The Real Economics of Oil

05/25/2011 11:55 am ET

The pubic has been given a story about gasoline that is simply not true. It is a major misdirection by the oil companies that does not give us the true economics of crude oil and the reason oil companies need to dump gasoline on the market.

Although I am not a petroleum expert, as a CPA and former forensic auditor, I audited some oil companies while working for the IRS in the late 60s when the price of crude oil was less that $5 per barrel. During the audit I learned a lot about the refining process. Today the price of crude oil is about $70/barrel. Below is part of a report from the Energy Information Administration of the U.S. Government. You can find this at

"What are the products and uses of petroleum?

There are many ways that petroleum (oil) is used. Oil is refined into useable petroleum products. Most of the petroleum products are used to produce energy. Other products made from petroleum include: ink, crayons, bubble gum, dishwashing liquids, deodorant, eyeglasses, records, tires, ammonia, and heart valves. From a barrel of oil, 47% is refined to gasoline for use in automobiles, 23% is refined to heating oil and diesel fuel, 18% is refined to other products, which includes petrochemical feedstock such as polypropylene, 4% is refined to propane, 10% is refined to jet fuel, and 3% is refined to asphalt. (Percentages sum to over 100 because there is approximately a 5% processing gain in refining.)

How many gallons of gasoline does one barrel of oil make?

One barrel (42 gallons) of crude oil, when refined, produces approximately 19.6 gallons of finished motor gasoline, as well as other petroleum products."

Approximately 20 gallons of gasoline is produced per barrel of oil. If the retail price of gasoline is about $3/gallon, the oil companies are getting $60 of revenue from a barrel of oil that costs $70. Somehow the economics do not make sense if gasoline is the major economic output of refined oil. The fact is that gasoline is a hazardous waste product that is a natural output of the oil refining process. Some of the other products that come from the refining process are asphalt, lubricating oils, paraffin wax, heating oil, tar, and other parts of industrial products.

While gasoline at most yields $60/barrel of crude oil, the remaining products yield thousands of dollars of retail value to the oil companies. Accordingly, the real money in refined oil is not gasoline. So why do the oil companies insist upon marketing gasoline so much and resisting the idea of alternative energy for automobiles? The answer is that gasoline is a hazardous waste in the oil refining process and if not consumed by the driving public would have to be disposed as a hazardous waste at a cost that would be prohibitive.

Essentially, gasoline is a waste product of the oil refining process and the oil companies get rid of their hazardous waste and charge the public to do that. It actually reduces the cost of the oil refining process and at the same time contributes greatly to the greenhouse effect of global warming. If the oil companies were not so greedy, they would give it away to the public. The fact is that these oil companies have the "chutzpah" to charge us for their garbage even though at most it only yields them $60/barrel of refined oil while the other refined products yield them thousands of dollars per barrel.

Before the piston engine was developed in the late 19th Century, gasoline was a major problem for the oil companies. Today it is a legal way for them to dump their hazardous garbage on us and yield enormous profits to them and the oil producing countries. On the other hand, there are lots of garbage waste products that can be used to lessen our dependency on oil including bio-diesel and other recycled waste products. And the Bush Administration knows the economics of oil better that any past administration and of course in their usual tradition have not been willing to tell us the truth about oil refining.

Since most members of Congress are not aware of the economics of oil refining, we should all inform them that the oil companies are fleecing the nation by charging us such high prices for gasoline when in fact the major revenue from crude oil comes from other products. The price increase of gasoline is absolutely unjustified in light of the real economics. If the oil companies had to dispose of this garbage gasoline coming from the refining process, they would not be able to make the other refined oil products economically feasible. My proposal would be to at least take the garbage gasoline off their hands for nothing so they can continue to make their billions of dollars from the other oil products. That is conditioned upon the oil companies seriously funding technology for alternative energy.