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Monday, July 31, 2006

Big Oil Profits...Congress to blame for prices

--posted by Tony Garcia on 7/31/2006

We talked about this on the show yesterday...in doing show prep I found out a few things that are, well, very interesting. I came to a few new conclusions on energy prices. First, you have to understand that I started this because of the news that Exxon had $10.4B in profits last quarter.

Big number...but think about how much petroleum products are sold each day. Gas for cars, metro buses, planes, truckers...vasoline, valvoline...you gearheads know better than me all the stuff in the cars. So the oil companies make money from economies of scale...large volumes of product. Does not yet mean they are gouging or to blame.

So, the rest of this is the short version of what I discovered. If you want to be upset about gas prices you need to focus on Congress.

Oil prices at the gas pump are driven largely by three things...in this order.
1) Futures prices. Price per barrel. It is not the current price, but a futures price. This, btw, is how Wall Street works. If you buy a futures contract for a barrel of xygzam at $75 and by the time you buy that barrel the price might actually be $90, and so you save $15 on cost of business. Why do prices fall slowly? If you buy that contract for $75 and in 6 months the actual price drops to $60 then you lost $15 on the cost of business. So, better to pay a little high on the futures than a little low. Since futures are driven by fear and everything in the Middle East sends the prices sky high. And it is hard to justify bidding on the low side.
2) Global demand. So much more demand globally is driving prices higher. Simple supply and demand. Nothing scandalous there.
3) Domestic supply problem. No new capacity to refine the crude into product means that even with new drilling the supply to the gas pump cannot increase. Lower supply raises prices until demand drops.

The Domestic supply problem is created by Congress and government. They have made it soooo incredibly difficult to build a refinery that one has not been built since Carter was elected. (Many sources available but I used today this one).

There are two effects to this...
a) Prices at the pump go up (again, lower supply raises prices until demand drop).
b) Provides a legitimate increase in profit margin for...REFINERS...not the oil compaines.

Now, how much of your money goes where?
Based on 2005 prices (and I am doing this from memory of yesterday's show) there was
** 19% of the price per gallon went to profits AND cost of refining. Profits includes the .10 per gallon going to the oil company and the profits of distributors, gas stations, refineries...everyone.
** 19% of the price per gallon went to federal and state taxes. This does not include county, city, agency or local taxes and does not includes sales taxes (which some states do).
** 53% of the price per gallon went to the actual cost of the petroleum...that actual purchase of the barrel (not the futures contracts), the cost of building upkeep, salaries, permits, etc.
** 9% of the price per gallone went to exploration.

Now, where is the oil company to blame in that process? Nowhere, if we are being honest about the issue.
Where is any company to blame? At worst the refineries, but they are simply following the supply/demand curve created by price controlling policies of the government (strike one against the gov't)
How does the government have any hand in the production of your gallon of gas? They don't. So them taking taxes from that is like the Mob taking "protection" money from business. There is no legitimate reason for them to be included and there is not a way to 'refuse' the payment. (strike two against the gov't)
Now Congressmen & Senators want investigations, fail to relax the restrictions on refining, want to have government involvement/regulation. (strike three against the gov't).

Pissed about the price of gas? Don't blame Big Oil. Blame every single incumbent on your ballot this November.

********** UPDATE **********
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