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What To Do About $5 Gas
Posted February 23, 2012
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By Kevin McElroy
Analysts (most notably, CNBC analysts) are beginning to call for $5 gasoline to hit pumps by this summer. I don't know if they will - but it's certainly within the realm of possibility.
And though we're still patting ourselves on the back here in the United States for increasing oil domestic oil output, the problem has little to do with oil supply, and everything to do with refinery capacity.
For significant periods of time, refineries have swung in between profitability and non-profitability. Though the politicians at the helm mean to "punish" oil companies with higher taxes, these taxes frequently hit the bottom line of refiners harder than anyone.
Refining is a costly business - not just because it's heavily taxed at about 10% before a single barrel of gasoline is even sold, but because of the massive shipping, storage and actual product and refinery costs.
And though refining can experience periods when it has higher profit margins, on the average, it's pretty low on the totem pole when it comes to profit margins. The average for the industry is somewhere between 3-5% - which is dwarfed by railroads (12% profit margin), cigarettes (17%), and even generic drugs (6.6%).
Today, refineries in Europe and the United States are closing. Why? Well, it's not for lack of refinery demand. It's because margins are so slim, that there's no guarantee of profits in the sector anymore.
So refining capacity is beginning to be strained in the West - which is bad news for gasoline prices even if the United States is producing more oil. READ FULL ARTICLE HERE
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