The Real Numbers Behind High
Gas Prices
By Dr. Steve Sjuggerud
July 1, 2008

"So Steve, what do you think the price of gas will do next?"

My neighbor owns a car dealership. He asked me this last week. Chances are, his business is feeling the one-two punch of falling home prices and rising gas prices. It's not just his business, of course. Everyone is feeling it.

I try to be an optimist. Unfortunately, in answering his question, I couldn't be optimistic...

The answer I'm sure he wanted to hear is that $4 a gallon is crazy. And if I were better at social situations, I probably would have said so and left it at that. But I'm not that smart. Instead, here's what I said...

"First, nobody knows where the price of oil or gas is headed." You should be extremely skeptical of anyone who says otherwise. "But here's what I do know..." Then I shared with him some simple math:

To give you some perspective, I put together this chart:

You think gas is expensive now? Consider this:

The chart shows the price of a barrel of oil on the left scale, versus the price of a gallon of unleaded gas on the right scale.

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Adjusted for inflation, the price of unleaded gas had been relatively stable – around $2 a gallon – for nearly two decades. The price of oil adjusted for inflation had been somewhat stable as well... around $30 a barrel since 1986.

Then, boom! The price of oil shot higher. Yes, the price of gas has doubled from $2 to $4. But that's nothing compared to oil's massive moonshot.

When you realize that the biggest part of the price of gas is the price of oil... then you can easily see how the price of gas can go higher from here.

Here's where your gas money goes...

Refiners, distributors, convenience stores, you name it, they've been squeezed trying to get you gas cheaply. (Exxon is actually getting out of the service station business!)

The high price of oil is what's done us in. Quite frankly, knowing what we know about the price of oil, I'm surprised we're not paying even more for gas now.

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"When will we get relief from the high gas prices?" I wish I could be more optimistic with my friend the car dealer, and with you. But I have to be honest...

When I size up the two pictures above, my simple answer to you is "not soon."

Good investing,

Steve

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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THE DUMBEST TAX POLICY YOU COULD POSSIBLY SUPPORT

Oil is skyrocketing... and Chevron and Exxon should be making outrageous profit margins. So let's tax those "windfall" profits! But... hold on a minute...

From March 2007 to March 2008, Exxon's profit margin was just 10%. Meanwhile, its income tax rate was about 43%.

Compare this with Microsoft: Microsoft's profit margin was over 28%. And Microsoft's tax rate was under 30%.

Microsoft makes a much bigger profit margin than Exxon. And it's taxed way less. Heck, if anyone deserves an "excess profits tax," it's Microsoft, not Exxon, right?

Do you think Microsoft's Office software is outrageously expensive? And if so, is the right solution to tax Microsoft more? Does that fix the problem for consumers?

Right now, people just want to hear that the government is doing something to fix high gas prices. Many people naively believe the gas stations and Big Oil companies like Exxon are gouging them.

But calling for a windfall tax on Big Oil is among the dumbest policies you can possibly support... and there are a lot of dumb ones to consider.