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Tess Vigeland: You heard Tom and me a minute ago bandying about this phrase "a barrel of oil." Ever wondered what that means, exactly?
We did, too, and so today's Marketplace Money Summer School session will attempt to define it. At the blackboard this week: Professor Severin Borenstein.
Severin Borenstein: A barrel is 42 gallons, nothing more and nothing less.
It came about from the early days of oil drilling in the United States in the late 1800s. When the oil came out of the well, it was actually put into barrels. So all it is is a measurement. Nobody uses the barrels anymore; oil is transported in trucks and pipelines and tankers.
It's actually a term that's used in the United States, not really used in the rest of the world. The United States has stuck to barrels of oil and it's something that's so familiar to traders and to market analysts that they continue to use the term even though it doesn't really bare much relevance. Oil producers in the United States generally talk about dollars per barrel of oil, but when they get outside the Untied States, the much more frequent measure is metric tons of oil.
Back when oil cost $100 a barrel, you could take the price per barrel of oil, multiply it by 2.4 and you would get the cost of the oil that's going into that gasoline, so back when oil was $100 per barrel, the oil component of gasoline prices was $2.40 a gallon. That, however, of course, did not include the refining costs, the distribution costs, the retailing costs and the taxes.
The taxes are particularly high right now in many states because about half of all states have sales taxes that are proportionate to the price of the gasoline, so when the price of gasoline goes up, the tax you pay also goes up proportionally.
Vigeland: Severin Borenstein is Director of the University of California Energy Institute.
Next week, we take on amortization.