Get ready for $6 gas

Interesting math from George Ure of Urban Survial on the weekend edition of his daily news brief:

The run-up of oil prices this week about ensures $6 gas this summer. here’s why:

A barrel of oil is 42 gallons. That means the raw material cost to make gasoline or diesel is $3.33 a gallon. Now, what do you reckon the cracking (distillation) costs are? I would guess a dollar. And transportation and Federal taxes? Another buck, you think? And then what about mark-up for the retailer? 50-cents, maybe? Throw on a heap of state and local taxes and we’re there! Just has to come through the supply chain to you.

Look for war to show up about when gas goes over $6 dollars. The pols & hacks will then blame Iran (or whoever) and the dumber of our countrymen will buy it.

That math looks pretty sound to me, unfortunately. There was a brief lull in retail gas prices around here late last week, as gas prices in my area fell to the relatively reasonable amount of $3.74 per gallon. I was in the office on Friday and saw oil prices starting to surge. My wife called me while she was out running errands, and I told her to fill up the tank on her vehicle, since I expected prices to start heading up. Sure enough, by the time I got home, the local station was back up to $3.89.

few stations in town, including one I drove by yesterday and already advertising $3.99, and I expect we will blow by the $4 mark next week. That’s only the start, I’m afraid. It seems bizarre to think that gasoline prices have risen 100% in about 15 months, but that’s what’s happened. This time, there’s no Goldman Sachs to manipulate commodity prices and trigger a free-fall drop again.

The continued rise in gas will affect everyone from the SUV-commuting suburbanite to the car-free fixed-gear cyclist. Everything we buy from food to clothes to cycling parts is trucked in, and the surge in gas costs will be passed along to the consumer at every step. If you haven’t started thinking how this rise in prices will affect your standard of living, reality will be delivering a two-by-clue to your forehead in coming weeks.

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4 Responses to Get ready for $6 gas

  1. Jim says:

    I’m not sure it’s that simple. My understanding is that a 42-gal barrel of light sweet crude will yield 19.5 gal of gasoline, in addition to quantities of kerosene, diesel, fuel oil, lubricants, paraffin wax, etc. It’s not known to me how the raw material and refining costs should be distributed among these components. As a rough estimate, however, the Urban Survival computation probably gets us in the ballpark.

  2. Bart says:

    True enough, Jim. Here’s a link that shows what you get out of a barrel of oil:

    http://www.liquidninjas.com/bbs/showthread.php?p=106569

    For what it’s worth, I didn’t intend this article to scare anyone… just to get folks thinking a bit. We humans are a pretty adaptive species… in this case we’ll need to adjust to less unnecessary motor transport, and producing more local goods again, since the high costs of transporting stuff around will probably provide the necessary incentive for people to make things locally again.

  3. As much as I might like George, I know for sure that his markup figure is wrong. Here in Wisconsin, we have a minimum markup of 6% over wholesale. That figures out to 23 cents per gallon on $4 per gallon gas and 43 cents for $6 gas. We don’t have a maximum markup, but most retailers tend to cluster around the minimum.

    This wouldn’t be such a big deal except that it sounds to me like he’s just guessing at the other numbers too. Although the gist of what he’s saying is correct (that current gasoline prices do not yet reflect $140/bbl oil) why not do a little more footwork and come up with a more accurate number?

  4. Bart says:

    Point taken… Based on what I know, George has a tendency to knock things out quick in the early AM before he gets on with his day.

    The gasoline market is an interesting animal, in that it takes a while for oil price rises to work it’s way through the pricing system, but sudden events like a hurricane or a refinery problem can cause an immediate price spike.

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