Friday, June 8, 2007

Mister, “Can you spare a gallon?”

It seems like every year at this time we go through the same gas shortage/high prices phenomenon. This has been going on since I first started driving in 1976, I started late! Did I miss something? I know I am not very smart and don’t claim to be, but why has this problem not been adequately dealt with in 30 years? Why have we allowed the big oil companies to year after year present this same lame excuse for price gouging? Why have our elected officials not been able to or been unwilling to tackle this national problem?

I was in Chicago over the weekend and gas prices were 4.00@gallon. Is it just me or does that seem inordinately high? If every year the oil companies know there will be a larger demand in the summer, why do they not make allowances for this? Can it really be as simple as it is being reported by the media for why gas is so high? I have never been one to accept the status quo so after a little investigating this is what I found out.

There's no doubt that the recent refining share has gone higher, although the share has been higher in the past. (Note: With a higher gasoline price, the spread in dollars is going to be higher even with a constant share.) A quick glance reveals obvious seasonality in the refiner's share. To get a feel for how we stand relative to the same time in previous years, Figure 4 presents the refiner's share over the current and past three years.

Figure 4: Share of gasoline prices associated with refining, in 2007 (blue), in 2006 (red), in 2005 (green), in 2004 (black), in percent. Source: Energy Information Administration.

The graph confirms the impression that the refiner's share has been particularly high for this time of the year, although there have been higher peaks, specifically in 2004.

One bit of policy analysis. The Washington Post article quotes the assertion that the wide spreads are due to policy inaction over the past six years. There is indeed a temptation to ascribe the wide spreads to cartelization, or opportunistic shutdowns of refineries (and I won't rule either of those out -- remember Enron and California in '00-'01...). However, high spreads are also consistent with the view that there is no coordinated reduction of supply and the view that if conservation had been encouraged over the past six years (instead of tax breaks for SUVs), the spread would be smaller. That's because theory predicts that the greater and more inelastic the demand, the greater the resulting price-cost margin.

So one way of thinking about what policies could have mitigated the crack spread is to consider both demand management and supply enhancement. The Administration until recently focused almost solely on the latter.[1]

Basically what is happening is that the oil companies which not only import oil, they also refine the oil, and then they sell the gasoline that is refined from the oil are always looking for ways to increase profit margin. The profit margin in the actual price of crude oil is pretty much stagnant; it is built into whatever the market will bear. All oil companies pay about the same price for crude so there isn’t a lot of room for individual price change, except on a conspiratorial cartel level which the author seems to brush off with little desire to explore. As usual we fell to grasp the obvious in our search for some far fetched analysis of why things are the way they are. The answer is usually something simple; in this case it is; big oil companies wanting to maximize profits at the expense of a captive consumer. It is a known fact that even with gas prices spiraling; demand has not diminished and it does not diminish due to what we drive and how we drive.

I have never understood why no one has ever investigated the link between the American auto industry and big oil. Is it just a coincidence that when the price of gas is at an all-time high the most popular vehicles are SUV’s and other large vehicles? We must not fall for the old scam of “it is a consumer driven market”, the consumer will buy what is presented to them. If there were no SUV’s would consumers demand them? I find it interesting that we have an energy policy that does not deal with two of the most important components of the issue. The fact that we have been sold vehicles that are energy inefficient and that our gas policy is being set by a few giant energy conglomerates. It doesn’t seem to matter who is in power or who is in office, the oil companies keep making money. And we the consumer, keep filling the coffers of those companies despite the hardships it is causing.

The rise in prices is hurting working class and lower-income families the most, as they have less disposable income to shift to transportation costs. This means that the high prices are cutting into other necessary spending, including food, prices for which are also rising throughout the country. An AP poll released May 25 found that 46 percent of the population said that high gasoline prices are causing severe financial problems.

The shortage of refining capacity is generally attributed in the media to a number of planned and unplanned refinery outages. However, refinery capacity has been deliberately decreased over the course of the past two decades, for the explicit purpose of boosting profit margins.

The Journal article notes, “For decades, there was too much refining capacity in the US, margins were crummy and many companies were closing or selling off refineries. In 1986, refiners made little more than $2 for every barrel they processed.” The newspaper quotes Fadel Gheit, a senior energy analyst of Oppenheimer & Co. and a former employee at Mobil, now part of ExxonMobil, as saying, “We used to commission studies to get rid of refineries. We wanted to give them away.”

