Breakdown of Gas Prices Where the dollars at the pump go
Breakdown of Gas Prices
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- What I hope to do in this video is to explore the relationship
- between oil and gas prices, and you do see that there is
- a very strong correlation between how they trend.
- This right over here is oil prices quoted at a specific point on the planet
- This is dependent on where you are and as you can see this is
- in US dollars per barrel. In early 2008 around $100
- It went up to about $140 then came back down
- and then it's been trending up ever since, now it's about $100 per barrel
- this is where we see the oil prices on a per barrel basis
- And then related to that you see the gas of gasoline
- this is even more geographically specific because not only do you have
- transportation costs but you also have very
- region specific taxation for oil and sometimes
- regulation but taxation is the big part of it
- but you do see that it trends up when oil prices
- trend up, and then it goes down and this is on
- a per gallon basis and these are the prices right
- over here in New York. But they don't move competely
- locked up, if anything you can see that the oil price on a per
- barrel basis is much more volatile than the gasoline
- prices right over here but there is the same
- general trend, when the oil prices moves up
- this tends to move up but it's not always in the same
- percentage but there's definitely a relationship.
- Now, before trying to figure out when you pay, say
- $4 at the pump how much up that is oil and how much
- is refining and how much is transportation
- Let's at least kind of build up to that
- to think about how does the oil even end up in your
- car, then we can build up that price of the oil.
- Or, the price of the gasoline I should say.
- This right over here, you're probably familiar with these,
- these are oil rigs, two very different types: this
- This is an offshore oil rig, this is a land based oil rig
- but they're both doing the same fundamental thing:
- they're drilling into the ground until they get to a pocket of oil
- and then they will pump that oil out
- and try to transport it to the market somehow, first
- going through a refinery. Offshore is really fast and it
- really is an engineering marvel how they do it
- It might be sitting out here in the ocean and it will
- literally go to the bottom of the ocean, go to the sea
- floor and then drill from there to actually get to the
- oil pockets so it's really an engineering marvel
- and you have to be very careful, it can be very dangerous
- working on an oil rig and obviously if there's an accident
- it can be an environmental nightmare like we saw
- with the BP situation but it is undoubtedly an
- engineering marvel. Now, once you have that oil you need
- to get it to a refinery so that the oil can be
- broken up into its useful parts, and the way it
- is typically transported to a refinery is some combination
- of a pipeline or an oil tanker, this right over here is actually
- the Alaskan pipeline, it takes oil from the very northern part
- of Alaska to the southern part so that it can then be
- put onto oil tankers which can then transport it anywhere
- in the world to refineries. It could go straight to a tanker
- actually in some offshore places you could use a tanker or sometimes if they're
- close enough to land they actually might have a pipeline
- that will take it to land where it can go to a refinery
- or go to an oil tanker so that it can be transported
- even farther. And then from there it gets to a refinery
- So we can start to think about how the price of oil is built up
- before we even think about what a refinery
- even does. So let's say that the current price of oil
- and I kind of rigged the numbers, to work out fairly well
- But let's say the current price of oil is $90 per barrel.
- So a barrel (this is just a units thing) is equal
- to 42 gallons. So if I say I have a barrel of water
- I'm really saying that I have 42 gallons of water.
- And now all 42 gallons of crude oil do not turn into
- 42 gallons of gasoline, out of 42 gallons
- of crude oil you can get about 19 or 20 gallons of
- gasoline, to make the numbers easy I'll just go with 20.
- And then the rest will be other stuff, so 22 gallons of other stuff
- It might not even be 22 gallons, some of it will just be
- waste, some of it will be by-products some of it is actually
- used to fuel the refining process.
- I won't write that number, the rest is "other stuff."
- So let's say, this refinery is paying $90 per barrel
- when it gets it, so that incorporates what the oil procuders
- are getting, and it also takes care of the transportation
- costs to the refinery, and let's say jsut for the sake
- of argument that the refinery can sell
- Let's say that it doesn't even take care of the transportation
- network, let's say there are people willing to buy directly
- from the refinery at the refinery, they are willing to buy
- gasoline at $3.25 per gallon, so the gas at refinery,
- people are willing to spend, the transporters are willing to pay them
- $3.25 per gallon, and so from this barrel they're going
- to get 20 gallons of gasoline, they can sell that
- at $3.25 per gallon so you're going to have
- 20 * 3.25 = $65 for the gasoline
- And then let's just say, for the sake of argument,
- they get $35 for the other stuff
- Some of this other stuff is actually quite useful, it's stuff like
- motor oil, it could be jet fuel, it could be natural gas
- All sorts of... and it can obviously be fuel to actually fuel
- the refinery, and so let's actually start building this up over here
- so one way to think about it, let me draw it this way
- so the price we're up to $3.25, this is what the price is
- exiting the refinery, what the refinery is getting for it.
