different weight components.
However, this does not match the market needs, so oil refiners have
developed ways to modify the distillates.  The major one is to break down
the heavy components (like tar and asphalt) into lighter molecules
(gasoline) by a process known as "cracking".  Also, very light components
(low octane gasoline) can be "concentrated" into heavier, higher octane fuel
through a process called ultra forming. Obviously there is an additional
cost associated with both processes, and a practical limit as well.

Thus, many years ago, oil refiners priced their diesel fuel and similar
products to "get rid of them" in order to make room for the gasoline
production.  Now we have jet airliners and larger diesel powered truck
fleets which can consume a higher volume of the diesel fuel.  What burden
the refiner puts on the price of each of the refined components is somewhat
arbitrary, other than the desire to maximize revenue and profit.  Since the
oil industry is not a free market, but, rather, an oligopoly (a small number
of suppliers) the oil companies have a lot of clout as to how they price
their products.

However, before beating up the oil companies too much, one should recognize
that oil products are NOT priced on their actual value, or even true cost,
in the first place.  The price of the crude is initially influenced on its
EXTRACTION cost, not its practical value.  Since it is sold on a world
market, even extraction cost doesn't count.  Clearly it is cheaper to pump
it out of a desert well in the Middle East than out of a North Sea oil field
via an off shore oil platform. Thus the Arab producer, or perhaps the
Mexican producer, has a higher profit margin than the off shore producer.

Similarly, if bio-diesel or ethanol become cheaper to manufacture, the
prices of petroleum fuels will have to adapt and reflect the impact of this
competition (and the oil companies will likely go into the ethanol or bio
diesel business).  Meanwhile it is a sellers' market. That is not to say
that the sellers do not take advantage of their oligopolistic position.

Consider too the monopolistic activity of government - federal, state and
local, in taxing fuel.  Motor fuel typically includes a federal tax, plus a
state and often a local tax on the PRIOR TOTAL INCLUDING the previous Taxes.
In the USA, the tax collector probably makes as much or more money per
gallon of fuel than the profit oil company realizes with all its risk and
investment to produce and deliver that gallon of fuel.  In Europe the taxes
are much higher, as the social engineers and tax collectors have tapped into
a mother lode of funds with a vengence.

Oliver Filippi