The Gas Price Blame Game - Revisited
by Doug Edelman (4/4/08)
I first published an article on this subject in April 2006 - two years ago… but with some minor updates it is still as true today as it was then - and to my mind, it bears repeating! So here goes:
There is no denying the pain felt at the pump as gas break thru the $3.00 per Gallon mark. The life blood of this nation IS oil, whether we like or acknowledge it or not. So when gas prices rise there is a predictable rush to blame someone. Democrats are quick to blame the oil companies for “gouging” or for “obscene profiteering”. Are they right? Sensing blood in the water, the Dems are ready to levy new punitive and confiscatory taxes on the oil companies. Have they considered the “Law of Unintended Consequences’? A “Windfall Profit Tax” to punish the oil companies for making a profit? Let’s look a bit closer.
Yes, the oil companies operate in a world of big numbers. Their profits are in the billions. But is this obscene? Think of the trillions of gallons of oil our nation consumes (not to mention the burgeoning demand of other nations). They are meeting an incredible demand, and doing so with a profit to costs ratio in the 9 to 10% range. Few businesses can operate at all on that small a margin. It’s hardly an obscene rate of return.
And who gets those profits? The shareholders do. How many shares are in circulation?? I wouldn’t dare speculate… but can you name a single mutual fund out there that doesn’t have SOME of it’s assets in oil? Do you have a 401K or IRA? YOU are probably an oil profiteer!
What would happen to the economy if suddenly the value of every mutual fund in America were to have to absorb the impact of confiscatory taxes on the oil companies?? The Law of Unintended Consequences!
The oil companies bear the costs of purchasing all that oil – much of if from less than friendly sources abroad, transporting it halfway around the world, refining it, meeting governmental regulations for upwards of 25 different custom blended formulations of gasoline – not to mention motor oil, home heating oil, kerosene and other petrochemicals, and the demands of the plastics industry. They must then transport and distribute these products around the country. Getting crude oil out of the ground in Saudi Arabia – turning it into a legal-to-sell-in-Podunk blend of gasoline – and then getting to the Podunk Gas-n-Wash on Main Street is not exactly an inexpensive proposition.
Some Democrats have even proposed a NEW ADDITIONAL $.50 per gallon gas tax! Can you imagine the economic impact of that “giant sucking sound” of our dollars?
It seems to me that the oil companies ARE INDEED holding the line on gas prices in some measure. Think about this: When oil was $20 a barrel, we were quite accustomed to gasoline around $1 a gallon. Why then wouldn’t gasoline break thru the $3 a gallon mark by the time the cost of crude went over $65? But oil is now over $100 a barrel, and the average pump price nationwide is just breaking the $3 mark. Am I the only one who recognizes there is some level of restraint built in there? Do the math! The cost of crude has gone up 5 times since we saw dollar-a-gallon gas, yet we’re just now surpassing $3 at the pump. And while sudden oil price rises make news, several times in the last year there were precipitous drops in the price – which, while temporary (all pricing in this market is temporary!) these drops received little press.
So who CAN we blame for our pump-pain? There is plenty of blame to go around.
Did you realize that for every gallon sold, more money goes to the Federal, State and Local Tax coffers than to the bottom line of the oil companies? Who is the big bad oil profiteer? Who’s “gouging” and reaping a “windfall”? While the government profits MORE than the oil companies, they don’t have to find, buy, transport, refine, or distribute anything. And they don’t just place direct taxes on the gas. They also tax the company’s profits. Blame government taxes.
India, China, Korea and other nations have finally moved into the 21st century. As their infrastructure grows and their economies expand, their demand for oil increases. OPEC no longer feels any pressure to keep prices in line, as we are hardly their only or even their biggest market anymore! If WE drop our consumption – they’ll just sell more to other nations who are happy to pay the price. Europe has been paying over $4.00/gallon for years. We have enjoyed prices artificially lower than the market price in the rest of the world for a long time. As the world’s economies become increasingly global, what makes us think we can continue to get discount prices when other markets pay full price? Blame the emerging nations!
Did you know that government regulations on gasoline formulations require the oil companies to create numerous custom blends that can only be sold in specific regions? The companies must predict the demand in each of these markets so their refineries can produce one blend for just so long, and then retool to produce another. If they miscalculate, there will be a glut in one area and a shortage in another. A glut for one regional blend cannot be tapped to meet a shortage in another, because the formulations may not be sold across regions. So instead the price drops in the region with the glut, and rises in the region of the shortage. Then the people in the shortage area will note their price is higher than perhaps their neighboring state… and they begin to cry “Gouging!” Blame the environmentalists who pushed for the boutique blends regulations.
We have not built a new refinery since the Carter Administration, yet for a variety of reasons several have come off line in that time. With reduced refining capacity, the burdens of boutique formulations, and environmental regulations – even if we have adequate crude supplies, heavy demand outstrips the capacity to turn that crude into marketable products. Blame the environmentalists who won’t let us build refineries!
Our dependence on foreign sources of crude makes us beholden to the pricing whims of nations not always friendly to our interests. Where is the oil we import coming from? We import our oil from the Islamic nations of the Middle East, along with Venezuela, & Mexico primarily. Not exactly our blood-brother allies. On the other hand, environmental groups quash every attempt to develop our domestic reserves. Alaska? Off Florida? California? There’s plenty of oil to extract, but the environmentalists won’t let us drill. Once we pay the price at the foreign well-head we still have to transport all this crude halfway around the world on Diesel Burning ships! Very eco-friendly!
The environmentalists complain that drilling in ANWR might disturb some native caribou, yet one square mile of tundra looks like another… they can walk a mile away, and not even see a drilling rig! These Eco-Nuts worry about the possibility of pipeline spills – yet existing pipelines have excellent records in that regard. If a spill should occur, it is always of limited scope as turning a valve upstream from a rupture cuts the flow. On the other hand, floating billions of barrels of crude across the oceans in tankers isn’t exactly without risk. The possibility of dropping the entire load of a tanker is absolutely frightening. Of course, a wreck of the magnitude of the Exxon Valdez is rare – but ships can and do get into trouble on the high seas. And what is the first line of defense a ship’s captain has against foundering in angry weather? Yes, lightening the ship by jettisoning cargo! Now THERE is an environmentally friendly thought! Blame the environmentalists who won’t let us drill for our own resources!
As in ANY commodity trading, uncertainty and instability raise prices. The current fears regarding Iran’s activities and other Mideast turmoil certainly casts doubts and uncertainties on the markets. This drives up prices. Blame the jihadists who can’t coexist with anyone else in this world!
Oil is a worldwide commodity, with worldwide influences on its price. There is no single culprit in the rising price of oil. Blaming the oil companies themselves is myopic, and punishing them is counterproductive.
We MUST develop our own domestic sources – environmentalists notwithstanding. We must reduce our dependency on foreign sources of oil. We must build new refineries. We must reduce consumption. We must encourage alternative fuels. We must remove the disincentives to explore for new oil deposits.
The machine that is the United States runs on gas, and is lubricated with oil. The oil companies are very efficient at delivering those commodities to us despite numerous obstacles as listed above. But putting more obstacles in their way is not going to get more oil here, and won’t make it any cheaper.
Copyright © 2008 by Doug Edelman
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