Do Not Blame Big Oil So Fast

There seems to be a lot people who are really angry with BIG OIL yet no one appears to really know the real reasons as to why the price of oil continues to rise. As I was reading various columns published by several leading news sources and watching major news stations I can see why most Americans are steamed at Big Oil.

Over the past few weeks I’ve had some questions regarding this current situation and attempted to address it via this blog. But this is now my 3^rd attempt at putting this post together. My first two had me being over zealous and thinking I could combine and explain why the price of oil is so high and how the general public is being manipulated by various political agendas through the use of major news entities. When completed, I was looking at a 12 page theses.

I will admit I was even bored reading that work so I chose to start again coming from a different direction. After taking a day off from this post I made the decision to only create a list of the major questions I had regarding the principle issue, the current price of oil. I will try to strip away all political agendas and be as factual as possible.

Could the answers to these questions be wrong, yes! But I feel pretty good that I now have a better understanding of this issue and I can explain why we are all ‘taking it’ at the pump!

1. Why are the oil companies making huge record breaking profits?

“Energy company profits, though huge in absolute terms, are in line with those for other industries. Earnings from oil and gas companies averaged 5.8 cents on the dollar, compared with 5.5 cents for all industries in the five years that ended with the third quarter of 2005.” Los Angeles Time, Business

Over the past few years I have heard this quote from multiple sources on TV and in print. I would really like to see a graph representing the profits big oil has made over the past 25 years accounting for inflation. It would interest me to see if oil and gas companies were averaging much lower and now in recent years achieve an average of 5.8 cents.

2. What dictates the price of oil?

“Oil companies do not single-handedly determine the price of oil. The price of oil is set on the crude oil futures market. Simply put, these prices are affected by supply and demand because, at present, oil trades in a global commodity market where increased demand or reduced supply in one place instantly translates into price shifts everywhere. A variety of publicly available information sources show that supply is relatively static at the moment, while world demand continues to grow as economies grow.” Energy Bulletin

For more information on how Futures Speculation works, read Predicting Futures Oil Prices. Oil Drum

3. Are we seeing record high numbers?

“The current price of oil would have to “rise above $90 to exceed the all-time high’s set a quarter century ago when supplies became tight in the aftermath of a revolution in Iran and a war between Iraq and Iran.” Los Angeles Times, Business

In my 31 years I have never seen the actual digits posted on gas stations reach these current high numbers but reporters must take inflation into consideration when reporting “record highs”.

4. How come the price of gas keeps going up & up?

Here is where I think most of confusion is created. You can read a dozen articles on this subject and get two dozen different answers. Here are two sources who I felt nailed it. (There are other reasons, but these give us the big picture.)

“The geopolitical situation is volatile, and an astute citizen may notice that every time there is news from Nigeria or Iran, the price of oil goes up because of the potential and real effects of these situations on world oil supply. Again, oil traders are fearful that the supply will not remain stable forever.

Countries like China and India are industrializing at a great pace, and while we are accustomed to obtaining oil at a comfortable quantity and price, it will be impossible (and immoral) to deny similar resources to these countries. China is working furiously to secure new oil supplies, and they’re content to negotiate with countries we’re reluctant to deal with, like Iran and the Sudan.” Energy Bulletin

“Gasoline inventories typically decrease this time of year as refiners shut down their plants to perform maintenance ahead of the summer driving season. And oil traders typically point to the decreases as reason for concern about summertime supplies, a routine that, more often than not, sends futures prices higher.

That said, there is additional worry about summer gasoline supplies because of the prospect of tight supplies of ethanol, which is needed in increasing amounts as refiners phase out their use of methyl tertiary butyl ether, or MTBE, which has been found to contaminate drinking water.” MSNBC

5. Are we witnessing another Enron type scandal?

It appears our government feels we have another possible Enron scandal in the making. Governor Schwarzenegger was quoted as saying “we must not rule out the possibility of market manipulation, price gouging or unfair business practices employed by oil companies.” Los Angeles Times, Business

“The first thing to do is to make sure Americans are treated fairly at the gas pump,” Bush said. ‘This administration is not going to tolerate manipulation.” Bloomberg

“The administration sent letters yesterday to state attorneys general urging them to vigorously enforce state law ‘against any anti-competitive, anti-consumer conduct in the petroleum industry.’

