On Friday, oil spiked $10.75 a barrel, a record single-day increase, which followed on the heels of a $5.49 a barrel jump the day before.
As the inexorable rise in oil prices is reflected at the pump, the prospect of $6 a gallon gasoline becomes not only a possibility, but is likely to occur as early as this summer, the traditional season for gasoline price increases.
The record prices are being blamed by many Americans on the oil companies, largely due to reports in the media of record profits for firms such as Exxon Mobil, Chevron, Conoco, and in Europe, Royal Dutch Shell.
But is this actually the case? Are the oil companies really to blame for the “pain at the pump” we are currently suffering?. A closer examination of the oil companies' reports reveals that, while they are reporting record profits, thanks to record prices, their profit margins, at 7.6%, are actually lower than those of most manufacturing firms, which, exclusive of the ailing auto industry, average 9.2% nationwide. Oil companies are enjoying substantial returns on equity, with industry-wide levels reaching 27% recently, compared to manufacturers' ROEs in the high teens, but oil exploration is a very expensive activity, with a high probability of failure. Greater risk always results in higher ROE for investors. Too, extraction costs are rising rapidly, as the “easy” deposits are dwindling, and producers must turn to more expensive processes to pump the crude.
The point is that while we blame the oil companies for the high prices we pay, we are doing so because they are the easy, most visible target. In reality, those most responsible for high prices are the oil owners; nations such as Saudi Arabia, Iran, and others in the Middle East, and Venezuela in our own hemisphere. They enjoy unimaginable riches; riches which have come primarily from the USA and Europe, and there is no end in sight to this unprecedented transfer of wealth.
Because the producers have raised crude prices so rapidly and extensively, the margins of other segments of the oil industry (refiners, retailers) have been reduced in order to keep retail prices down. Pressure on these margins is also likely to contribute to retail hikes in the short term.
The producing nations' actions have also sparked a frenzied speculative market in crude oil prices, which yesterday led to the unprecedented hike in the price of a barrel of crude. As the base prices have risen inexorably, thanks to the greed of the producers, speculators have begun to play an increasingly influential (and detrimental) role in pricing.
Article comments
— go to most recent comments1 - Dan Miller
Clav,
Leaving aside the high likelihood that any member of Congress proposing or voting for this would be tarred, feathered and ridden out of Congress on a spiked rail, do you really think that the Congress would return the funds directly and immediately? It would be a first, as far as I know. And even if that were to happen, the economic dislocations would be substantial. Payroll tax reductions? But but but you gotta be working to pay payroll taxes. How about the folks who don't work? Wouldn't they be screwed? Just imagine the impact on the poor old folks who rely on their monthly Social Security checks. And consider the plight of the unemployed, who spend all of their waking moments driving around looking for work. And how about the effect on U.S. exports; wouldn't even modstly increased transportation costs within the United States make them even less competitive internationally? How about the inflationary impact on all sectors of the economy? Most everything has to be transported from point of origin to point of consumption, and transportation costs add significantly to costs; such costs would not be noticeably offset by payroll tax reductions.You say that the funds raised by your proposed $2.00 gasoline tax increase (I assume you include diesel fuel as well)
R and D are great things. The Manhattan project worked, but how many other Government initiated/supported/supervised R and D projects have? Government simply doesn't work that way. Can you imagine the irresistible (and I use the adjective literally) pressures to spend the money on politically correct but otherwise silly projects? On numerous things which wouldn't be done commercially because they make no sense? Hey -- we need that sort of project in Wyoming! Just think of all the money and jobs it will bring us! Whoopee!
One of my former partners was fond of saying that the Government doesn't need any more money: it already has more than enough and spends it most unwisely. I agree.
Clav -- are you joking? Is this perhaps a satirical take off on Ruvy's thesis that Senator Obama is the best U.S. presidential choice for Israel?
Dan
2 - Clavos
No, Dan, it's not a satire.
Though I didn't say so in so many words, the proposal is predicated on the tax being legislated to be used in one of the two ways I propose, as part of the package.
All the points you raise about the impact on the economy and on Americans are valid, IF one assumes that the $2 rise in the price of gasoline will remain as an increase. However, the more likely scenario is that the increase will precipitate an immediate (and huge), drop in demand, which will in turn, precipitate an equivalent drop in the price of crude, thus nullifying most, if not all, of the scenario you mention. It's worth noting that public transportation ridership is up sharply across the nation, with the recent, smaller increases in gas prices.
Your point about the reluctance of legislators to raise taxes is, I admit, the fly in the ointment of this proposal. Our cowardly, self-serving, craven legislators are, for the most part, not interested in acting in the nation's best interests above their own. Something must be done; not only to stimulate our leaders into finally taking positive, immediate action toward energy independence, but also to stop this hemorrhaging overseas of our national treasure.