In the first quarter of the year, refining profits of $1.91 billion at Exxon and $1.62 billion at Chevron have helped generate massive profits for the companies as a whole. Corporations that engage only in refining have done even better.

In the long-term, the high gasoline prices are a product of the conscious policy of the giant oil companies, who, through a series of mergers and acquisitions over the same period, have concentrated the market in the hands of a small number of firms. Inflation-adjusted prices for gasoline in the US were below $2.00 a gallon for most of the late 1980s and 1990s. They only surged above $2.00 in 2004, and have pushed past $3.00 for periods of time in 2005, 2006 and again in 2007.

The ability of energy companies to increase profits simply by raising prices is aided by the fact that demand for gasoline, particularly in the United States, is highly inelastic—i.e., demand does not fluctuate much with changing prices. This is due to the fact that there are few alternatives to automobile transportation, given the absence of viable public transportation systems in many areas. In major metropolitan areas such as Los Angeles or Detroit workers have no choice but to drive the often long distances separating homes from work. According to the Census Bureau, only 4.7 percent of the US commuting population takes mass transit to work each day.[2]

It appears that the biggest surge in prices have come under the President with ties to big oil. Am I the only one who finds this disheartening? When will we as Americans stop supporting those who do not share our best interest?

NEWSFLASH – There are other issues in this country besides abortion and gay marriage. While these issues are important to a great many people and I would never attempt to minimize them, we also have to look at the big picture. While the powerful are pushing these “hot button” issues they are stealing the country blind. The sad fact is that these people will not abide by or be affected by whatever the outcome of these will be in court or public opinion. They don’t care if abortion is illegal or legal, if they need to have one they will get one. So while average Joe and Jane are picketing and voting in these corporate and wealthy stooges, the rich keep right on getting richer. These people could care less about the average person; there only loyalty is to money. It is not to race, creed, or color; unless the color is green. They will make money off of anybody or anything. Just think about all those things that were once considered “ethnic” and how they are now being used to sell everything from luxury sedans to diapers.

What is clear is that the rise in prices cannot be explained by a corresponding rise in crude, since crude prices have remained largely flat over the period that gasoline prices have soared.

Several commentators, including the WSWS, noted the coincidence last year between a sharp decline in the gasoline prices and the run-up to the 2006 mid-term elections. According to polls conducted at the time, 42 percent of the American population held the opinion that the price drop was part of a deliberate attempt to manipulate the elections by temporarily decreasing economic insecurity. This was seen as a potential boost to Republican candidates. (See “US gasoline prices; the ‘free market’ and the November elections”)

With the soaring gas prices, the energy companies are now getting back every penny, with interest, that they lost while prices were relatively low in September, October and November.

Even if one were to suppose that there was no element of deliberate manipulation, the situation stands as an indictment of the anarchistic character of the capitalist market, particularly evident in the fluctuations in the prices of basic necessities such as gasoline. An energy policy developed to serve the interests of the population, and not the profits of a handful of energy giants, would involve ensuring an adequate supply and low prices, not to mention substantial investment in public transportation infrastructure. The subordination of the energy market to the demands of profit has also made it impossible to pursue rational energy policy on such issues as global warming.

Under these conditions, the various proposals advanced by the Democrats in Washington are noteworthy only for their cynicism. The House of Representatives passed a bill that would punish anyone found guilty of engaging in price gouging. Others have suggested measures—the same ones suggested and never passed whenever gasoline prices spike—that would temporarily cut federal taxes or create a “windfall profits” tax. Leading Democrats raise these proposals knowing full well they will never pass into law. However, even if they did, they would have no impact on the underlying problem—the domination of a handful of energy companies over a market that affects hundreds of millions of people.[3]

The interesting thing here is that even if we were naïve enough to believe that there were no price gouging, just the fact that one of our most basic needs is being manipulated by such a small group. Just as we have public energy commissions for our other energy concerns, why do we not have one for gasoline? Let the oil companies justify their rate hikes before a group of citizens who are not on the payroll. We should be tired of the same old tricks, where the Democrats hold hearings and protest before the cameras only to leave the thing still broke. They get some mileage from beating up “big oil” and still get to keep their contributions. Is this a great country or what?



[3] Ibid

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