Effect of $100/bbl Oil on Gasoline Prices: Back of Envelope Calculation

Assuming all other costs – taxes, refining, distribution remain the same in dollar terms.

US $3.33/gallon; compare with approximately US $3.00/gallon September 2005.

Europe $6.87/gallon; compare with approximately $6.30/gallon.

Method of Calculation

According to available figures, when oil was $37/bbl (2004) in the US, gasoline was $1.85/gallon and the breakdown per gallon was:

47% crude

23% taxes

18% refining

12% distribution

At $100/bbl, crude prices go up 2.7 times, giving $3.33/gallon gas.

In October 2005 oil prices were $70/bbl. In Europe, gas averaged, very roughly, $6.30/gallon. Of that 70% was taxes.

Doing a back of the envelope calculation, and using the simplifying assumption that refining and distribution costs in Europe are the same, we get $6.77/gallon.

Caveat 1

If crude prices go up, it is likely that the refining/distribution costs will also increase to the extent the processes use crude. This may affect our calculations by a few cents per gallon.

Correspondingly, of course, increased prices will cut demand and that in turn should bring the price down from $100/bbl.