Consumers around the nation have expressed concerns about what they have perceived as anti-competitive or otherwise unfair conduct by the world’s major oil companies,” said Attorney General Alberto R. Gonzales and Federal Trade Commission Chairman Deborah Platt Majoras.” WP Herald

Even though Bush, Schwarzenegger and many others are making statements alluding to the fact there could be possible price manipulations taking place, I am unable to find anything hard hitting which has any kernel of truth to it.

“Past investigations of price gouging have concluded that ‘the industry is reasonably competitive and the explanation for price increases lies in other causes,’ said Bert Foer, president of the American Antitrust Institute. The chance that investigators will find anything new ‘strikes me as fairly low,” WP Herald

6. Who should we really blame?

Well, the fact is the reason for the high price of oil is simple supply and demand. But some government officials feel that the mergers and acquisitions of big oil over the past several years have created an uncompetitive marketing place.

“Sen. Arlen Specter, R-Pa., chairman of the Senate Judiciary Committee, is backing legislation to toughen antitrust laws relating to oil company mergers, and says a tax on extraordinary — windfall — profits could help cut fuel prices.”

Here is my quick short list of people we could try to blame, but I think it is pointless.

• We could blame Bush for invading Iraq and creating a politically unstable environment.

• We could blame India, China and Korea for coming of age.

• We could blame environmental policy makers. Creating clean oil is not a cheap operation.

• We could blame the speculators and market makers.

• We could blame geologists with their intention to create global awareness that the wells are running low.

“Oil is a worldwide commodity, with worldwide influences on its price. There is no single culprit in the rising price of oil, but the fact is that blaming the oil companies themselves is myopic and punishing them is counterproductive.” Conservative Voice

7. Why doesn’t the US Government step in and help?

“”I’m a capitalist, but I think we’re being extorted,” said Ron Safier, 72, an executive recruiting company owner in Los Angeles, as he put $46.94 worth of gas into his Toyota sedan. Oil companies “need to be brought to their knees” by government intervention, he says.” USA Today

“Bush renewed his call for greater domestic oil production, including in Alaska’s Arctic National Wildlife Refuge; the construction of new U.S. refineries; and new tax breaks to anyone who buys a hybrid vehicle such as Toyota’s Prius this year. Currently, only the first 60,000 vehicles produced by each manufacturer are covered by the tax break, which tops out at $3,400.” Washington Post

“Sen. Carl Levin, D-Mich., who appeared with Specter, said gasoline prices ‘would come down within a matter of days’ if President Bush said he would support a windfall profit tax on oil companies.

Such a tax would backfire, warns Wachovia economist Jason Schenker: ‘If you tax the oil companies for producing, then they are less likely to produce,’ he says.” USA Today

8. Are high prices really a bad thing?

I have a quick response to this. Short term it hits us in our wallets and makes one second guess commuting unless one has to. In the long term, COME ON FREE MARKET ENTERPRISE!

Over the past few years cars have gotten bigger and hybrids are still a novelty to most people. We don’t realize how much influences we have as consumers. The answers is not with government helping us but we should look towards our self’s. We bought into the system and have become reliant and now the rest of the world is catching up with demand.

9. Are we really running out of oil?

I have saved this question for last because it is highly controversial. The prices of oil are on the rise because speculators are predicting massive shortage. But according to an article in this weeks Economist, “Steady as she goes” this issue makes a point of saying there is plenty of oil in the ground for years to come.

It seems there is no common consensus for how much oil is left in the Earth. But the article does mention with the help of new technologies and setting the right political climate we should be able to dig in areas that were once impossible.

This entry was posted on Thursday, April 27th, 2006 at 2:58 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.