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A Project of The Annenberg Public Policy Center

Playing Politics with Gasoline Prices

Both parties make questionable claims about gasoline, oil.


Democrats and Republicans disagree on energy policy, but this they share: Both shade the facts on the complex issue for political advantage. 

  • Republicans say repealing oil industry tax breaks will drive up costs at the pump. However, nonpartisan congressional analysts and industry experts say higher taxes would have little or no effect on gasoline prices.
  • Senate Democratic leaders asked the Federal Trade Commission to investigate oil refiners for limiting supply "to keep prices artificially high." But the FTC says the "vast majority" of past investigations found "market factors," not collusion, to be the cause of price spikes.
  • President Barack Obama in a weekly address said policies already adopted by the administration "could save families as much as $3,000 at the pump." Maybe so. But that's an administration estimate of cumulative net savings over six years for somebody buying a new car in 2016.
  • Sen. Rand Paul claimed that oil companies earn only 7 cents on a gallon of gasoline. Not true. That figure does not include profit from producing and selling crude oil, so it grossly underestimates the amount companies earn on high gasoline prices. One oil analyst calls the figure "disingenuous."


Gasoline prices have been hovering near or above $4 a gallon for months, and the summer driving season is only just about to start. The reasons for high prices at the pump are many, beginning with the high cost of crude oil — which accounts for about two-thirds of the cost of gasoline. Energy Information Administration data shows spot prices of crude oil have been near or above $100 a barrel since late February.

Oil industry analysts say several factors contribute to high cost of crude oil: increased demand for oil as the world economy begins to recover, turmoil in oil producing countries in the Mideast and North Africa, a weaker U.S. dollar, and speculation in the oil futures market.

The focus in Washington has largely been on the oil companies. Democrats have called for the repeal of oil industry tax breaks, and they suggest that refiners are illegally manipulating gasoline prices and gouging the public. Republicans have called for increased domestic oil production and warned that any attempt to penalize oil companies will cause more pain at the pump for motorists. The partisan debate has produced some questionable claims.

Will Repealing Tax Breaks Raise Prices at the Pump?

The Senate on May 17 voted down a Democratic bill that would have repealed tax breaks for major oil and gas companies to the tune of $21 billion over 10 years. But with the price of gasoline remaining high, the issue isn't going to go away. The Democrats immediately vowed to bring the issue up again during negotiations on raising the debt ceiling, and they have been using the issue of tax breaks to help raise campaign cash. 

During and after the vote, Republicans warned that repealing tax breaks would raise prices at the pump, as Sen. Rand Paul of Kentucky claimed in his May 17 floor speech before the vote. 

Paul, May 17: We are going to raise costs to the oil companies by raising their taxes, which means we will pay more at the pump. It is economic illiteracy and it is what is wrong up here in Washington. We still have too many people who do not understand the basic economic realities. If you raise costs on a business, if you raise taxes on a business, you will raise prices at the pump.

A day after the bill failed, Sen. Lamar Alexander of Tennessee also said on Twitter that repealing oil tax breaks would raise gasoline prices:

Alexander, May 18: Why, when the problem is high gas prices, is the Democratic solution to raise them more?

Will repealing the tax breaks increase the cost of gasoline at the pump? Not much, if at all. It would depend on what tax breaks were repealed. The nonpartisan Congressional Research Service said the Senate bill would be unlikely to raise gasoline prices.

CRS, in a May 11 letter to Sen. Harry Reid, said the Senate bill likely would not raise gasoline prices. CRS said that the price of gasoline is largely based on the price of crude oil and that the tax changes would not affect crude oil production; therefore, the price would likely not be affected.

CRS, May 11: The price of gasoline is composed of four components. The largest component of the price is crude oil, 67%, followed by federal, state, and local excise and sales taxes on gasoline sales, 13%, refining expenses, 11%, and distribution and marketing expenses, 9%. If the proposed changes in tax policy result in increases in the price of gasoline, it would generally be through an increase in the price of oil. However, the price of oil is determined on world markets and tends not to be sensitive to small cost variations experienced in regional production areas. In the recent market environment, with the price of oil averaging approximately $90 per barrel over the period December 2010 through February 2011, and the current price over $100 per barrel, prices are well in excess of costs and a small increase in taxes would be less likely to reduce oil output, and hence increase petroleum product (gasoline) prices.

However, CRS said two months earlier that President Barack Obama's 2012 proposed budget – which would impose higher taxes on the industry – could cause a “small scale” increase in gasoline prices. The Obama budget would repeal tax breaks and make other changes that would impose a $46.2 billion tax hike (page 147) on the industry over 10 years — more than double the size of the tax hike contained in the Senate bill.

