Explaining high gas prices

David MoonBlog

A popular narrative is that corporate greed is to blame for higher gas prices. That ExxonMobil earned twice as much in the first quarter of 2022 than in 2021 is offered as “memeconomic proof” of the argument.

You will get no disagreement from me that oil company executives are greedy. But blaming higher gas prices on some sudden increase in corporate greed is naïve, illogical and wrong.

ExxonMobil’s first quarter 2022 earnings of $5.48 billion were twice that of Q1 2021. But its first quarter 2022 earnings were 38 percent lower than the in the fourth quarter of 2021, despite higher gas prices in 2022. Were the executives less greedy in early 2022 than in late 2021?

It makes no sense.

Relative to gas usage, an extra $2.7 billion in ExxonMobil earnings is a tiny drop in the gas can, equal to eight cents for each of the 33.2 billion gallons Americans burned in the first quarter of this year. Gas prices were an average of $1.20 higher in the first quarter of 2022 compared to a year earlier. Eight cents is a rounding error.

It is bizarre to blame oil refiners for some imagined unwillingness to produce more gas. Except for companies that also have upstream exploration operations, refineries must purchase higher priced crude oil to convert into gasoline.

There are four major items that comprise the price of gasoline: refining, distribution, taxes and crude oil. The price of oil is easily the largest cost driver, usually comprising 50-to-60 percent of the cost of gas. Refining (including refiner profits) is currently about 20 percent of the cost of gas. Distribution (again, including distributor profits) is 15 percent. Depending on the state, the final 10-to-15 percent of the cost is taxes.

As is always the case, the changing price of crude oil is almost wholly responsible for the increase in gas prices.

So why is the price of oil higher? While the price of oil is related to supply and demand, it is even more directly affected by oil traders’ expectations of future changes in supply and demand. World production and consumption of oil is about 95 million barrels a day – and those figures change by small degrees, not in swings that would explain a doubling of oil prices in only 18 months.

The simple (and complex) reason oil prices have increased is because oil traders expect them to increase. And that has little to do with greedy Exxon executives, the Keystone Pipeline, Covid cash, federal budget deficits, Putin’s price hike or war in Ukraine. When running for president, Joe Biden guaranteed that he would “end fossil fuels.” Oil traders simply believed him.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.