"The national average price for gasoline rose about 16 cents over the last two weeks..."
- San Francisco Chronicle
"If the uptrend continues, market watchers say this could be the week that oil manages to punch through the symbolic level and eclipse the inflation-adjusted record of $101.70 reached in April 1980."
- Wall Street Journal
But you know what? All these dire pronouncements are meaningless. The plain fact is that the price of gasoline right now has nothing to do with the price of crude. Are you paying $3.80 a gallon for gas? No? I didn't think so, and neither is anybody else...not anywhere in the nation! Despite the fact that, with crude at $100/barrel, $3.80 is the break even point for refiners...the BREAK EVEN POINT! Forget about profits.
Consider: Approximately half of the 42 gallons of crude in a standard barrel are refined into gasoline. So...$50 for 21 gallons or $2.38/gallon is the cost of the crude. Add to that the average of $1.40/gallon that comprises the cost of refining, transporting, and marketing gasoline (which includes $.40 in state and federal taxes). Hell the highest prices in the US are right here in Babylon by the Bay, and we're only seeing $3.28 for regular.
What's it all about then? Simple... Last spring--as the summertime petroleum consumption bonanza ramped up, crude hovered in the $70s, and gas prices topped out just above $4.00 a gallon--Big Oil raked in the profits. And now they can afford to subsidize our purchases--sell gasoline at a loss for a bit--because what they must ensure, in fact what they are desperate to ensure, is that we keep on consuming oil just as fast as we can. In other words, this is massive market manipulation.
So forget about opportunistic politicians who whine about price gouging. Complaining about gouging, with respect to a finite resource the remaining supply of which is already known, is absurd. What politicians should be talking about is the fact that Big Oil is selling at a loss in order to encourage demand. Or, to put this on a more personal level, we are all being manipulated through price fixing into consuming more petroleum than we probably should.
Think about that the next time you're at the pump.
13 comments:
Kvatch is back posting! This is great!
Thanks for a thought provoking post. This is a visceral topic indeed.
Even though, for example - I know you are correct, my gut still pulls.
We have been manipulated. Really manipulated.
And we keep driving our big cars and not looking at petroleum use holistically. Even those of us who are aware. (although for the record, I drive a 1998 Honda Civic that averages out at 33 MPG, not the best but not the worst.)
Anyway, just a thought... what two major political figures stand to gain from higher oil prices? (Jeopardy theme in the background...)
Who are Preznit F*ckwit and Blam-Blam Cheney for a barrel o' crude.
Holy crap! I didn't know about this.
I bow to your wisdom on this subject because nothing I have heard from the media makes a bit of sense to me.
That is a concern because if oil does go to $100 dollars a barrel, which it is slated to do this week. We are then face with a higher cost this winter and an even higher cost next summer somewhere between $4.00 dollars and $4.40 or higher.
Place the problems with Banks, markets dealing in financing, money lost because of the heating bill being put to a veto, and our housing problems. We are bound for some big problem with oil at that point.
Recession could once again be in the wind and during the time of the next elections gas might become a problem on the shoulder of others problems already mentioned above.
Another point that further disconnects the cost of gas from the reality of crude is the fact that the larger suppliers, BP, Shell, Conoco/Texaco are in control of their sources. Though this doesn't account for all, or even a majority, of the oil that comes into the US, it places those lucky suppliers in the position of making profits from the entire production chain but also doubles the imperative for keeping US consumers consuming.
There is only one way out of this, we all must learn to us less. If we don't learn now, we'll have to learn the hard way later.
Fran... The Civics are great, aren't they? I had a 2000 Civic for about 2 years (the only car I've owned in 12 years in SF) and it was awesome. Got 34 MPG. I don't see why every car on the read should not be that efficient. But manufacturers keep right on catering to the American fetish for horsepower, and the only way this is gonna change is when we all change our ways. It's for damn sure that the government isn't gonna step in and regulate. I mean look at what they're doing to CA--stalling indefinitely on our request for an EPA exemption to raise air quality standards.
The oil that is currently selling at $90+ a barrel is a two month contract price. It won't be in the system until December. Price increases should be coming soon after.
Kvatch is right that they might sell at a loss for awhile, eating up the big profits they have made, but don't expect that to go on forever.
Nasty economic times are coming from a bunch of directions.
Always glad to be the bearer of cheerful news.
Welcome back, Mr. Froggie!
Very interesting article. It makes me glad I don't drive.
Matty Boy... You're certainly correct. Though even adjusting for the crude price from September, with a price of $80 to $90 a barrel, the current retail price of around $3.00 for regular isn't supportable. In other words, they're still losing money.
TomCat... Not so much at Blognonymous, except for the cross links. I'm doing the journeyman thing. Trying to direct some of my traffic to...well to anyone who wants it. :-)
Makes me glad to get rid of the car and walk to work. Sure, walking to work sucks when there's an ice storm, but I can deal for a few days a year. My old car (which I loved, by the way...a Miata) really was a ball and chain. No doubt keeping the rpices low will ensure that measures to boost light rail and other mass transit options will be pushed off for yet another day. And finally, anyone think that the oil companies will let it rip after a democrat gets into the white house?
kvatch, I don't know where you get your oil economics. Your imagination, I guess.
First, you can be sure oil companies will not post losses in the third or fourth quarters of 2007. Neither will they post losses next year, unless the world is beset by a new never-before-seen problem that upsets everything.
Oil economics is too large a subject for this space. But long story short, all of the oil coming from wells today was drilled when prices were lower. All oil was found when prices were lower.
Thus, it is ACCOUNTING for INVENTORY that matters with respect to profits and losses.
Oil Reserve Accounting and Valuation is a huge subject that drives much of the oil industry.
You have also overlooked that huge portion of prices at the gas pump that are federal, state and local taxes. If the price at the pump is $3.00 a gallon, you can be sure that maybe 75 cents goes to the various governments. That leaves $2.25 for the oil company. Still, due to accounting for inventory, the oil company will stay profitable.
Also, you have neglected to account for the gains due to the sales of non-gasoline products. Big fat margins in motor oil and other lubricants. Then there's jet fuel and heating oil.
Anyway, believe what you like, but the oil companies do not control oil prices, and their overall profit margins are unimpressive. In the last year profit margins have been running around 10%. That's nothing compare with Microsoft, which earns a net after-tax profit of 25 cents on every dollar of revenue. A 25% profit margin.
Fran, I'm afraid your blog needs an enema. :-(
Kvatch,
As much as I hate too, I have to agree with No_Slappz here.
The current price of oil is for December delivery. When that oil gets sold, refined, and finds its way to our gas tanks, that is when we will pay for it.
Rest assured, we will pay for it.
So actually, I guess I'm agreeing with both of you in a way.
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