CRS, March 3: On what would likely be a small scale, the proposals also would make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence.

Tom Kloza, an oil industry analyst and founder of the Oil Price Information Service, agreed that the impact would be negligible. "It is a small amount of money considering the huge sums flowing in and out of oil futures," he said, referring to the commodity markets.

The two CRS reports are often mixed up and misquoted. The March report on Obama's budget was cited by Republicans as proof that the Senate bill would raise prices at the pump — even though that's not what the CRS said in its report on the Senate bill. Republican Rep. Phil Roe did exactly that in his May 11 weekly column.

Also, Republicans have taken this CRS quote from the March report out of context: "On what would likely be a small scale, the proposals also would make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence." In a press release attacking Democratic Sen. Sherrod Brown of Ohio on the day after the Senate vote, the National Republican Senatorial Committee provided only part of that quote, leaving out the opening clause that reads "on what would likely be a small scale" — inviting Brown's constituents to think the impact would be greater than CRS projects.

NRSC, May 18: But instead of working to expand domestic production and lower fuel costs for Ohio’s families and job creators, Brown and the liberal wing of the Democrat Party are working to raise energy taxes — a reckless move that the non-partisan Congressional Research Service (CRS) reports would “make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence.”

Such sleights of hand are worth keeping in mind as the debate continues to play out.

Are Refineries Manipulating Gasoline Prices?

On the day the Senate rejected the bill to repeal the tax breaks, Senate Democrats sent a letter to the Federal Trade Commission accusing refineries of reducing production to drive up prices, and asking for an investigation. Democrats based their claim on a report in the Kansas City Star, and they cited government data showing refineries were "using only 81.7 percent of their capacity, a decline of 7 percent from the same time last year.”

Senate Democrats, May 17: At a time when major refiners and oil companies are making record profits and American families continue to struggle with gasoline at record prices, the idea that refiners may be manipulating the market to keep prices artificially high is offensive.

EIA releases data every week on how much operable capacity is used by refiners, and the percentage varies greatly, even from week to week. It was 81.7 percent for the week ending May 6 — down nearly a full 7 percentage points from 88.4 percent from a year ago — as the Democrats said. But two weeks later, by the week ending May 20, it was 86.3 percent — down only 1.5 percentage points from a year ago (87.8 percent).

Allegations and investigations of gasoline price manipulation occur whenever the price of gasoline spikes. In 2005, the FTC issued a report called "Gasoline Prices Changes: The Dynamic of Supply, Demand and Competition." In it, the FTC said that "the vast majority of the FTC's investigations have revealed market factors to be the primary drivers of both price increases and price spikes."

In May 2006, the FTC issued a report on the spike in gasoline prices in the aftermath of Hurricane Katrina and said again it found "no evidence" that refiners reduced capacity to drive up prices. The agency said it analyzed "financial data for 30 refiners, 23 wholesalers, and 24 single-location retailers."

FTC, May 22, 2006: During the time period examined, the Commission found: no evidence to suggest that refiners manipulated prices through any means, including running their refineries below full productive capacity to restrict supply. … The evidence indicated that these firms produced as much gasoline as they economically could, using computer models to determine their most profitable slate of products.

That's not to say that refiners don't make money when the price of oil goes up. They do. ExxonMobil reported earning $1.1 billion on gasoline sales worldwide (total downstream earnings) in the first quarter of this year compared with just $37 million in the first quarter of 2010. In a PowerPoint presentation to investors and analysts during its quarterly earnings conference call in April, ExxonMobil cited “improved industry refining margins" as a reason. 

In 2001, an FTC investigation into gasoline price spikes in the Midwest during the spring and summer of 2000 "found no credible evidence of collusion or other anticompetitive conduct by the oil industry." But the agency did say it found "decisions by some firms to maximize their profits (curtailing production, keeping available supply off the market)." Those decisions did not cause the price spike, but they took advantage of it. The impact on prices was brief and, as it turns out, not illegal.

Energy experts say there is no evidence of criminal collusion this time, but they don't deny that refiners manage profit margins just like any other industry. Fadel Gheit, a former Mobil Oil executive who is now a senior energy analyst at Oppenheimer & Co., compared refiners adjusting production levels to manage profits to the airline industry canceling flights to manage ticket costs. "It's not manipulation," he said. "They are in the business of making money."

Kloza, the founder of the Oil Price Information Service, called price manipulation a "gray area." He agreed with Gheit that it is standard business practice to manage supply and that companies do not collude on prices. "A lot of the Democrats would give a more sinister air to what is probably standard business practice across manufacturing," Kloza told us in an interview.

But Kloza also said that refineries are more concentrated in the hands of fewer companies now than eight or nine years ago, so individual company decisions have a greater impact on gasoline prices.

