There is no denying the pain felt at the pump as gas prices flirt with the $3.00 a 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. Bill O'Reilly has been a crusader in the effort to blame the oil companies for "gouging". But is he right? Democrats, smelling blood in the water, 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 that 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.
The 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.
And who gets those profits? The shareholders. How many shares are in circulation?? I wouldn't dare speculate … but is there any 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!
Bill O'Reilly has touted that it is the patriotic duty of the oil companies to hold the line on prices against their increased costs because we are in a time of war. Hey, Bill. How about the CABLE TV people holding off price increases … we're at war! Why is a pound of hamburger so expensive these days? We're at war, for goodness sake!
It seems to me that the oil companies ARE doing some level of holding the line. When oil was $20 a barrel, we were used 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 it's at $70 and the average price nationwide is only now just bumping the $3 mark. There is some restraint built in there! The cost of crude has gone up 3.5 times since we saw dollar-a-gallon gas, yet we're just now getting to $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 oil profiteer? The government profits MORE than the oil companies, and they don't have to find, buy, transport, refine, or distribute anything. And that's just in 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 economies grow, so does their demand for oil. OPEC no longer feels any pressure to keep prices in line, as we are not their only or even their biggest market anymore! If WE drop our consumption -- they'll just sell more to other nations 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 force 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 so long, and then another. If they miscalculate, there will be a glut in one area and a shortage in another. The glut cannot be tapped to meet the shortage, 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 note their price is higher than perhaps their neighboring state … and they cry "Gouging!" Blame the environmentalists who pushed for the boutique blends regulations.
We have not built a new refinery since the Carter Administration, yet several have come off line in that time. With reduced refining capacity, the burdens of boutique formulations, and environmental regulations -- even with adequate crude supplies, heavy demand outstrips the capacity to turn that crude into marketable product. 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? Islamic nations of the Middle East, 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 and not even see a drilling rig! They worry about the possibility of pipeline spills -- yet existing pipelines have excellent records in that regard. Where a spill does 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 our own resources!
As in ANY commodity trading, uncertainty and instability raise prices. The current fears regarding Iran's nuclear capabilities 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, but the fact is that blaming the oil companies themselves is myopic and punishing them is counterproductive.
We must develop our 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.
The New Media Journal.us © 2006
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