Everyone knows that "Big Oil" is gouging us at the pump.  We just KNOW it.  

Everyone agrees it's true.  Ergo it MUST be true, right? 

Well actually, no.   

At least, it’s not the oil refiners and distributors “gouging” us -- the ones we call "Big Oil." These companies are making money, but -- oddly enough -- their profit is not a significant component of the price of a gallon of gasoline. 

The number one reason for Big Oil’s “innocence”?  76% of the price of a gallon of gasoline reflects the price of the crude oil component.  

94% of the world's oil fields are NOT owned by Big Oil -- these presumed-rapacious oil companies have to buy their crude oil from the "owners" -- usually despotic governments.  It's the owners of the oil fields who profit mightily -- not "Big Oil" – and whese lucky oil field owners do the least to get us the product we need. 

So how much actual profit does Big Oil make on a gallon of gasoline? The article below drills down into the data to find answers. 

Bottom line?  In 2011, Exxon made 7 cents profit per gallon of gasoline sold. Granted, they sell a LOT of gallons per year, but 7 cents is a very small component of the retail price – and seems to represent roughly the earnings of the other Big Oil companies.

Seven cents per gallon is even less than I had penciled out in times past -- I had concluded the profit was closer to 15-20 cents a gallon -- but my work was crude, so to speak.  And my work was PRE-income tax – this 7 cent figure is doubtless AFTER the corporate income taxes are paid. On the other hand, University of Michigan's Economics Professor Mark Perry announced in a blog post that in the last quarter of 2010, Exxon reported profits of only TWO cents per gallon (abnormally low, to be sure).  

http://nocompromisepac.ning.com/group/drill-baby-drill/forum/topics/gasoline-taxes-vs-exxon-profit-per-gallon?xg_source=activity

Compare this 7 cent per gallon profit with the roughly 50 cents a gallon taxes that federal, state and local governments collect directly at the pump -- in the form of excise and sales taxes (cranked into the price).  

Not surpringly, California's total tax at the pump is significantly above the national average.  To be specific from my California fact sheet):

CA has the highest gasoline tax (tied with NY) in the nation at 67.7 cents/gallon (June, 2012).  National average is 48.9 cents.

http://www.api.org/statistics/fueltaxes/   (also CA has the nation’s 5^th highest diesel tax – 71.9 cents/gallon. National average 53.8 cents) 

But those direct excise and sales taxes are not all the taxes that oil companies (actually their customers) pay – not hardly!  It does not include the federal and state corporate income taxes on the profits, which in the U.S. approach 40% on average. Presumably the 7 cents per gallon profit is AFTER the corporate income taxes are paid, which means that the PRE-tax profit is about 11 cents a gallon.

Then there’s the oil severance taxes on oil pumped out of the ground – taxes which vary dramatically by government jurisdiction.  And let’s not forget property taxes, payroll taxes, sales taxes on equipment and consumables, insurance taxes, travel taxes, etc. – plus countless government “fees.”  Yes indeed, government does profit from the oil business – while taking zero investment risk.

While government makes many times more profit from gasoline sales than does Big Oil, that high tax cost is NOT what causes the dramatic SWING in gasoline prices.  That’s the direct result of the changing price of CRUDE oil – the oil coming out of the ground – which over time reflects the effect of supply and demand. 

According to the Energy Information Administration (EIA), the price of crude constitutes about 76% of the total cost of a $3.50 gallon of gasoline – about $2.66.  And as I mentioned above, Big Oil doesn’t own most of the oil fields of the world – as an industry, they own about 6% of the proven reserves still in the ground.  Hence they have go buy much of their crude oil from the field owners – primarily those despotic third world governments. 

NOTE:  There is a second factor that drives up gasoline prices from time to time -- disruption of the supply of  gas. Such is the case today in California -- after the fire at the Richmond, CA oil refinery.

In most states, this type of disruption is not a big problem, as gasoline and diesel can be pumped in from neighboring states over pipelines with little delay.  Not so in CA.

