Why is a gallon of gas cheaper than a gallon of milk?

by Robert L. Fares
Tuesday, July 12, 2016

For most of the last decade, the price of a gallon of milk has exceeded the price of a gallon of gasoline. Credit: data from U.S. Bureau of Labor Statistics Consumer Price Index; graph: Robert L. Fares.

I often tell people that one of the challenges associated with transitioning away from fossil fuels is that the amount of energy they contain is truly miraculous. A gallon of gasoline contains enough energy to push a modern sedan more than 30 miles down the road. Imagine throwing your car in neutral and pushing it for 30 miles — the energy required is roughly equivalent to the amount provided by that gallon of gasoline. Yet a gallon of gas weighs a mere six pounds and, on average in the U.S., costs just $2 to $3 — less than a gallon of milk. Truly miraculous.

But why does a gallon of gasoline — a nonrenewable resource millions of years in the making that requires extensive processing and is often transported halfway around the world — cost less than a gallon of milk, an often local resource produced by renewable cows fed renewable grass? The price disparity isn’t just a product of the global oil price decline that began in late 2014. According to the U.S. Bureau of Labor Statistics Consumer Price Index, the average price of a gallon of gasoline has been less than the price of a gallon of milk for the most of the last decade.

The average price of a gallon of gasoline was just $2.02 in March 2016 — more than a dollar less than the average milk price of $3.19 per gallon. Purchasers of organic milk in some parts of the country may see prices close to $7 per gallon. To understand what’s behind this price difference, let’s look at how both milk and gasoline are produced, stored and ultimately transported to consumers.

Gasoline begins as crude oil, which is an amalgamation of different hydrocarbons naturally formed over millions of years and extracted from the ground by drilling rigs. Most of the U.S. crude oil supply is produced domestically in Alaska, North Dakota, Texas and the Gulf of Mexico. What isn’t produced in the United States is imported, mostly from Canada and the Middle East.

After it is produced, crude oil might be stored for months at a time in large tank farms before it is eventually sent via pipeline to a refinery, where it is superheated into a vapor and then distilled from a gaseous mixture of hydrocarbons into constituent fuels such as gasoline, diesel and jet fuel. These liquid fuels are then piped from the refinery to terminals, where the fuel is stored in tanks until it is loaded into fuel trucks and delivered to gas stations or wherever else it’s going. The total time from extraction at the oil well to consumption at the gas pump depends on the availability of oil production, refinery capacity and consumer demand. Ordinarily, it takes weeks to months for crude oil to make its way from the wellhead to your gas tank.

Like gasoline, milk begins as a raw liquid that must be processed into a consumer-grade product. About 57.5 million gallons of raw milk a day — or about 21 billion gallons a year — are produced at more than 60,000 dairy farms throughout the United States.

Because milk is prone to rapid spoilage, it is stored at cool temperatures from the moment it leaves the cow. Raw milk is collected in storage tanks or silos on the farm and stored below 39 degrees Fahrenheit for no more than 48 hours before it is picked up by a milk tanker. From there, raw milk makes its way to a factory for processing, where it is pasteurized, homogenized, separated into various levels of fat content, and ultimately packaged into jugs and cartons for delivery to grocery stores.

All of this processing occurs under tightly controlled conditions with constant monitoring to ensure the milk meets consumer health standards. The total time from extraction, to pasteurization and packaging, to delivery to the grocery store is usually about two days. The time from cow to carton is short because delays in processing and shipment cut valuable days from its shelf life.

This brings us to one of the main reasons milk is more expensive than gasoline: It is perishable, and thus must be processed and used relatively quickly.

The fact that milk has to be refrigerated means that it cannot be moved via pipeline — by far the most efficient way to move liquid products over long distances. Instead, milk must be moved in well-insulated tankers or refrigerated trucks. Oil, on the other hand, is commonly moved around the country via pipeline. Furthermore, milk cannot be stored for long periods, which helps manage the balance between supply and demand in the market, while oil can be stored for months at a time in massive tank farms. The tank farm in Cushing, Okla., for example, can store up to 80 million barrels of crude oil — enough to make more than 1.5 billion gallons of gasoline.

The other price-relevant distinction between milk and gasoline is that milk is distributed in individually packaged cartons and jugs. A typical American household only consumes a gallon or two of milk each week, so there is no need for the large-scale pumps and tanks used for gasoline. Instead, it is more convenient to buy milk a gallon or half gallon at a time — and the packaging for each jug and carton adds to the overall cost per gallon. Furthermore, the lower volume of total milk consumption versus gasoline consumption means that producers benefit less from economies of scale, and have to charge more per gallon to cover fixed and overhead costs.

An example that illustrates how much delivery and packaging differences can affect cost is the price of bottled water versus tap water. According to the International Bottled Water Association, the average price per gallon of bottled water was $1.20 in 2014, whereas the price for tap water was about $2 per thousand gallons — or 0.2 cents per gallon — according to the U.S. Environmental Protection Agency. While some of the additional costs for bottled water are associated with purification and marketing, much of the difference comes from the fact that bottled water is individually packaged and distributed by truck or train instead of by pipeline. If we could have a tap for milk in our home fed by municipal pipelines, it would probably be a lot cheaper than pre-packaged milk — of course, piping milk like we do water is impractical because we consume so much less and milk must be refrigerated.

Some of the price differences between milk and gasoline are, to be sure, related to things not directly associated with how they are produced and distributed. For example, both milk and oil prices are affected by myriad regulations and subsidies. But it is the fundamental differences between milk and gasoline — shelf life and the scales of production, distribution and consumption — that drive a gallon of milk to cost more than a gallon of gasoline.

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