Nixon proved price controls don't work in the previous oil crisis. This is an idea that, with some tweaking, at least might have a chance of working.
3 - Clavos
Dan,
One additional point:
While in general, i agree with your characterization of the government's ability to do anything well, I will point out that, in addition to the Manhattan Project, the government has two other large scale accomplishments to its credit: TVA and Kennedy's mandate to go to the moon did both succeed.
My intent, in any case, is not for the government itself to conduct the R&D, but for the private sector to do so, paid for from government funds, as in the case of the above projects.
4 - Dan Miller
Well, Clav
I guess it's possible. Fortunately or otherwise, I suspect that we won't know until, to borrow a phrase, they have snowball fights in Hell.
And, I still think that letting the Government have more of our money is a bad idea; once Government has it, it is Government money, to continue to collect ad infinitum and to which it is entitled for whatever it wishes to use it, even long after the original reason for collecting it has vanished.
Dan
5 - Dan Miller
Clav,
One additional point: Didn't Senator Clinton in her "suspension" speech today urge Senator Obama to campaign for higher gas taxes? I thought I heard something along those lines, but maybe my sometimes fuzzy internet connection was at fault and it was just her reference to the glass (sounds sort of like gas) ceiling.
Dan
6 - Clavos
Dan,
The price of gasoline is going up, regardless.
If, as many experts predict, we will be paying $6 for gas by Labor Day, why not keep those two bucks here at home, instead of sending them overseas? Our money in the government's hands, which I agree is less than ideal, is better than in the Arabs' or Russians' hands.
With the two bucks tax (and subsequent adjustments as needed) we can also set a price floor ($4 seems sustainable) on gasoline, thus ensuring that demand won't skyrocket as the producers lower prices, which they inevitably will, thus also preventing future rapid runups in price.
Remember that payroll taxes include income tax, which even non-working retirees pay, not only on their SS, but also on interest and dividend receipts. Stability in fuel prices would probably also lead to increases in employment, as the economy stabilizes.
7 - Condor
I wish I could sell my house and move closer to work. I was relocated to a cost center 60 miles away in 2006. Couldn't sell my house and now I'm stuck. 6 bucks a gallon might force my hand to strike a retirement deal, which would relieve the 100+ dollars per week I'm spending on gas.
But that's just top-of-head thinking. I drive by a HUGE coal yard on the way and back from the job. It sure smells good. I wonder if 60 per barrel fuel made from coal would make me feel any better. Or... as the pundits cajole the folks from the coal regions.... put those people back to work in an industry that would benefit those regions?
Hmmm... pehaps it's a great left wing conspiracy.
There is no doubt we have the resources. Grain is rising in cost (thanks W) along with transportation fees, leaving us feeling the pinch and more places than just the pump. Viable resource? It takes energy to leverage those. Petroleum is THE most effecient energy source, bar none. Even OPEC stated that the costs are they find reasonable is around 60 to 75 bucks per barrel.
Are you sure it's OPEC and not the speculators?
Weren't there measures in place to shelter the price of energy from speculation? What happened to that? One doesn't have to look too far into the past to realize that lobbying efforts lifted those sanctions for the "good" of corporate profits.
Six bucks per gallon. I'm about to puke, and I'm running a effecient auto...
Now... let me qualify myself. after 32 years in the job market, it was only until 2003 that I was taken away from a metro area rich in alternative means of getting to and from work. I can't move back there (WashDC) as I can't sell the abode.
Before relocating to a different cost center I was a scant 13 miles from the job site... now I'm 62 miles. This is getting ugly.
8 - Dr Dreadful
My wife and I are already carpooling to work most mornings, even though we would be able to afford the predicted hike without too much pain.
I'm also considering commuting by bike one or two days a week as well, although this is primarily for fitness reasons: it wouldn't save us any gas, as my wife would still drive herself.
Your suggestion is interesting, Clav, although I think it has zero chance of being adopted. As you observe, the gas companies are taking the flak from the public at the moment because they are the visible face of the oil industry. Most of these consumers are not going to appreciate the 'long game' behind any new tax - it would simply be perceived as adding insult to injury. In an election year, no politician is going to go kamikaze like that.
So - assuming there won't be the new tax and consequent benefits you suggest - what do you think will actually happen?
9 - Zedd
Clav,
You missed the major role that investors play in increasing prices. The market is playing the most significant role at this point.
10 - Clavos
Simple, Doc,
The price will continue to escalate to the point OPEC will notice that they're losing billions due to low demand; they'll reduce the price, demand will begin to climb again, even to the point of SUV sales reviving; little to nothing will be done about alternative fuels and the entire cycle will start all over again, just as it did from the seventies, until today.
