Thursday, September 15, 2005

A Full Tank of Greed

One summer a few years ago, I think it was 1999, I visited my aunt & uncle who live in California. On the way to the airport for the trip home, we stopped and filled up the car with gas. Of course, California gas costs significantly more than the rest of the country because of the environmental regulations in that state. Their gas comes special from Alaska and is custom formulated. So I took a picture of the sign at the gas station to show everyone back home the amazingly high price. The price at that time was $1.59 (and 9/10) for regular, 1.69 for mid-grade, and 1.79 for premium!

Oh, how we wish for those days again!

We've all seen the price at the pump soar to sickening levels in the last month and a half. The last boost was supposedly from the disaster in the Gulf coast states. Now rates seem to be receding like the flood waters in New Orleans, thank goodness. But why did it all really happen? I decided to do a little research and find out the real story.

The cost of a gallon of gasoline can be broken down into several parts. The biggest chunk is the price of crude oil, the raw material that gas is made from. Crude oil cost accounts for about 55% of the price of gas. The next piece of the pie is refining costs. This is the expense (and profit - more on that in a minute) involved in converting crude oil into auto fuel. It totals about 18%, but maybe higher than that recently. The remaining costs consist of taxes (19%) and distribution & marketing expenses (8%).

Looking at it like that, your first reaction might be to curse "those doggone terrorist ragheads in the Middle East" for gouging us Americans. But while they're not sacrificing much to meet our needs, there are several other factors behind the recent hikes.

So why hasn't OPEC done more to reduce prices? All of the oil producing nations, except Saudi Arabia, are at full production capacity. And the Saudis mainly produce a heavier grade of crude that we don't refine as easily. So OPEC is unable, to a certain extent, to meet the higher demand beyond what they are doing now. They have lost control of the market, in a sense. OPEC claims, according to their web site, that they do not directly dictate the price of a barrel of crude oil. It is actually set by three petroleum commodity exchanges. To me, this seems to mean that there are Wall Street types that are really in control. And from my perspective, that's usually a bad thing.

Okay, so OPEC aren't quite saints, but they do reduce the price of crude now and then. But have you ever noticed that gas prices don't usually follow immediately? Now when crude prices go up, the price of gas rises almost instantly! Consumer groups notice this, and have accused oil companies of taking too long to pass on reductions. But there is no government regulation in the industry, so consumers are basically on their own. [You can't really blame the service station owners, because they still pay more for wholesale gas.]

It's the oil companies that are at the heart of the matter, in more ways than one.

They say that all the easy oil has already been found and that it's harder and costlier to find new supplies here in the US. Now who's going to shed a tear for big oil?

In the fiscal year 2003-4, four major oil companies reported record profits, as well as record refining profits. Conoco-Phillips was up 44%, Exxon/Mobil 125%, British Petroleum (BP) 165%, and Chevron-Texaco a whopping 294%!! These companies are making money so fast they don't know how to use it all. What they are doing is giving dividends to their shareholders and buying back their stock. And of course, the CEO's will reap handsome bonuses. The rest of us go broke trying to get to work, and these guys are rolling in cash.

Along with the record crude prices, there have been several outages to an already strained refinery industry here in the US (some caused by the hurricane, and some not), as well as the usual seasonal demand spike that comes around Labor Day. Added to the mix is an increased level of demand by China on world supplies.

So recent refinery outages have contributed to price hikes. US refineries were running at 70% of their total output ten years ago. Today they are closer to 95%. Production is so tight, any time something goes wrong at a single plant, the price of gas jumps. More than 10 refineries have reported unplanned outages in late July and early August of this year. Even when the problems turn out to be minor, consumers take a hit. Aggravating the problem are state clean air laws that require the production of 45 different blends of gasoline across the nation. This makes refinery outages that much more significant.

Ten years ago, the five largest companies (Exxon/Mobil, Conoco-Phillips, BP, Valero, and Royal Dutch Shell) controlled a third of of all refineries in the US. Now they control more than half. This makes it easier for them to withhold production to drive up prices. The Federal Trade Commission (FTC) uncovered evidence in 2001 that they had actually done so. These actions have NOT been challenged by the government as yet. The only penalties so far have been in our wallets.

One fact that is always mentioned is that there have been no new refineries built since 1976. And, of the 325 facilities operating then, 176 of them are no longer running. Why did all those plants close? Some say the market was manipulated by the bigger companies. 97% of those facilities that have been closed were operated by smaller companies. Congressional investigations revealed memos from the big companies discussing strategies to maximize profits by forcing the smaller refineries out of business. But it may not be entirely their doing. From 1973 to 1980, the government subsidized smaller, less efficient refineries. When the price control programs ended, so did the small refineries.

So why aren't the big companies building more? From 1975 to 2000, there was only one request for permit to build a new refinery. That new energy bill gives cash incentives for new refineries, but it isn't expected to help. Bureaucratic red tape, Environmentalist protests, and the "NIMBY" (Not In My Back Yard) factor are normally blamed for lack of new construction. But instead of building new ones, companies are doing plenty of expansions and improvements to existing plants. This is a lot easier and cheaper, and since the normal profit for a refinery is rather small, they welcome any savings.

But even refinery margins - the difference between the price of crude and wholesale gas - have been rising faster than OPEC's rates. In two weeks in August, pump prices increased 11%, while refinery margins went up 54%! The FTC was recently investigating why oil companies aren't expanding production since they're raking in record profits. For some reason, the investigation has stalled. (Can you say "stifled"?)

So it all comes down to one thing. GREED.

What they're doing is basically saying:

  • "Crude prices are going up, let's raise prices!"
  • "The terrorists are getting mad at the US for Iraq and Afghanistan, they may withhold supplies, let's raise prices!"
  • "The Chinese are wanting more and more oil, let's raise prices!"
  • "Refinery breakdowns may cause supply shortages, so let's raise prices!"
  • "The law says we have to make way too many different blends of gas, let's raise prices!"
  • "We're not making much on refining, let's raise prices!"
  • "The Americans won't be driving their gargantuan SUVs as much after Labor Day, let's raise prices!"
  • "We keep raising prices, and people are still buying! Let's see how high we can raise prices!"
  • "We have to go farther to find more oil ourselves, let's raise prices!"

Where does it all end?

The government won't do anything. They want their millions in campaign contributions, (or stock dividends) so they do just enough to stay in office.

The oil companies won't change anything. They control the whole process. They're making billions and we're letting it slide.

OPEC nations won't change anything. Most of them detest the US anyway. Except when we show up with money.

People keep trying to organize boycott days, but they'll just have to buy gas later. The revenues might be zero one day, but they'll be double the next. One theory was for everyone to boycott certain brands. Not sure if that would make a difference. Seems like all the stations get their gas from the same distributors or something.

Should we park our cars and trucks and buy hybrid compacts? Unfortunately, I think Amercans are too dependent of their massive SUVs. The soccer moms would be lost if they had to cram their 2.5 kids into less than 500 square feet. Plus, the car is such a part of the culture that we'll never get it down to a pure utility vehicle.

I guess we're left with praying for compassion from the CEOs of big petroleum and the Middle East oil barons.

Other than that, we'll have to do like the Army drill seargeants say: "Suck it up and drive on!"

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