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Here we go again! 😦

Much of what I wrote on June 11, 2008 still rings true, though I would add my further understanding of the role of speculators in this equation. Did you know a barrel of oil in Jan. 2002 was less than $20??? Some people are “speculating” that the price will go up, so they pour money into the trading market and when it does go up (thanks to them) they cash in. A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.” This isn’t just fat cat Americans doing this, it is international. It’s a whole other issue (for a whole other blog posting) about where we should be getting our oil, but suffice to say, we get almost nothing from Libya yet we are being told that is the reason for the increase…this time…

Here is my posting from nearly 3 years ago.

Fact:

The price of gas (here in America) has doubled in the past 3 years (quadrupled in the past 10 years), and is up $1/gallon in the past year alone. Over $4/gallon now.

 Why?

 Some people say “simple supply and demand”. Regrettably, this is false.

Has the demand doubled in the past 3 years or quadrupled in the past 10? No.

Has the supply been cut in half in the past 3 years or by 75% in the past 10? No.

Per http://zfacts.com/p/35.html , the current price (adjusted for inflation) is the highest it has EVER been. That includes the OPEC embargo/gas shortages and lines/Iran-Iraq war of the 70s and early 80s where the peak was $3.37/gallon in March 1981.

 Fact:

Without petroleum-based fuels, America (and the world) stops.

 Yes, we all agree we have to become less dependant on foreign oil and oil in general. Not having to rely on the OPEC cartel, Russia, Venezuela, etc. for fuel oil would be a very good thing. The solution to that is easy: drill here, refine here. But that’s a whole other ball of wax. While we need to “diversify” to protect ourselves from prices like this, the reality is that we are dependant on, foreign or not, oil/gas. Drilling and refining more at home would make gas much less expensive for us, but that still doesn’t answer the question. Why has the price doubled in the past 3 years (quadrupled in 10)?

 Per http://www.fueleconomy.gov/feg/gasprices/faq.shtml#Taxes , about 13% of the price for every gallon of gas goes to state and federal taxes. 11% is for distribution and marketing (basically the trucks to deliver it from the refinery to the gas station). 8% is for refining. And around 68% of it is the price of crude oil itself. 3 years ago, only 50% of the price was due to the price of crude. So the price you pay at the pump is, even at today’s record cost, only 2/3 dependent on the price of a barrel of oil. 10 years ago, a barrel of oil was under $20. 3 years ago, it was up to $40. In January it was $100. Today it is over $130. There is no question that the price of oil on the world market is influencing the price of gas, but it’s not the whole picture.

 Somebody has got to be making money from this…who? The shareholders and employees of the oil companies along with the market traders. Normally that is good news, but this is no ordinary product or service. It is an integral (and life-sustaining) part of our economy and our daily lives. We all need gas to go to work. Trucks need fuel to travel across the country to deliver every type of good; from food to medicine to machinery to packages. Ever think about how important airlines are to us? They need fuel too. Individuals are suffering and businesses are suffering at every level because of these prices. Wouldn’t it stand to reason that the “Western” oil companies themselves would go above and beyond (since they are supposed to be competing with each other) to LOWER the price? They were called the “7 Sisters”; now via consolidation over the past few years, they are down to 4: ExxonMobil, Chevron, Shell, and BP. There are also state-owned companies from Saudi Arabia, Russia (Lukoil), China, Iran, Venezuela (Citgo), Brazil and Malaysia, but they are not independent like the other 4 so they really have nothing to do with this topic. The laws that require useless Ethanol in every gallon of our gas was a great idea too. NOT.

 For simplicity’s sake, I will lump in the oil companies per se and their refineries (technically separate entities): Per http://zfacts.com/p/348.html ,

“Oil-Company Profits – The price-at-the pump is the sum of all the input costs plus, perhaps, some additional markup because of market power. We can tell if there’s market power by checking the price increases. Because there are 42 gallons / barrel, when the price of oil goes up by $10, say from $55 to $65, the price of gas should go up by $10/42 = 24¢. It’s actually gone up faster than this, so we know oil companies are exercising some market power and passing through a “markup,” not just their actual costs.”

That means for a $100 jump in oil prices, a $2.40 increase in gas can be expected. None of this adds up when you look at the past 10 years of gas prices. Just in the past 3, the price of oil has tripled but the price of gas has only doubled. That means the oil companies can absorb these huge “losses” and STILL post quarter after quarter of record profits since 2005. It doesn’t take a genius to figure out something very fishy is going on.

 I truly hate to sound like a whiny Liberal, but consider this. Remember the lies that prices started going way up in 2005 because of Hurricane Katrina (and Rita, etc.) knocked out many refineries? The last 2 years, no major storms at all, refineries fixed, the prices naturally went back down…oh wait…

The incredibly simple bottom line is: The insane profits the oil companies are making for the past few years are DIRECTLY PROPORTIONATE to the prices at the pump! Amazing, isn’t it? Not simply supply and demand, not refinery output, not OPEC, not even taxes, but “because they can”. Competition drives prices DOWN. They are NOT competing, they are colluding. Think about it. Why do prices go up? Your local gas station charges slightly more than they pay for the gas (around $0.05/gallon). They have to make some profit, nothing wrong with that. Some stations take more profit than others, you would hope that local competition would keep the price as low as possible. Since the price is pretty much the same all over the country, it is clear that most local gas station owners are NOT making huge profits. They buy the gas from retail distributors. These distributors are also NOT making huge profits, many go bankrupt. The huge profits are all for the refineries and the drillers themselves. Those who create the gasoline are controlling the price. Period. And they are not willing to compete against one another because the profits are just too good and too easy to obtain. $2/gallon gas could be back tomorrow if our oil companies chose to do it. Image if say Chevron announced that all gas from their refineries will now be sold at $20/barrel? Chevron stations would be MOBBED and hailed as heroes and patriots and the others would be (rightly) vilified. In turn, one or more of the others would have to (gasp) COMPETE by lowering their prices accordingly. Then just like every other industry, they would have to FIGHT for their profits against their competition. THAT is the American Way. I was always willing to give them the benefit of the doubt, but the past 3 years have changed my mind.

I am not advocating for government Price Controls or taxing their profits. I am advocating for open competition and full accountability. John McCain’s summer gas tax break wouldn’t be much per gallon ($0.184), but it would be a welcome DECREASE for once, even if only for a few months. His plan for CEO accountability says “all aspects of a CEO’s pay, including any severance arrangements, must be approved by shareholders” – I am sure this will have an impact on the oil companies as well. Other than that, there is not much else that government can/should do short of filing anti-trust charges.  I know this is a very complex issue with many variables, but the bottom line is very clear to me.

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