The ART Of Business

$5 a gallon gas! $9 a gallon water?

The former CEO of Shell turned some heads recently when he predicted that gas would be over $5 a gallon by 2012.

Many analysts have predicted that $4 a gallon is well within reach by this spring.

Although such price levels would certainly negatively impact the U.S. economy, some perspective might help.

I just filled up at my local station here in Cleveland for $3.18 - regular unleaded.

In Ohio, the combined local, state, and federal tax on that gallon is 48 cents - right at the national average.

I also bought a bottle of 20-ounce bottle of water at the quickie mart inside the same station. That cost $1.49 with no tax charged, as it is a grocery item.

So let's do the math to see which is cheaper: the retail price of the gasoline or the bottled water?

First, backing out the taxes, the gallon of gasoline was $2.70.

Next, we need to figure out how much a gallon of the bottle of water would have cost. There are 128 fluid ounces in a gallon. So, it would have taken more than 6 of the 20-ounce bottles to make a gallon. So, the baseline cost of the water would have been around $9.50.

Now I realize this may seem to be comparing apples to oranges- or at least water to oil. Still, there is a key takeaway.

Clear enough is the fundamental reality that the total cost of discovering, accessing, refining, transporting, and distributing oil- along with earning a nice profit for everyone involved- is pretty cheap, even at $4 or $5 a gallon.

The discussions surrounding alternative energies are nice.

But until a global supply chain is constructed that can move another form of energy cheaper, we- like our great-grandparents before us and our great-grandchildren after- will remain full-fledged members of humankind's Oil Age.

TAGS: Supply Chain
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