Don’t Blame Oil Companies for High Gas Prices
- 5 May 2006 by Author 0 Comments
Don’t Blame Oil Companies for High Gas Prices
Published Idaho State Journal, May 5, 2006
Sticker shock is commonplace for anyone buying gasoline these days. A vehicle that used to cost $35 to fill up now costs $60 or more. Suffice it to say that none of us likes to pay these kind of prices for gas. While the results of high gas prices are universally lamented, the reasons for the high cost of gas are multifarious and to some people, more subject to debate.
The “crude” realities are shocking. Based on figures from the Energy Information Administration, 47% of the cost of a gallon of gasoline is crude oil; 23% Federal and State taxes; 18% refining costs, and 12% distribution and marketing. Based on an average cost per gallon of $1.85 in 2004, $.87 covered the cost of crude oil. With current prices locally at about $2.65, the crude oil component is roughly $1.25. That represents a 70% increase in the cost of crude. How much have gasoline prices increased since 2004? Hold the presses! Almost exactly 70%!
Domestic oil companies like Exxon Mobile only own about 3% of the oil consumed in this country. Ostensibly the U.S. oil companies can hardly be blamed for the high cost of gas at the pump!
Many are questioning the retirement package of outgoing Exxon Mobile Corporation CEO Lee Raymond. Raymond is leaving with an astounding $400 million retirement package. While this seems an outrageous sum to most of us, let’s put it in perspective. U.S. gasoline consumption is approximately 300 million gallons per day. That means that Raymond’s whopping $400 million retirement package is the equivalent of $1.33 per gallon of gasoline consumed in one day in the United States. Class envy causes most of us to resent such a compensation package, but it’s more of a public relations nightmare for Raymond and Exxon than it is a cause for high gas prices.
The major U.S. oil companies averaged 10.4% profit over the past year, while the S&P 500 profit margin average was over 12%. Hence oil companies’ profits aren’t out of line relative to the U.S. corporate universe.
In a free market system, supply and demand affect prices. However, in a commodity based industry like oil, commodity prices determine costs to the consumer. They are not “fixed” by oil companies, nor are they governed by OPEC production levels. Gas prices we pay as consumers are driven by commodities traders who buy and sell contracts on crude oil based at least in part on perceived global supply and demand. These commodity prices determine the oil companies’ replacement cost for the gas currently being distributed.
Global demand has risen exponentially, with China and India at a consumption level that the U.S. was at just ten years ago. Just 20 years ago, China and India combined hardly showed a blip on the global consumption chart. The reality of rising demand drives up the commodity prices.
Any disruptions in supply cause the commodity cost of crude oil to spike as well. The destructive hurricane season of 2005, coupled with other global issues, caused crude oil prices to move from $45 per barrel to over $70 per barrel, a 64% increase. Now, with the possibility of UN sanctions placed on Iran for their nuclear weapons threats crude commodity prices have soared to around $75.
We should be more outraged with commodities traders like the wire-house brokerage firms than we should be at the oil companies. Oil companies trade the commodities mostly for hedging purposes since they have a consumer product that must be delivered to the market efficiently and profitably. The traders drive prices strictly by fear and greed based on perceptions pertaining to supply and demand.
The most nefarious group causing supply problems is the environmentalists who prevent domestic exploration and drilling in proven oil depositories. Fidel Castro can begin drilling a new oil well 45 miles of the coast of Florida, but no U.S. company can! The “snake oil” sold by the environmentalists to our lawmakers about drilling in Anwar (Alaska) flies in the face of the logic of utilizing our domestic natural resources to help bring down commodity prices. Drilling and production technology has advanced to the point that a million acres of oil fields can be accessed with a production facility footprint of a mere 2100 acres.
Isn’t it interesting that those who cry loudest about the high fuel costs are the ones who stand in the way of increased domestic production? Reason would dictate that any reasonable efforts to increase domestic self-sufficiency would help stabilize prices.
Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board. He can be reached at firstname.lastname@example.org.