Sten Gazette

The odds are real good that at some time during the last two weeks you paid more for a tankful of gasoline than you ever did before in your entire life. You may not be very happy about it– you have probably complained to your friends and family, and you might even have written a letter to the editor of your local newspaper, but the extent of your protest has been limited by your acceptance of the published “reasons” for high gas prices. Which are almost all lies. Or “disassembly” as our Liar in Chief would say.

The traditional justification for record-setting pump prices is the cost of crude oil. Looking at the handy-dandy piechart produced by your government, you will see that the cost of crude oil is the biggest part of what you pay at the pump, if only slightly larger than the agregated taxes. We’ll revise the chart for you a bit later, but for now it is a reasonable representation of why increases in crude oil prices result in more or less commensurate increases in gas prices at the pump. Depending on the mood or motivation of whatever Oil Industry reporter, analyst, apologist, or talk show host you happen to encounter, the current surge in crude oil prices is a result of :

Supply and Demand

Refinery outages

Hurricane threats

War and economic factors in the Middle East

Speculation

There are elements of truth in each of these factors, which is why they are so easily accepted by the public. In a truly free market, only supply and demand should matter. Each of the other factors could be an explanation for a change in supply or demand, but in the case of oil we have a market structure that is so far from free that we don’t even have a name for it as a whole. The closest term for the economic model is “monopoly,” which is defined as a persistent market situation where there is only one source for a product or service, and there are certainly regional monopolies in the oil business. “Cartel” comes close– a cartel being an organization or group of producers that controls supply, prices, and competition– and OPEC is certainly a cartel, but a non standard one. Somehow OPEC appears to control prices universally, but it only controls about 20% of the supply (more about that later). A “vertical trust” or “vertical monopoly” is where the entire marketing chain, from production of raw materials through manufacturing and distribution/retail is owned or controlled by a single entity, and oil companies have long been classic examples of vertical trusts.

All three of these models are antithetical to a free market, all of them can can be found in the “oil industry,” and all of them are illegal under US and international laws. So collusion on the part of national, state, and local governments must be a factor, and you are welcome to draw the logical inferrences that governments not only turn a blind eye to illegal cartels, consortia, and vertical trusts, but actually protect and encourage them. How can this be, if it is so damaging to the interests of the country as a whole? That’s a question that has simple one-word answer: greed. Greed on the part of all echelons of the oil industry, and greed on the part of every echelon of government that extracts taxes from the oil industry.

Let’s take a little side-trip to bottom line on this before considering the cost and price factors in more detail:

Higher crude oil prices mean more profits for oil companies and more tax revenue for governments.

It’s as simple as that, and it explains why oil companies and governments do not want you to pay less at the pump.

The chart is extremely misleading in two areas. First, the taxes shown are the outright taxes on gasoline (the finished product) and do not include the taxes that the federal and various state governments levy on the profit of the businesses that make up the Oil Industry. Second, you will note that the word “profit” is shown only in the “refining costs & profits” slice of the pie. Does DOE want you to think that oil production, refining, and distribution businesses are “non-profits?”

In order to understand where the huge profitability of the Oil Industry resides, so huge that the Oil Industry can dictate to governments, we need to look at where crude oil comes from and how it gets to your local gas station. These charts are also from the U.S. Department of Energy, or more specifically from the Energy Information Administration, which is part of DOE and evidently cannot spell the word “other.”

Looking at the crude oil source chart, you will see that half of our oil comes from the western hemisphere. This includes Venezuela, which is a member of OPEC, and all domestic production. OPEC members are responsible for a bit more than 20% of all crude oil production (not all Persian Gulf producers are members, but producers in other regions are). Yet OPEC sets the benchmark price. Exxon, for example, gets its crude oil from oil fields that it owns or leases as well as from OPEC countries. And Exxon itself has said that the actual cost of getting a barrel of oil out of the ground is around $7.50. If Exxon sells crude oil to refineries at the the benchmark price of $67 a barrel, but produces the crude for only $7.50, there is certainly a “profit” in the crude oil slice of the pie. And your federal government of the USA collects a nice chuck of change in the form of taxes on that profit (which is why it can afford to offer tax subsidies like those in the Energy Policy Act.