California lacks the pipelines to other states.  In part, that's because the gasoline in other states does not meet California's stringent refining requirements -- requirements that even in normal times increase the retail cost of our Golden State gasoline.  It requires a big effort and time to retool a refinery to produce "California blend gasoline" (called "carbob") -- something no refinery will do to meet short-term California disruptions in supply.

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Here's the WALL ST JOURNAL article on this: 

http://online.wsj.com/article/SB10000872396390443687504577563383982418536.html#printMode

 THE WALL ST JOURNAL

·         OPINION

Who Really Gets Rich Off High Gas Prices?

Exxon made seven cents per gallon in 2011. Federal, state and local governments siphoned off 50 cents in taxes.

By DREW JOHNSON

With the average price of gas in America hovering around $3.50 per gallon for regular unleaded, it costs more than $50 to fill a typical car's 15-gallon tank this summer. Why does gas cost so much?

You may blame high gas prices on rich oil company executives or greedy gas station owners. The truth is that governments rake in a larger profit at the pump than anyone—and with gas taxes on the rise in many parts of the country, there's no relief in sight.

The price of a gallon of gas is based on the combination of four costs: that of crude oil, of refining gas, of distribution and marketing, and of taxes.

Crude oil costs make up about 76% of the cost of gasoline, according to U.S. Energy Information Administration (EIA). Thus $2.66 of a $3.50 gallon of gasoline is set before the oil is even refined. Global markets, reacting to supply and demand, determine the cost of crude oil. Just like any commodity, from gold to corn, a shortage in supply or an increase in demand leads to a rise in prices.

Refining oil is the next step in the process—and the next expense for drivers. Gasoline is extracted from crude oil and additives, including lubricants and detergents to reduce engine deposits, are added. As of January 2012, the EIA found that refining was responsible for 6% of the cost of gasoline.

Distribution and marketing—the part of the process most apparent to consumers—constitutes another 6% of gas prices. That portion of the cost includes the shipping and transportation of the gasoline, a markup to cover retailers' expenses, and any advertising created to appeal to customers.

The remaining 12%—or almost 50 cents per gallon today—goes directly to federal, state and local governments in an array of sales and excise taxes. The federal gas tax is 18.4 cents on every gallon of gasoline sold in America. State gas-tax rates vary from a low of eight cents per gallon in Alaska to a jarring 49 cents per gallon in New York. Other states where it's steep to fill up include California and Connecticut—each with 48.6-cent-per-gallon gas taxes—and Hawaii, at 47.1 cents per gallon.

Some local governments have gotten in on the act, too. In California, local sales and excise taxes on gasoline average 3.1%, according to the Los Angeles Times. That works out to about 12 cents in local taxes for each gallon of gas, based on the state's current average of $3.80 per gallon.

Skokie, Ill., a suburb north of Chicago, levies a gas tax of three cents per gallon. You'll pay an extra nickel per gallon at gas stations in Eugene, Ore. And the next time you're gambling in Las Vegas, you'll need plenty of cash left over to cover Clark County's 10 cent local tax on a gallon of gas. In Florida, Brevard County (home to the Kennedy Space Center) expects to siphon more than $15 million from motorists this year, according to the newspaper Florida Today.

Put this all together, and government makes far more from gas sales than all of the oil companies put together. Exxon, for example, made only seven cents per gallon of gasoline in 2011. That's a drop in the bucket compared to the nearly 50 cents per gallon that federal, state and local governments rake in on an average gallon of gas pumped in the U.S.

Most people have to drive—whether to work, to the grocery store, to pick up kids from school or for dozens of other reasons. For some families struggling to make ends meet, paying 50 cents per gallon in taxes may be the difference between driving to work and putting dinner on the table.

So the next time you begin to blame oil companies, speculators or service stations for high gas prices, remember that no one get richer off of gasoline than government.

Mr. Johnson is a senior fellow at the Taxpayers Protection Alliance.