I’ve always wanted to see the La Brea Tar Pits. Ever since I was a boy I had heard stories of the famed petroleum pits that hold millions of fossils. When my wife, my youngest son, and I were in California a few weeks ago, we took time to visit the archeological find in the heart of downtown Los Angeles located in the Miracle Mile District.[1] Oil literally seeps to the surface through fissures in the Earth’s crust. Some of the lighter oil evaporates, leaving behind the heavy tar, or asphalt, in sticky pools. For centuries, the tar was used as a low-grade fuel, waterproofing, and insulation. Harvesting the asphalt was easy and inexpensive. No discovery teams or drilling equipment were needed. It’s not surprising that oil drilling began on the site of the oozing pits, since where there was tar there was oil.

People are complaining about the high price of gasoline. Unlike La Brea, oil does not seep out of the ground and fill up barrels on its own. Exploration, drilling, transporting, and refining are expensive. Off-shore drilling is expensive, risky, and dangerous as hurricane Katrina just demonstrated. Oil prices spiked in anticipation of the storm and its possible disruption of oil supplies. Oil and gasoline production is a lesson in economics.

I received an email from someone calling for a boycott of the oil companies. The emailer complained that they were reaping excessive profits. Where was this guy when gasoline was under a dollar a gallon just a few years ago? So-called Big Oil is one of our nation’s biggest employers. Any disruption would ripple through the economy affecting the people who explore for oil, the drilling companies that drill for oil, the manufacturers of drilling equipment, future oil supplies (that’s what profits are for), the truck drivers who haul gasoline, the stations that sell gasoline, the companies that build the stations, companies that build the trucks, the people who work at the refineries, and the list goes on and on. The oil companies employ, directly and indirectly, millions of people and pay their salaries, insurance, and “contribute” to their Social Security “trust fund.”

Then there are individual stock holders who profit from the profits. These profits ripple through the economy as stock owners buy goods with their dividends. The profit on a gallon of gasoline is less than five cents, probably nearer to three cents. The average tax on a gallon of gasoline—state and federal—is forty-two cents! The combined tax in the states of Nevada, Hawaii, and California is over fifty cents per gallon![2] So then, government makes more than TEN TIMES what the oil companies make on each and every gallon of gasoline. The oil companies take all the risks, supply American’s with cheap fuel, get all the grief, and the State collects most of the money. Gasoline prices today, when adjusted for inflation, are no more expensive than it was in the early 1970s when it was, in some places, a dollar a gallon. Go back and look at the price of homes, cars, and food, and you will see that gasoline prices have gone up, but no greater than any other commodity. It’s harder to find oil, which means it’s more expensive to extract. This is basic economics.

We ignore the fact that government is the biggest hindrance to domestic production and supply with its regulations, failure to allow more drilling in the United States, and obstacles that hinder the building of new refineries. Few people know the amount of tax that’s tacked on to every commodity sold in America. The next time you stay in a motel or hotel, notice the taxes. The next time you look at your phone bill, notice the taxes.


[1] www.tarpits.org
[2] www.energy.ca.gov/gasoline/statistics/gas_taxes_by_state_2002.html