MEANWHILE: In the name of Jesus of Global Warming (Amen! Hallelujah!), stringent emission reduction measures will be proposed (some will even be passed) and imposed on the public and the auto companies, cap-and-trade (already in the works) policies will be adopted (these are a more surreptitious tax - more palatable to the pols, and easier to fool the public), and still the price of gas will be controlled, but by OPEC, not us.
For a while (probably too long), emphasis on alternative fuels will once again fade away with the lower oil prices, until they (inevitably) climb back up again. The energy (read oil) companies will continue to work on developing alternatives, but won't release them until economics dictate their release.
As long as OPEC controls the prices, it will continue to manipulate the market until all the oil IS nearly gone, decades from now.
And John Q Public will continue to pay - through the hose...
11 - Dr Dreadful
Well, maybe, Clav.
Economic cycles come and go, but for me there is a subliminally apocalyptic feel to the current situation. I expect there was in 1973, as well, although I was too young to remember anything except the power cuts.
For many of the OPEC countries, oil is their only natural resource and the source of all their wealth. As it starts to run dry, you can't really blame them for wanting to rein in supply a bit while they figure out what to do when it's gone completely.
As an object lesson in what happens when a nation's only natural resource is exhausted, I'm sure Saudi Arabia, Kuwait, the UAE and the rest of the oil sheikhdoms have paid close attention to the fate of Nauru.
12 - Clavos
Well, Doc, obviously I can't speak to your personal apocalyptic feelings, but I think any related to the oil bidness are more a product of the arcane art of selling newspapers and air time than anything else.
I am old enough to remember 1973 very well. There was a similar thread of alarm running around the land back then as well, but if memory serves, the worst economic damage was done by Nixon's hamhanded attempts to control prices by fiat, not the "crisis" in the oil industry.
The story about Nauru is a sad one, but I'm not sure how much of a parallel can be drawn between that tiny speck and the Middle East. The Arab countries are significantly more advanced and sophisticated than the islanders appeared to be; look what Dubai is doing with their petrodollars, for example.
That said, there is a lesson there for the unwary among oil sellers. Mexico would be well advised to take heed of the plight of Nauru; their oil production is already slowing down, and my countrymen, sadly, seem to be doing little about it so far, except for squabbling among themselves.
Mr. Chavez, as he spends his billions shoring up his faltering client nations, might want to pause and think about the Nauruans, as well.
13 - Jet in Columbus
I see smoke and mirrors here. Trying to palm off billions of profit by using a tiny number for it- 7.6 percent is an obscene old and tired trick that no one's buying any more.
If they cut their profits in half to say 4 percent, their bottom line would still be healthly in the green by hundreds of millions.
They're so profitable because they're not building refineries, they're not building refineries so that there's a gasoline shortage which makes them obscene profits under "supply and demand" why would you do something to bring down the price of gasoline, unless you knew it helped your bottom line?
And the old excuse that the tree huggers are keeping them from building new refineries is getting old too.
With all that oil real estate in the Taxas vast wasteland, there must be hundreds of places to build one that no one would object to.
14 - Dr Dreadful
Dubai has rightly identified and is already exploiting tourism as the answer to her future survival and prosperity. Qatar is following suit. Saudi Arabia will probably be all right, as well, as one of the Five Pillars (Hajj) gives her an automatic and massive tourist industry.
But Kuwait, Oman, Bahrain and all those other little countries that haven't got much else to offer but sand should be worried.
15 - Jet in Columbus
While you're at it, try re-reading my article of a couple years back that all of you have been pointedly ignoring, and then ask yourself-where's all that Iraqi oil going?
Iraq has one of the biggest oil reserves in the world, but once we had control of it, the big oil companies in Houston prevented Bush from making a hero of himself by having it released onto the market-vastly lowering the price of a barrel of oil... which would vastly lower their profits.
What would happen if that oil were to hit the market? We sure as hell wouldn't be paying millions a day on a war in Iraq. Shit, Iraqis would be the richest people in the world right now.
Control of that huge amount of oil is sitting in several vest pockets in highrises all over Houston right now, which is where it'll stay until oil hits $200 a barrel.
Maybe they're holding out til just before the election to make Bush (and by proxy McCain) a hero?
16 - Jet in Columbus
I'm laughing now, because everyone thought I was a nut for writing this paragraph two years ago...
17 - Marley
To see where the US went wrong, read "The Forrestal Diaries." Back in 1947, Forrestal predicted what would happen to the price of oil if the US didn't act in its own best interest.
If Americans still don't get it after 60 years, there is no hope.
As a result, the lights will soon go out.
18 - Clavos
Well, Jet,
You may not "buy" the 7.6 number, but nonetheless, it's a matter of record, easily verifiable by anyone with a modicum of access to statistics on the internet.
