Tuesday, April 04, 2006

Gas at $3.00 Again!!! Who's to Blame?

There has been much made in the news lately about the big oil companies and their enormous profits in 2005. Granted the profits were unusually large and those profits came at the expense of you and I, the US consumer, but I think it is worth while to discuss the how & why of higher oil prices.

Today, I paid $2.98 for Super Unleaded in Clayton. I was mad as........, well I was mad. $2.98 and there are no hurricanes to blame, no coups in Nigeria, no refinery fires, no peak driving season.....

What's the deal??? Who's making the $$ and why?

First, for the most part the station owners have very little flexibility in pricing. If they are a branded gasoline chain (Exxon, Mobil, BP, etc) their pricing is pretty much set for them. The independent gas station has the right to buy from the lowest cost wholesale dealer and thus, will often have the best pricing in a given market. So, you might ask, if I can't blame the station owner, how about the big oil guys making $36 billion in profits?

Well, that would seem to be the logical jump, but oil is different from most other businesses. Walmart determines the price of the goods on their shelves. Time Warner tells you what you will pay for their cable services. Oil, however, is a commodity and it's price is - in a perfect world - driven by supply and demand in the marketplace. So, Exxon et al are really just selling their products to the consumers at a price set by the futures markets. When oil was selling for $10/barrel in 1998 it wasn't Exxon that chose that price, it was the market. I'd point to the major gold producers that are churning out all the gold they can at $500/ounce because they remember the days of $375/ounce really well. Big oil deserves some of the blame for their post-Katrina information flow which spiked prices, but for the most part their profitability is a by-product of supply/demand issues which are out of their control.

Okay, so if it's supply/demand let's look at that equation. Supply is pretty tight around the world right now with Iraq pumping less oil than pre-war and refinery capacity still constrained post-hurricane season. Demand, however, is the real problem in my opinion. Enormous new demands from China, India and the US are pushing demand for oil to unseen levels and unfortunately, I don't see a slowdown in demand coming.

The final factor is the equation is the market itself. Futures and options on futures for oil were really a niche 5 years ago with a handful of skilled traders investing alongside major consumers of oil (airlines, etc). However, this market has become the new wildwest for aggressive hedge funds and hot traders. Over the past few weeks oil prices have moved up on reports by scientists forecasting another strong Atlantic Hurricane season. In the past, hurricanes would move the oil market, but only when you could see them shutting down the rigs in the Gulf of Mexico. Now the forecast for an upcoming hurricane season is moving the market - that is a sure sign of speculators.

So, if you're looking for someone to blame for high prices at the pump look at

* Big Oil Companies - 30% to blame because they did not explore enough in the 90's w/oil at $10/barrel (but ask yourself how many houses you were building in 1991? If you'd been building when prices were low you'd be printing money right now like Exxon.)

* Yourself and your neighbors - 50% to blame because your car still gets only 19 miles/gallon and you like buying $0.88 dinnerware at Walmart made in a Chinese factory which uses more and more Russian and Mideast oil every day.

* Speculators in the oil markets - 20% to blame - This is a small group, but they exert a tremendous amount of influence over the price of oil.

Just my 2 cents, but I thought it might be valuable primer to know where to point your anger when you're paying $3.15 for regular unleaded in June :(


Anonymous said...

Good article!

Anonymous said...

sure what you are saying is true, but why such a jump so fast when the prices were down to 2.18 a gal.

Anonymous said...

Well in one sense you are right...no coups in Nigeria, no peak driving season, etc, etc. The profits of the major oil companies come from one thing and one thing only and that is supply and demand. The oil fields that are producing the oil that is used today were probably generating a profit at $25 per barrel. We have expanding economies surging ahead in India and China, using more and more oil each day. Unless there is a major recession in one or more of the major economic countries the supply will remain tight. So as price of oil remains above $60 ($66.40 this morning)for a prolonged period of time we will see $3 gas real soon.

Any disruption in supply at this point and we will see $3 gas sooner. I remember reading years ago (10+ yrs) that the amount of big SUVs and trucks we Americans drive contribute 10 cents to a 1.50 galloon gas. That should be more like .30 now.

ok so now to the profits. It's not like these companies buy their oil at market prices. They are pumping from wells drilled perhaps years ago in fields well developed.

entropy@twcny.rr.com said...

Hi, Just wondering why you buy the SUPREME gas @ $2.98 g. Are you driving a Arab Charity Wagon like a Caddy??? Premium gas gets less mileage than regular because it is refined more and therefore contains less energy and therefore gets less MPG than regular. A law of physics! Also if your Arab Charity Wagon does not require Premium fuel, the extra cost only gets you more expense!!! There are no advantages to premium fuel other than greater anti-knock protection which most engines of late design do not require. Only Arab Charity Wagons; Caddie, Masarati, Ferreri, etc. require premium anti-knock fuels. Edo from Clayton

The Artful Blogger said...

Thx for all the feedback today, we're closing in on 1,000 unique visitors today. Oil and gas prices certainly get everyone's attention.

Regarding the recent run-up of prices it is difficult to talk in broad terms (the proportion of oil being refined for gas is a major factor) but the market speculators pushing prices up on hurricane/summer driving news played a meaningful role.

Regarding the big oil companies and the markets. You are right to assume that the oil companies are not paying the market price. Their cost to get a barrel out of the ground varies but is usually in the teens-$20's per barrel. I can't be upset with them for selling their product for a profit when the market is setting the price. It is akin to saying you'd like to buy a share of Google for $50 but the market says it costs $400/share. Can you blame Google for selling a share at $400 even if you think it's only worth $50?

Finally, I do agree that if your owner manual says to use 87 octane you certainly should not pay for Super. However, some high performance engines do require Super (92 octane or higher).

Finally, there is a need to clarify one misperception that seems to be pervasive - only one country from the Middle East is among the TOP 5 suppliers to the US.

1. Canada
2. Mexico
3. Saudia Arabia
4. Venezuela
5. Nigeria

"Why don't you ask the kids at Tiananmen Square,

Was fashion the reason why they were there?"

Anonymous said...

I think we should Nuke em all