Perfectly reasonable people can’t be blamed if they suspect that Big Oil is jazzing gasoline prices.
Gasoline inventories are reportedly at a 15-year high, which, according to the laws of supply and demand, should mean that prices ought to be sinking. Instead, the national average retail price of regular gasoline has risen to a record $3.29 a gallon, which is 23 percent higher than last year, the AAA Daily Fuel Gauge Report said last week.
On an anecdotal level, it’s hard to imagine that someone isn’t taking advantage of the situation when, as I saw on the Indiana Toll Road last week, one oasis was selling regular grade gas for $3.70 a gallon when other stations along the highway were selling it for a more modest (?!) $3.35.
And so, the House Select Committee on Energy Independence and Global Warming last week called top oil company executives to account. Explain to us, again, why prices are going through the roof? Why should you get billions in tax breaks when your profits are in the mind-boggling billions? “The anger level is rising significantly,” Rep. Emanuel Cleaver, (D. Mo.), observed. “Your approval rating is lower than ours, and that means you’re damn low.”
But while the hearing was called to elicit information from the oil industry, finding a cogent explanation for the price increase was almost impossible, as the oil executives’ elucidations were squeezed out of most stories by the congressmen’s rhetorical displays.
So, at the risk of being called a patsy of the oil companies, let me try to shed some light on the oil companies’ explanations. These are reasons offered by ExxonMobil, but they are standard for the industry. You decide.
Turns out that the laws of supply and demand are in play after all. Yes, inventories are high, but Americans are driving at a record pace, consuming about 9.3 million barrels a day last year. At the same time, China and the developing world increasingly are competing for the available oil, putting upward pressure on the price of crude oil, which accounts for about two-thirds of the gasoline price. Nineteen percent go for refining, transportation and marketing, while 13 percent goes for taxes..
The industry has responded by increasing capacity, adding the equivalent of a large, new refinery every year for the past decade. (That’s despite the kind of frantic and misplaced opposition that BP encountered last year when it planned to increase gasoline refining capacity at its northern Indiana plant.) Adding to the cost is the federal Clean Air Act, which requires refiners to ship more than 20 specialized gasoline blends to separate markets. Government ethanol mandates also complicate and increase the costs of refining and delivery.
As for those truly impressive oil and gas company profits: like other commodity businesses, the industry’s fortunes are cyclical, but averaged out tend to be not much different from other sectors. Oil industry profits were near historic highs in 2006 at about 9.5 percent on sales, but they were not much different than the 8.2 percent average of all manufacturing sectors in general. (Pharmaceuticals topped the list at 21.5 percent.) In 2007, the oil and gas industry earned 8.3 percent profit, compared with the Dow Jones Industrial average of major industries of 7.8 percent.
ExxonMobil’s U.S. profits from 2002 to 2006 were $39.5 billion, impressive enough, but about $19 billion less than its U.S. tax bill. The company’s worldwide income tax rate for 2006 was 43 percent. The publication, Tax Notes, surveyed 80 leading U.S. companies; their average income tax rate was 30 percent, while ExxonMobil’s effective income tax rate was 44 percent. A “windfall profits tax,” which is demand by some politicians, increased oil imports by as much as 16 percent in the 1980s, according to the Congressional Research Service. Exactly what we don’t want to repeat.
Then there are demands that the industry’s $18 billion in subsidies be repealed. Actually, they are tax deductions given to all manufacturers, to encourage them to pursue policies in the public interest.
My recitation of these facts will be regarded in some quarters as an apologia of the oil industry. Certainly, such facts and figures are boring. But a slice of boring is what we now need; certainly more than the self-serving theatrics of congressional poseurs.
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Dennis Byrne is a member of the Chicago Daily Observer Editorial Board.
Anon says:
Stupid oil executives taking advantage of the gas prices. It all started with Katrina, then they said it will go down soon, which it never did.
I protest! Call for an investigation!
John Powers says:
Look at the Crude Oil prices on NYMEX. They have gone up, so gasoline has gone up as well.
That was an easy investigation.
JBP
Carlton Perry says:
We need to read no further than the use of last year's statistics rather than the use of this year's first quarter to smell the aroma surrounding this article. To those who are unacquainted with oil in its natural state or even kerosense or fuel oil - oil smells, as does this article
B Kalik says:
Consider this:
NEW YORK, April 6 (Reuters) - The average price for a gallon of gasoline in the United States rose 5.26 cents to a record high in the last two weeks, and an industry analyst said retail prices would keep rising amid refinery cost increases.
The national average for self-serve, regular gas was $3.3171 a gallon on April 4, according to the nationwide Lundberg survey of about 7,000 gas stations. This was 53 cents higher than a year ago and compares to a March 21 record of $3.2645.
Survey editor Trilby Lundberg said prices would keep rising along with crude oil and ethanol prices as refiners pass on the costs of mandated spring reformulations of gasoline.
"The essential causes are strong crude oil prices, dramatically higher ethanol prices and seasonally rising gasoline demand," without any year-to-date gasoline demand growth compared with last year, Lundberg said.
To comply with federal environmental protection regulations refiners have to reformulate gasoline by using more ethanol, which has itself been rising in price, Lundberg said, noting that more ethanol than ever is required this year.
As a result, she estimated that it would "take a substantial drop in the price of crude for gasoline prices to fail to jump up from here" as refiners absorb these costs.
"It's too early to tell now whether the gasoline market will shrink this year or fail to grow, but one thing sure is that it will not see the kind of growth that would help refiners and retailers suppress price hikes," Lundberg said.
This means pump price will rise faster going forward.
"These added costs will come to the pump increasingly and I think that gasoline price increases will be speeding up from here," she added. "It's safe to say that these prices have arrested demand growth but won't stop the seasonal rise in gasoline consumption which occurs every year."
Mac says:
Finally an unbiased and factual article on Big Oil. Big Oil does not control oil prices. Big Government has caused this problem.If the United States wants lower oil prices and independance from foreign oil, Big Oil should be allowed to drill known oil reserves on the East Coast, West Coast and Alaska where drilling has been banned by state and federal laws. Finally enviromental restrictions should be eased to allow more refineries to be built.Until these actions are taken oil prices and gas prices will continue to be high and will go higher. Thank Big Government.
Paul Froese says:
Dennis if you're trying to argue supply and demand fundamentals for gasoline prices THIS year versus LAST year, then why are you looking at gasoline demand figures from LAST year (2007) to justify these prices? The 2008 figures for gasoline AND distillate consumption show a DROP, which negates your whole argument. The reality is that the prices are driven by over-leverage and speculation on the commodities exchanges, and the margin requirements should be raised. Once that happens, prices almost ALWAYS drop. It doesn't take a rocket scientist to figure out what's really going on here, but oil interests just don't want to admit it to the public.