Rightfully yours

Can the government do anything?

Before we start discussing that issue, let’s remember the 18.4-cent federal gas tax per gallon. Western countries have the highest usage rates of gasoline per automobile driver. The United States is the largest consumer of gasoline among the Western countries with a daily average in 2005 of 386 million US gallons. This translates to nearly $26,000,000,000 (yep-trillion dollars) per year collected by the government for gasoline. Retail consumers and wholesalers pay roughly half each of the federal specific tax.

Following soaring crude oil prices, Exxon Mobil announced it had broken the record it previously had set for profits by a U.S. corporation, earning $40.6 billion last year, or $4.6 million an hour. Since 2002, profits of the top international oil companies have tripled. The five largest oil companies rang up $123 billion in profits last year and used $50 billion of that to repurchase stock and drive their stock values higher.

The chiefs of five major oil companies (Exxon Mobil, Shell Oil, BP America, Chevron, ConocoPhillips) appeared in front of a House of Representatives Select Committee on Energy Independence and Global Warming on April 1, 2008. It was not the first time that oil executives had defended the industry’s huge profits and faced the harsh words of lawmakers frustrated over their inability to do anything about soaring oil and gasoline costs. In November 2005 and about six months after that, executives of the same companies sought to explain high gas prices at a Senate hearing.

The slick-speak of the oil executives focused on the cyclical nature of the industry. The executives acknowledged high gasoline prices, but said that profits in the oil industry varied widely depending on worldwide supply and demand for petroleum, and tight supplies supported higher prices.

The executives said they know fuel prices are hurting people, but they argued it’s not their fault (sounds like whining) and their profits are in line with other industries (what industries are those, I wonder). Among other things, they blamed the weaker dollar, geopolitical risk (worrying about oil investments in unstable countries) and speculation (they might have something there).

They said, in prepared remarks, they depend on high earnings over the up-cycle to sustain investment over the long term. The first time they referred to that strategy, oil was at $60 a barrel – it’s more than double that now.

The oil executives complained (?) their worldwide profits have grown, but taxes have grown even more (don’t we feel sorry for them). When challenged by the lawmakers to pledge to invest 10 percent of their profits to develop renewable energy and give up their $18 billion in tax breaks over 10 years so money could be funneled to support other energy and conservation, the executives responded that they face a new reality – volatility, high prices, greater competition for resources, and they have invested billions to comply with new environmental standards. Pipeline and refinery construction are billion-dollar undertakings that take years.

(the short answer is no).

The oil executives continued that their companies already are spending on alternative energy projects and argued that new taxes would dampen investment and lead to even higher prices (a threat). They also threatened that imposing punitive taxes on American energy companies, which already pay record taxes, will discourage the sustained investment needed to continue safeguarding U.S. energy security (now it’s a national security issue?).

Although Exxon Mobil has funded $100 million for alternative energy research at Stanford University, the lawmakers urged them to invest some real money for this end.

The oil executives said they continue to look at that area (but not spend for it) and have studied all forms of alternative energy and the current technology just doesn’t have an impact on this challenge (not that will profit them, at least). They said they’ve been investing in wind, geothermal, solar and biofuel operation, while also making expenditures in oil and gas exploration in the Gulf of Mexico and in Canadian oil sands, adding that they understand that “Americans see the pain” of expensive oil.

A House bill earlier this year called for major oil companies to support a measure to give up $18 billion in tax cuts and channel the money into renewable energy. The measure passed the House but later died in the Senate (there is real payoff in lobbying, so you know where that path leads).

Rep. Edward Markey, D-Mass., in previewing the hearing complained “These companies are defending billions of federal subsidies … while reaping over a hundred billion dollars in profits in just the last year alone.” The oil companies are reaping “a windfall of revenue” while poor people have to choose between heating and eating because of high energy prices.

Ed.Note: The lawmakers can chastise the oil companies, but the fundamental issue of capitalism is at stake. Although the lawmakers attempted to pass a law to take away tax cuts and invest the money in alternative energy research, it failed, perhaps due to the millions the oil companies spend lobbying in Washington. In 2005, the top ten oil companies spent $33,173,092 lobbying Congress and the Bush administration. The leaders were ChevronTexaco, ExxonMobil, and ConocoPhillips, who accounted for more than $20 million of the total.

Alternative energy will come from resources the oil companies will have a difficult time buying up for their profit — like sunshine, water, and cornfields. They are buying cornfields, which is why the recent emphasis on ethanol.

So the government will be little help, due to vast amounts spent lobbying, and the government receiving huge amounts from their taxes. And oil company executives rely on profits to boost up their salaries and bonuses.

The government regulates the prices of some commodities like prescription drugs and crops to keep costs in line and prevent excessive consumer costs, but does not appear to do anything about oil prices.

