They are out there. Big corporations, out to bleed us dry, suck up every penny they can, plumb the depths of our finances, run up our debts and reap the profits of interest. Yes indeed, they are out there and they should be hammered for taking advantage of us.

But let’s be real. The vast majority of the population is a willing victim. Think about it. In a country where we have safe potable water delivered directly to our own homes, readily available through multiple taps conveniently located throughout our domiciles, at a rate of four dollars or less for a thousand gallons(1), we happily spend $1.25 for a 20 ounce bottle of water from a soda machine. Simple math says that a thousand gallons of bottled drinking water from a soda machine would cost $8,000. So, if you think about it, there are companies out there which take a four dollar initial investment and turn it into $8,000 because that’s what we want. Shoot, that’s two million gallons of water from your tap!

Let’s contrast the price of gasoline. A barrel of crude oil contains 42 gallons of oil. Current cost of crude is about $125 a barrel(2). Refineries currently are able to convert about half a barrel of crude oil to gasoline(3). That means that it takes two barrels of crude to make one barrel of gasoline. So an initial investment of $250 in crude oil will reap a return of $147 in gasoline at $3.50 a gallon at your local gas station. And the oil companies don’t see all of that $147 because part of it provides the gas station with its profit. Now, I’m sure the oil companies utilize the remaining portion of the crude oil in other products in order to generate profits as well, such as diesel fuel, plastics, and other petroleum based products. They have to, because the simple math here shows that gasoline alone simply cannot generate the returns necessary to make a profit. How’s this compare with the bottled water profits from the soda machine?

Taking this in another way, let’s look at the historical price of gas. I remember gas reaching $0.79 a gallon during the “energy crisis” of the 1970s with inflation rates upwards of 12 to 15 %. A little over thirty years later, the price of gas is $3.50 a gallon and inflation rates are 4%. So gas has gone up by a factor of about four while inflation rates are almost a quarter of what they were then. Heck, the unemployment rate, which peaked at about 11% in the early 1980s, is currently at 5%.

Want another example? Try this one out for size. A quick search for “gas sippers” on the internet produced an article listing 10 cars with their advertised mileage. The highest mileage listed in this article was 27 MPG city/35 MPG highway(4). Now, I will not name the vehicle and I’m not saying nor implying that this vehicle is the best or highest mileage available, simply that it is the example I choose from a random search. You can check my source or do your own research. Now let’s do some math.

I own a used 1995 Buick LeSabre. It is in good condition and serves me well. Believe it or not, I get 33 MPG at highway speeds of 65 to 70 MPH. In town I get 21 MPG and I have gotten as high as 39.6 MPG at 55 MPH on the highway. Since I do most of my driving on the highway, we will use 33 MPG in my calculations.

The vehicle I looked at cost just over $21,000. Converted to gallons of gas, this would be $21, 000 divided by $3.50 per gallon or 6,000 gallons of gasoline. If I were to keep my own car and spend this money on gas I could drive 198,000 miles. I drive about 40,000 highway miles a year. This means it would take me about 5 years to use 6,000 gallons of gas. If I bought this new car, I would spend $21,000 for the car and have to buy 5, 657 gallons of gas at $3.70 a gallon (did I mention all the cars in this gas sipper article used premium gasoline?) for an additional cost of $20, 931 to drive the same distance. So, replacing my perfectly fine LeSabre for this new car will cost me $41, 931 over a five year period, not counting new car insurance rates and future gas price increases. I could drive almost 400,000 miles for that. Oh, yeah…and I get a MUCH smaller vehicle, too. Also, the fact that the car uses premium gas would offset the 2 MPG advantage of owning this new car. Even if the new car used regular gasoline, this 2 MPG advantage would only save me $1,200 in gas over five years. This means I would have to own this new car for almost 18 years just to break even on the cost of purchase. Replacing my existing car for a “gas sipper” to save me money in gas would not make economical sense unless I was already in the market for a new vehicle in the first place.

I fully realize there are other reasons for buying a new vehicle and that there are a lot of vehicles out there to choose from to meet one’s needs. I also realize that my car probably will not make it to 400,000 miles without at least one major mechanical failure. But the fact remains that there are very few cars out there which get the poor performance and mileage typical of the automobiles of the 70s and early 80s. Properly cared for, most modern automobiles currently on the road will get mileage ratings comparable with similar sized new vehicles. You want better mileage? Three decades of driving experience tells me how you can immediately increase your gas mileage by 10% or more without spending any extra money on gizmos or gadgets: drive slower! 5 MPH difference in speed on the highway for most cars will change your mileage by about 3 MPG. Think about that the next time you’re driving over the speed limit and try it. Remember the 55 MPH limit imposed in the 70s? There were reasons for it, agree with them or not. The cost of replacing a reliable older vehicle with a new one is an economic disaster to your budget, yet people willingly do it all the time.

Here’s yet another example of market woes: corn prices have more than doubled over the last year alone(5). Why? Because there is this huge perception that corn produced ethanol will help us save money at the gas pumps. Never mind that in order to make this ethanol our farmers will produce more corn at the expense of other crops which will result in increased prices at the grocery store for all those other vegetables we buy as well. And, contrary to popular belief, corn produced ethanol is NOT a renewable resource. All those nutrients the corn removes from the soil in order to grow have to be replaced. The major source of the nitrates used for this? They come from natural gas(6). Add in all the other resources necessary to produce ethanol as a fuel to support our economy, including how these changes affect the world market, and it rapidly becomes apparent that there is an overall price increase which more than offsets the savings at the gas pump.

Things that make you say “Hmmmmm….”.

There are numerous other examples of market costs, price increases, housing woes, interest rates, legal rulings, etc. which I could bring up. But the whole point of this article is: THINK before you start complaining about how “big corporations” are raking us over the coals. It does happen. But there are many factors which determine how our market functions financially, and as individuals we cannot seriously place all (or even most) of the blame for our woes on “big corporations” if our own actions are screaming that it is OK in the first place.

I mean come on, folks! We want to give companies $8,000 for $4 worth of water! Whose fault is that?

Sources

NOTE: All sources and numbers as of May 11, 2008

1. 2008 Virginia Water Rates by Locality
2. Crude Oil Price Forcast
3. What is a Refinery? (A Lesson in How to Make Gasoline)
4. Edmunds Inside Line - Guiltless Gas Sippers: 10 Cars That Deliver the Most Fun Per Gallon
5. Wikinvest - Corn Prices
6. American Lawns - How Fertilizer is Made

by Glenn E Moss CIV NNSY, C2330 © May 11, 2008 - email:  (I will forward emails)
 

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