What’s up with

November 2014

More expensive crude oil drives up gasoline and diesel prices. Historically, as crude prices have increased, so have fuel prices. The reverse is also true.

What consumers are paying for at the gasoline pump. The biggest single component of retail gasoline prices is the cost of the raw material used to produce gasoline – crude oil. In September 2014, crude oil alone made up 64 percent of the price to consumers at the gasoline pump. Excise taxes accounted for 12 percent of the price of gasoline. Refining the crude oil into gasoline added another 14 percent to the retail price of gasoline. Transporting and retailing accounted for 10 percent.

A host of factors affect the price of crude oil. The global economic recovery is increasing demand for oil as unrest in the Mideast and North Africa has put supplies at risk. This combination of rising demand and reduced supply has helped to push prices higher. In addition to economic growth and geopolitical risks, other factors, including weather events, inventories, exchange rates, investments, spare capacity, OPEC production decisions, and non-OPEC supply growth all figure into the price of crude oil.

Gasoline, Diesel and Crude Oil Prices

Where Your Dollar Goes at the Pump?

Factors Affecting Prices

Source: NYMEX (WTI crude oil) and AAA (gasoline and diesel) as of November 13, 2014.

Source: EIA estimate based on average price of gasoline of $3.41 per gallon, September 2014.

Source: EIA

$0

$1.00

$2.00

$3.00

$4.00

$5.00

May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14

Diesel (AAA) $1.77

Gasoline (AAA) $2.91

WTI Crude Oil (NYMEX) $3.64

November 13, 2014

What’s up with Fuel Prices?

Source: U.S. Census Bureau for U.S. manufacturing, and Standard & Poor’s Research Insight for oil and natural gas.

Source: Who Owns America’s Oil and Natural Gas Companies, SONECON, October 2014.

8.2

2009-2013 2013 2Q 2013 2Q 2014

6.8

9.0

7.0

9.1 9.3

7.2

8.0

What’s up with Fuel Prices?

Comparing earnings. Oil and natural gas earnings are typically in line with the rest of the U.S. manufacturing industry, averaging about 7 cents of every dollar of sales over the last five years. This fact is not well understood, in part because reports usually focus on only half the story — profits. Profits reflect the size of an industry, but they’re not necessarily a good reflection of financial performance. Profit margins, or earnings per dollar of sales (measured as net income divided by sales), provide a more useful way to compare financial performance among industries of all sizes.

If you’re wondering who owns “Big Oil,” chances are good the answer is, “You.” Contrary to popular belief, and what some politicians might say, America’s oil companies aren’t owned just by a small group of wealthy insiders. Only 2.9 percent of industry shares are owned by corporate management. The rest are owned by tens of millions of Americans. If you’re part of the 57 million U.S. households with a mutual fund, or the 46 million with personal retirement accounts, or the 61 million with a pension plan, there’s a good chance you invest in oil and natural gas stocks.

Earnings (Cents of Net Income per Dollar of Sales)

Who Owns “Big Oil?” (Holdings of Oil Stocks, 2014)

6.9% Other Institutional Investors

24.7% Asset Managment

Companies (Including Mutual Funds)

17.9% IRAs

28.9% Pensionfunds

18.7% IndividualInvestors

2.9% Corporate Managment of Oil Companies

U.S. oil and natural gas companies pay their fair share of taxes and are a tremendous source of public revenue. Some in Congress want to raise taxes on American oil and natural gas companies despite the fact that they already have an effective tax rate of 40.2 percent compared to 25.6 percent for all other S&P Industrial companies. In fact, U.S. oil and natural gas companies pay more than $84 million dollars to the federal government in both income taxes and production fees every single day. Increasing taxes could wipe out American jobs and hurt American businesses. A study from Wood Mackenzie3 found that in the long run, the negative economic consequences of higher taxes will more than offset any short-term gains in tax revenue.

What policymakers can do. Greater oil production tends to decrease oil prices, thus reducing the cost of producing gasoline, diesel, aviation fuel and other crude oil products. With current global uncertainty and turmoil in oil producing regions, America needs to regain control of its energy future with policies that encourage increasing oil production here at home, and that approve partnering with our reliable neighbor, Canada, to develop new pipeline capacity to export Canadian crude oil to the United States. This policy path would create hundreds of thousands of new jobs, generate billions in more government revenues, cut the trade deficit, and provide greater U.S. energy security.

There are two policy paths that we can take. We can grow the tax base with new energy development and all the benefits that come with it, or we can shrink it with new taxes. The choice is clear.

1 GICS Industry Group Code 1010.

2 S&P Industrials are extracted from the S&P 1500 by excluding companies in the Financials(GICS Sector = 40), Utilities (GICS Sector = 55), and Transportation (GICS Industry Group = 2030).

3 Wood Mackenzie, “Energy Policy at a Crossroads: An Assessment of the Impacts of Increased Access versus Higher Taxes on U.S. Oil and Natural Gas Production, Government Revenue, and Employment,” January 2011.

We count on our cars to get us where we want to go, when we want to go. That sense of freedom is important to us, but we also want to be sure we do our best to conserve natural resources for future generations.

Here are a few simple steps you can take to meet these goals.

Fuel-saving tips for drivers.

• Have your car tuned regularly. An engine tune-up can improve car fuel economy by an average of 1 mile per gallon.

• Keep your tires properly inflated. Underinflated tires can decrease fuel economy by up to 1 mile per gallon.

• Slow down. The faster you drive, the more gasoline your car uses. Driving at 65 miles per hour rather than 55 miles per hour reduces fuel economy by about 2 miles per gallon.

• Avoid jackrabbit starts. Abrupt starts require about twice as much gasoline as gradual starts.

• Pace your driving. Unnecessary speedups, slowdowns and stops can decrease fuel economy by up to 2 miles per gallon. Stay alert and drive steadily, not erratically. Keep a reasonable, safe distance from the car ahead of you and anticipate traffic conditions.

• Use your air conditioner sparingly. The use of air conditioning can reduce fuel economy by as much as 2 miles per gallon at certain speeds and under certain operating conditions.

• Plan your trips in advance. Combine short trips into one to complete all your errands. Avoid traveling during rush hours if possible, to reduce fuel consumption patterns such as starting and stopping and numerous idling periods. Consider joining a car pool.

© Copyright 2014. American Petroleum Institute (API), all rights reserved. API Digital Media: DM 2014-193 | 11.18 | PDFFind out more at www.api.org

40.2%

25.6%

1

2

What’s up with Fuel Prices?What’s up with Fuel Prices?

Source: Compustat North America Database (March 2014 update).

Income Tax Expenses as Share of Net Income Before Income Taxes (2012)