Now let’s look at the “vertical trust” aspects of the supply chain shown in the distribution chart. Using Exxon as a handy example, the standard pattern for an oil company is to own some or most of the production facilities, the ships that carry the crude oil to the refineries, the refineries themselves, the trucks and pipelines that carry gasoline to the retailers, and, of course, a majority of the gas stations. Every single level of this supply chain is very profitable, and the profit goes up with the cost of crude oil. If you build this into the “your gas dollar” pie chart, you get a chart that looks like this:

This model of oil company profitability is astounding, and it is certainly no wonder that the federal government prefers not to look at it that way. Our graph isn’t scientific, of course, but we can easily prove our basic contention with a look at what happens to a barrel of crude oil–

These are standard 44 gallon barrels, and the numbers shown are gallons of product. They add up to more than 44 because many refinery products are less dense than crude oil, so 44 gallons of crude will make 44.6 gallons of oil products.

The same economic and profit models apply to each and every one of the product “lines” that come out of a refinery. We see this with jet fuel all the time, and with heating oil during the winter, but the others are equally profitable (in percentage terms) and we see increased costs, eventually, for everything that starts out as a refinery product. Plastics, for example. But, returning our focus to the cost of gasoline, the key figure in the graph is the percentage of a barrel of oil that ends up as gasoline. A 44 gallon barrel of crude oil will produce approximately 9 gallons of gasoline. And the true cost of the crude oil rquired to make the 9 gallons of gasoline (the cost of getting it out of the ground) is approximately $1.50. A buck and a half. Yes the price of the barrel was $67, and yes, all but 11% of the $67 is pure profit to whoever was in a position to “sell” the original barrel of sweet light crude. Which used to be referred to as “sweet light Arabian crude” but we are politically correct now and don’t want to offend our friends.

If there were ever a legal definition of “obscene profit,” the oil industry would be the poster child.

Before we wind this up, let’s take a brief look at some of the side issues, which are often used as distractions.

1. Supply and Demand. Supply and demand trends do set prices in a free economy, but this isn’t one. The basic principle is that if supply exceeds demand, prices will go down, and if demand exceeds supply, prices will go up. Gas prices always seem to go up before a long weekend, and for the “summer driving season,” because demand is higher. But demand does not exceed supply– if it did you would be waiting in line at the gas station and some gas stations would be running out of gas! There is an increase in demand, and gas merchants take advantage of it because the consumer has no choice in when to buy gas. One other important aspect of the supply and demand equation is that (again, in a free economy), prices will go so high that demand will be reduced. Obviously that hasn’t happened yet, and there are indications that the average gasoline user really doesn’t have much flexibility.

2. Relativities. How often have you heard that we enjoy the lowest gasoline prices in the world, and that we “should” be paying a lot more? First, we don’t have the cheapest gasoline prices, by a long shot. Venezuela is a member of OPEC, and Venezuelan motorists pay around 15 cents a gallon at the pump. It’s all in the tax. The oil cartels and companies are multinational, and they don’t discriminate. But Canadians and Germans, and just about everybody else, pay a lot more tax on gasoline than we do.

3. Competition. In a free economy, where supply and demand dictate prices, the profit margin that a company imposes on the sale of its products will be reasonable, because if prices and profits become unreasonable, a competitor will step in and take over the market. The oil industry, which we have shown to be a monopolistic entity, has no competitor. And governments have no competitors.

4. Windfall Profits and Taxes. If a company is making a decent profit by selling its products at 10% over cost, and the cost doubles, the company has doubled its profit. This is called a “windfall” profit, and at various times the US has attempted to tax windfall profits more. In practice, that isn’t happening now because there are so many loopholes in the relevant tax laws. Governments are collecting more in tax revenues, and these should properly be considered as “windfall taxes.”

Now think about this in the context of a recent private meeting between the president and the crown prince (now king) of Saudi Arabia, during which the Saudis expressed regret that they couldn’t do anything about the price of crude oil, but would increase production.

–SG

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This entry was posted on Sunday, August 14th, 2005 at 8:08 pm and is filed under Politics, Issues, The President, Great Scams. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.