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Soaring prices don't signal oil shortage
By Skip Miller
Staff Writer
I was humored by news of the world’s largest oil producers and consumers gathering in Saudi Arabia where they would proceed to get to the bottom of outrageous gas prices.
Talk about appointing the fox commissioner of the hen house investigation …
The prices we pay at the pump should be cheaper than virtually anywhere else in the world. We are the world’s third-largest oil producer, behind Saudi Arabia and Russia.
Saudi Arabia charges less than $1 for gas. Russia charges less than $2.50. In some parts of the U.S., last weekend's price cracked $5.
The buzz is we get ourselves into shortage trouble because the country has not built a gas-making refinery in 30 years. We don’t need to build another one. The current refineries are nowhere near production capacity. In fact it’s not unusual for them to crank out a surplus that is exported.
The amount of gas United States engines have consumed in the past decade has been relatively constant. It certainly has not spiked high enough to put pressure on the oil supply. Still, prices have increased from $1.16 in 1998 to $4.08 in 2008.
The U.S. imports 40 percent of the oil it uses. That oil comes from all over the world. The biggest single supply comes from Canada; Mexico is No. 2.
If we stand back and look at it we see a stable crude oil supply, a stable gasoline retail market, the capability to produce more gas than we need, and stability in all of the other crude oil products, from varnish to propane.
We pause here to ask why we are considering offshore drilling and opening wilderness areas that hold part of the national reserve. Oh. And Saudi Arabia promised to pump more oil. We do not need more oil. We need sensible pricing and more efficient use.
Enter a character named the speculator. He’s a gambler who makes his money betting on the price of oil. He can bet it is going to go higher or he can bet it will go lower. He bases his bets on the world market value of the dollar. If the value of a buck drops, the price of oil goes up. And up. And up.
Yeah, I know. The formula is much more complicated than that. Who cares? Where's the formula that makes the prices go down? Don't tell me gas is some $12 a gallon in Norway and more than $8 a gallon in Germany. I don't plan on filling up at those pumps any time soon
This is where it gets messy.
Big oil companies such as Exxon Mobil and Chevron comprise the only market for crude oil. They also own their oil wells, transport crude oil in their ships and pipelines, refine it in their refineries, and haul it to retail outlets in their trucks. They even own a number of those outlets.
It’s a good business. It has made American oil companies among the biggest and most powerful companies in the world. Exxon Mobil pocketed $100 billion in profit last year. No other company in the history of human endeavor has posted such a profit.
So here’s the question: If speculators fiddle around and bid oil up to $130 a barrel, what have they done to the price of the millions of barrels of oil these big companies pump out of the ground? That oil will not be sold on any futures market. It remains the property of the big company until it is sold as a retail product.
Are they charging themselves $130 a barrel? More than 70 percent of the cost of a gallon of gas is the price of crude oil. Are the companies using the $130 to compute the 70-percent cost even though most of the oil came from their own wells?
Gas-producing companies divide the country into regions. Each region is divided into grids. The companies set the retail prices within each grid. How the prices are set is a complicated formula that includes location, competition, the amount sold, etc.
The pump price can be cheaper at one end of Culpeper than it is at the other. Gas in Culpeper is cheaper than it is in Fredericksburg or Richmond, and all points north. Gas is more expensive at outlets serving major arteries such as Interstate-95 or Interstate-66.
Meanwhile, the guy who owns and manages his own gas station is getting booted in the you-know-what. His profit margin is a nickel or less. Chances are he loses money on every credit card transaction because of the handling fee he pays the credit card companies.
In the past he has offset that with the sale of store items – a muffin and a cup of coffee, a soda and some chips. People are not coming into the store that much these days. They are not buying his muffins or his sodas.
The big boys gathered somewhere on the sands of Saudi Arabia, and they are going to get to the bottom of these outrageous prices. I don't know how they can do that and keep a straight face.
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