A 2010 Congressional Research Service report said 11 of the 124 U.S. refineries "provide one quarter of total U.S. refining capacity." Figure 9 of that report shows that half of the U.S. refinery capacity (about 18 million barrels per day) is controlled by just five companies. The CRS report said Congress may want to "monitor competitive conditions in oil refining" if smaller refineries shut down and the trend toward larger, more complex refineries continues.

Will New Fuel Standards Save Drivers $3,000 at the Pump?

In his May 14 weekly address, the president talked about the high cost of gasoline and claimed his administration's new fuel efficiency standards "could save families as much as $3,000 at the pump."

Obama, May 14: As a nation, we should be investing in the clean, renewable sources of energy that are the ultimate solution to high-gas prices. That’s why we’re investing in clean energy technology, helping businesses that manufacture solar panels and wind turbines, and making sure that our cars and trucks can go further on a tank of gas — a step that could save families as much as $3,000 at the pump.

The president didn't say when families would start to see such big savings or what assumptions went into the calculations.

Obama was referring to the new fuel efficiency standards adopted by the administration last year for model year cars 2012-2016. During the rulemaking process, the EPA estimated that the new rules would increase the cost of a model year 2016 car by an average of $869, but that additional cost would be offset by fuel cost savings, because the new cars would get better gas mileage. On page 8-15 of its impact analysis, the EPA says a driver who takes a 60-month car loan on a model year 2016 car can expected a net savings of between $2,340 and $3,166 over the six-year lifetime of the car.

In other words, don't expect to save money on gasoline anytime soon.

Do Oil Companies Earn Just 7 Cents on a Gallon of Gas?

In opposing the Senate bill to repeal tax breaks for oil and gas companies, Paul claimed that the federal government makes more money in taxes on a gallon of gasoline than oil companies earn in profits. He presented a chart that carried the header "Regular Gasoline Tax v. Oil Company Profit, Per Gallon," showing 7 cents per gallon for the oil companies and 18.4 cents per gallon for the federal government. (In his May 17 speech, he said 7 cents and 18.4 cents per dollar, but it was clear from his chart that he meant per gallon.)

But the 7-cents-per-gallon figure grossly underestimates the industry's earnings. It includes only earnings from the sale of gasoline and not earnings on producing and selling crude oil. There are no independent figures on how much oil companies earn on a gallon of gasoline.

Paul's per-gallon figure is consistent with a claim ExxonMobil Vice President for Public and Government Affairs Ken Cohen wrote in his blog, "Perspectives," when the company released its 2011 first quarter earnings in April.

Cohen, April 28: During the first three months of this year, for every gallon of gasoline and other products we refined and sold in the United States, we earned about 7 cents.

We called ExxonMobil and asked how Cohen arrived at his figure. Spokeswoman Kristen Hellmer said it was determined by dividing ExxonMobil's "downstream earnings ($694 million) by the number of gallons of gasoline and other products refined and sold during the quarter in the U.S. (9,355 million gallons). The result is 7.4 cents per gallon." Downstream earnings are what the company earns from refining crude oil into gasoline and other petroleum products and then selling it. But that ignores "upstream earnings," which is how much Exxon earns in producing and selling crude oil. And the cost of oil exceeded $100 a barrel in the first quarter of 2011.

Oil industry analyst Kloza called the 7-cents-per-gallon figure "disingenuous," because it ignores high earnings from oil production. "Bringing crude oil to market has been incredibly profitable," Kloza said. "It is disingenuous to say in the downstream we are making only this much."

ExxonMobil reported that its upstream earnings were $8.7 billion in the first quarter — up $2.9 billion, or 49 percent, compared with a year ago. As of August 2010, it was the third largest oil refiner in the U.S.

In a February 2011 report called "What's Up with Gas Prices?" the American Petroleum Institute reported that on average oil and gas companies earned about "6 cents for every dollar of sales" — not every gallon — in the third quarter of 2010. Rayola Dougher, API’s senior economist, said she arrived at that figure by dividing net income by total revenues for about two dozen integrated oil companies and independent producers. By her unofficial calculations, Dougher said, the average so far in the first quarter of this year is 7.6 cents per dollar of sales. “If you are a producer and getting more money for a barrel your profits go up,” she said.

But energy experts say the API method is also flawed, as we detailed in a 2008 article on this very topic. As we said at that time, the Energy Information Administration does not attempt to calculate how much oil companies earn on a gallon of gasoline. EIA economist Neal Davis told us in 2008 that trying to calculate a per-gallon average profit for gasoline would be "heroic at best" and "sadly misinformed … at worst."

— by Eugene Kiely


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