The process of getting to your tank

It is a common thought to think all our oil comes from the Middle East, but in reality, the biggest importer of crude oil to the United States is Canada. The high crude oil prices are doing wonders for Canada’s economy. The breakdown of import percentages to the United States is as follows:
Canada (20%), Saudi Arabia (17%), Mexico (12%), accounting for 49% of the total. Next comes Venezuela (11%), Nigeria (9%), accounting for 70% (rounded) of the total. Lastly there is Iraq (6%), Angola (5%), Algeria (5%), Brazil (4%), Kuwait (3%), Columbia (3%), Ecuador (2%), and finally, Russia, Lybia, and Equatorial Guinea (@1% rounded).

OPEC controls 40% of the crude oil production around the world and its members have two-thirds of the world crude oil reserves. OPEC sets production levels for its member countries to keep oil prices at a planned level. OPEC’s ability to control the oil prices has lessened due to the discovery and development of large oil reserves in the Gulf of Mexico and the North Sea, the opening up of Russia, and market modernization.

OPEC nations still account, as of March 2008, for 35.6% of the world’s oil production, affording them considerable control over the global market followed by the OECD, which produced 23.8% and the post-Soviet states, which produced 14.8%.

OPEC (The Organization of the Petroleum Exporting Countries) members are Iran, Iraq, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates, Libya, Algeria, Nigeria, Angola, Venezuela and Ecuador.

The OECD (The Organisation for Economic Co-operation and Development) is an international organization of thirty countries that accept the principles of representative democracy and free market economy. The post-Soviet states comprise the 15 independent nations that split off from the U.S.S.R. Source: US Energy Information Administration

Gasoline prices have to do with the costs and profitability of the oil supply chain, as well as the fact the oil and gas are traded at almost any point through it. Crude oil makes up more than half the cost of gasoline. Unprocessed crude oil after being pumped out of the ground, is sent various distances through pipelines to ships waiting at the oil ports. At any time and many times during its journey to the sea and on the sea to the refinery and distribution terminals, quantities of this crude oil are traded on the commodity markets.

Only about two-thirds of the cost of a gallon is determined by the normal costs and margins of the supply chain, which include raw material supply, product manufacturing optimization, supply and distribution. One-third is driven by trader belief as to what will happen in the future.

Optimization means maximizing the profit margins of the raw material. Not all crude oil gets manufactured as gasoline. Crude oil is the basic material for plastics, pesticides, clothing, cosmetics, fertilizers and pharmaceuticals. This has impact in the area of supply and demand that will affect price. California has a higher demand for gasoline than the state refineries can produce. There are only two other refineries in the world that can produce gasoline to California’s unique specifications, one in Northern Europe, the other in the Middle East.

After the gasoline leaves the refinery, it is shipped by rail or pipe to distribution terminals, where it is purchased by retailing companies, independent or oil company owned. These retailers distribute the gasoline to the gas stations where it is pumped into your gas tank. Retailers compete with each other for price as well as the gas station owners. You may see an independent tank truck filling the tanks of an oil company branded station, because the independent station owner is getting a better deal on the gasoline.

The supply chain in the oil business is long and involved . The same product, whether in raw form or finished form is bought and sold many times before it goes into a car tank. When there is a potential for profit, not all the people who buy and sell the product are connected with the oil supply chain. Some are just speculators. But everyone blames the oil companies and everyone else.

Crude oil prices have currently peaked as will any commodity. Consumers are changing their life styles to save money by using less fuel. When that happens, supply takes a while to adjust, but there is now more supply than demand, forcing the price down. Speculation is no longer profitable.

Keep in mind that although some states regulate the maximum profit on a gallon of gas to about a nickel a gallon at the pump, the retail convenience store will lower his price as much as possible because he is interested in getting the consumer into the store to buy higher profit items like cigarettes or candy.

Each product purchaser along the supply line has a responsibility to his company to make the most profit possible. Failing at that, he will be replaced. That goes for CEOs as well.

Other countries share our pain

As of July 2008, when the average US gallon of gas cost $4.13, the following countries reported these gasoline prices (all per US gallon and in US $):

Norway $10.33, Turkey $10.14, Netherlands $10.11, Belgium $9.39, Denmark $9.31, Germany $9.20, Portugal $9.16, Finland $8.90, United Kingdom $8.82, Italy $8.78, Sweden $8.71, Spain $8.10, France & Ireland both $8.06.

There are other countries where the government subsidizes the price. Some of those are:
Russia $3.97, Vietnam $3.26, Malaysia $3.18, China $3.05, N. Korea $2.69, Indonesia $2.46, Mexico $2.35, Egypt $1.21, Qatar $0.83, Kuwait $0.79, Saudi Arabia $0.45, Venezuela $0.11
Source: http://en.wikipedia.org/wiki/Gasoline_usage_and_pricing

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