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CRUDE, BUT EXPENSIVE!

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In the 11 years Zvi Friedman has owned and operated his Amoco station in Cedarhurst, New York, he never imagined he would be charging more than a dollar and change for a gallon of gas. As he told THAT MONEY SHOW, "You see the regular is $1.89, the silver is $1.95, and the highest is $2.09." But higher prices don't necessarily translate into higher profits for service station owners.

According to Friedman, "The price goes up, and sometime we make even less, because once the price goes up, you feel right away there are less purchases. So people are looking to buy gas where it's two cents, or three cents cheaper. So we're losing when the price goes up." So where does the money go? Friedman certainly has his own theory. "The oil company is the only one to gain the profit," he says. That's a sentiment heard often at the pump these days, since prices started to increase in 1998. But that's not the case, according to Rayola Dougher, an economist at Washington, D.C.-based oil industry trade group American Petroleum Institute. Dougher says, "I suppose that consumers might interpret the higher price as entirely going to profits for oil industries, but it's just not so. The biggest chunk goes to just paying for the oil and getting it to market."

The American Petroleum Institute says the bulk of the money we pay at the pump actually goes to buy the expensive crude oil coming from the countries that produce it. For example, breaking down payment for the average gallon of gas, costing $1.69, yields 63 cents as payment for raw crude oil. And, as Dougher says, most of that money goes off-shore. "We import about 61 percent of the product that we use. So a lot of that money is just going overseas and going to OPEC."

Cover Photo And then there are taxes. A big chunk of that $1.69-per-gallon price goes to pay taxes levied by your state and the federal government -- as much as 18 cents to the feds, and anywhere between 8 and 36 cents to the state. Add to that an extra tarriff for clean-air: The Clean Air Act mandates different gas formulas for more highly polluted areas. According to Buff Brown, President of W.H. Brown and Company, "Those areas that have imposed the use of re-formatted gasoline are, no question, paying a higher price." Completing the picture, Dougher says, "Now the remaining money -- about 64 cents per gallon right now -- is going to refine it, to transport it, and to market the gasoline."

When supplies grew tight in the spring, however, it was the refiners pulling in the big bucks. Brown says, "When the price of gasoline increased this past spring, the refiner made the most money from that. The marketer was actually hurt somewhat. The marketer would be the fellow that buys the gasoline from the refiner and then sells it in his gasoline station."

And it's precisely because of the profitability factor that some critics are crying foul. They claim that the big five oil companies are keeping prices artificially high, because they control 40 percent of domestic oil production, about half of the oil refinery capacity, and more than 60 percent of the retail market.

Tyson Slocum, a senior researcher at Public Citizen, isn't happy with this picture. He says, "What we are seeing here is price gouging. These companies control most of the market, and they're able to set the prices that are going to have a very high return, and it's coming at the expense of consumers." Tyson points out that the top five oil companies had record profits of $40 billion dollars last year. This is an increase of almost 150 percent from their 1999 figures. But according to the American Petroleum Institute, this is not the norm. Over the long haul, most oil companies have struggled to turn a profit.

The Petroleum Institute's Dougher agrees: "If you look at the last five years, the profit margins of the petroleum industry has averaged five percent. That's a nickel on every dollar of sales. And I think it's impressive that they can get enough gasoline to every car in America every single day for a nickel." Perhaps it's only a matter of perception. When compared to the 1998 lows, gas prices now seem very high. But according to the American Petroleum Institute, we're actually paying 93 cents less than we were in the inflation-adjusted 1981 highs.

But that's little comfort for gas-station owner Zvi Friedman and his slim profit margins. All he can do now is thank his lucky stars that at least his mechanics are turning a profit. He concludes, "We, the little ones, are the victims, cause I'm buying gas for my car too."




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