- So, let's say this is one dollar, this is two dollars,
- and this is three dollars, and they're getting $3.25
- $3.25 would be like that, that is what the
- refinery is getting and one way to think about it
- It's not completely... not all of their profit is coming from the gasoline
- But one way to think about it is the refinery, after refining
- all of this barrel of crude oil that they paid $90 for,
- they're going to get $65 for the gasoline and then
- they're going to get $35 for the other stuff
- so they made a combination of $100. They were able to buy
- crude oil at $90, do what they had to do, and then
- they were able to sell it for $100, so one way to think
- about it, at least in this situation, 90% of what they were
- getting for it is their cost, it breaks down between
- the other stuff and the gasoline, so it's not super easy to break
- down, but you can say in this example a good chunk
- of it was the cost of gasoline. And it obviously depends how
- you account for it but a good chunk of it is the cost of
- the crude, and this right over here you could say is
- how much the refinery actually makes and that the amount
- it actually gets versus what it costs, so the amount
- they actually get for the product they produced versus the crude oil
- that they had to pay for, this margin is often called
- the crack spread. Just to understand what a refinery
- is doing, it's breaking up the crude oil into its various parts
- It's actually a very simple, well I don't want to say "simple process"
- When you look at a refinery you obviously don't think it's a
- simple thing, but the idea for the process is actually
- fairly straightforward, it takes the crude oil
- and it heats it up through a boiler, so right over here
- the crude is getting really hot. This is the boiler,
- the boiler is often fueled by some of the outputs of
- that oil, and then it goes into a distillation column.
- That's why you see all the towers over here in an oil refinery
- Those are the distillation columns, and so in the
- distillation columns the different parts of the oil have
- different boiling temperatures. So the very long
- carbon chains in the oil have very high boiling
- temperatures, so as hot as they are they're not
- going to boil, they're going to stay in their liquid form
- down here, and then the slightly shorter chains are
- going to boil and evaporate a little bit but
- then as they rise they're going to cool down and
- then they might condense right over here and they can
- be pulled away in pipes, and then things that have
- slightly shorter chains than that will go a little bit higher
- before cooling to even lower temperatures before going
- back into a liquid state, and they can be collected
- over here... all the way until you get to the very
- shortest chains, like the natural gas, that would be
- collected out of the top. The gasoline that you put
- in your car might be collected right over here from this
- So essentially you're breaking up that oil into
- its different parts. As for some of the different parts..
- this might be motor oil over here, the thing you use to
- lubricate, not fuel, your engine. You might have
- jet fuel up here, then you have a whole ton of different
- fuels, this might be kerosene, and all sorts of things...
- you are able to take out of that crude oil.
- But anyway, let's get back to the gasoline.
- So the refinery got $3.25, now we have to
- transport that gasoline, so let's say 10 cents for
- transportation. This is at about $3.25 here, so now
- we're going to have 10 cents for transportation
- I'll just write transportation for short.
- And then it goes to the gas station, and as I mentioned
- gas is heavily heavily taxed and it depends on what jurisdiction
- what country or even states within countries
- but for the sake of simplicity let's just say that
- it's taxed at about 50 cents a gallon, which is not that
- different from what it's taxed at in many states.
- So now we're at 50 cents a gallon so that would be
- right around... this is tax right over here going
- to the state and federal government, so let's see
- $3.25 is what the refinery got, 10 cents for transportation gets
- us to $3.35, 50 cents for tax gets us up to $3.85
- and then now we're at the gas station, it'll essentially
- cost $3.85 for the fuel, but the gas station
- needs to make some money to pay their costs
- so the gas station sells you that fuel at a $4 per gallon
- So you might say, hey! they gas station made 15 cents
- But actually a huge amount of that 15 cents goes to the
- credit card processors because most people
- pay at the pump with their credit cards, so that's why
- some gas stations like it, even give you a discount when
- you pay in cash because of that 15 cents, as much as
- or in general about 5 cents of that will go
- to the credit card fees. So the retailer will be
- left with about 10 cents of margin.
- So anyway, hopefully that gives you a sense of how
- crude oil turns into gasoline, and when you pay at the pump
- what is the breakdown for the different players
- and how much of the money is going to those different
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