As for the difficulty in building new refineries; that, too is a matter of record. Here's an excellent 2005 NYT article which clearly explains the various reasons (chief among them: difficulty in obtaining permits and locations, and costs) why no new refineries have been built in the US in more than three decades. The article also notes that despite the lack of new refinery construction and many closures of outmoded facilities, existing facilities have been modernized and upgraded to the point that, even in the face of a 45 percent increase in demand (as of 2005, when the article was written), the gasoline shortfall is only 10 percent and is met by importing gas from foreign refineries.
The reason that oil companies are enjoying record profits (not record margins) is volume. Demand for oil and its byproducts has never been greater in the history of the industry.
The reason prices are currently so high is because the producers (both OPEC and non-OPEC) are manipulating the market to force prices higher, as are the speculators in the futures markets.
19 - Clavos
"Iraq has one of the biggest oil reserves in the world, but once we had control of it..."
We don't.
Bush has made a point of leaving the oil fields under the control of the Iraqis, precisely to avoid criticism such as yours.
Iraq, as an OPEC member nation, follows OPEC pricing.
20 - Jet in Columbus
Why are so many countries paying more per gallon that we are? The short answer is "we're not" tecnically...
The tax on a gallon of gas in the United Kingdom in 2003 was $3.40, bringing it to $5.89 a gallon!
I'm sure that figure is much higher by now, but compare what they were paying in 2003 against what we were paying at the same time...
In the U.S. in cents we have.
Alabama 39.4
Alaska 26.4
Arizona 37.4
Arkansas 40.1
California 50.4
Colorado 40.4
Connecticut 48.1
Delaware 41.4
Dist. of Columbia 38.4
Florida 48
Georgia 30.6
Hawaii 53.5
Idaho 43.4
Illinois 48.4
Indiana 36.5
Iowa 39.5
Kansas 42.4
Kentucky 39.8
Louisiana 38.4
Maine 41.9
Maryland 41.9
Massachusetts 39.9
Michigan 44.6
Minnesota 38.4
Mississippi 37.2
Missouri 35.4
Montana 46.2
Nebraska .8
Nevada 51.7
New Hampshire 39
New Jersey 32.9
New Mexico 36.4
New York 48.7
North Carolina 40.8
North Dakota 39.4
Ohio 40.4
Oklahoma 35.4
Oregon 42.4
Pennsylvania 45.1
Rhode Island 49.4
South Carolina 35.2
South Dakota 42.4
Tennessee 39.8
Texas 38.4
Utah 42.9
Vermont 38.4
Virginia 37.3
Washington 41.4
West Virginia 43.8
Wisconsin 49.5
Wyoming 32.4
U.S. Average 42
As you can see, it's not our fault that in other countries, they pay waaaaaay more than us!
21 - Jet in Columbus
Originally Bush's plan was to invade Iraq and release its huge oil reserves to the world market, plummeting oil prices, and then breaking the back and sabotaging the stranglehold that OPEC has on the world market. Bush would be a hero after gasoline prices dipped back to or even below a dollar a gallon, the economy would explode when Americans suddenly had more buying power, and GW would probably have a giant "Saddamesque" statue erected of himself in national mall that would rival the Washington Monument.
Why was the plan sidelined in 2003?
Bush needed/wanted/craved/coveted reelection in 2004, and, without big oil's financial backing, that was simply not going to happen. Can you imagine the outrage in Houston when they caught wind of the White Houses' plan? They weren't about to let "good ole' boy" Bush interfere with their own plans to completely suppress Iraq's oil reserves, because if they were released, those record-breaking, obscene, and unimaginable oil company profits that everyone's so outraged about lately (except rich Republican stock holders that is) would evaporate in mid air; that's why!
22 - Cindy D
I always understood the higher prices for gasoline in Europe were caused by the fact that they have way, way less refineries than we do.
They do have a minuscule number compared to us, but whether it actually is the reason for the higher price is something I heard when I was there.
23 - Jet in Columbus
I bought the percentage Clavos, reread and you'll see that. I'm saying that (had you read that far in the comment before posting you comeback) that that 7.6 could be halved and they'd still have hundreds of millions in profit.
24 - Jet in Columbus
As for problems building refineries, if you put a referendom on November's ballot saying that if we approve a couple new refineries being built to lower the price of a gallon of gas back to the obscene level of $2 a gallon, it'd win by a landslide.
The truth is no refineries are being built, and they're not even trying to, because any excuse to keep the supply of refined gasoline low, is a good one, regardless of how flimsy.
25 - Clavos
Actually, Cindy, Jet is correct. The chief reason they pay more than we do is that they have much higher taxes on petroleum distillate products than we do.