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.