Gasoline Wars

on Tuesday, May 29, 2007

I was supposed to hang curtain rods for Cari tonight. Instead, the news was complaining about gas prices for the bazillionth time. I got tired of hearing the same old rhetoric so I decided to vent and spent two hours typing this up. Anybody who has argued with me about this before may have already heard me say some of this. I've researched all this info out over the last few months, hopefully it's easy to understand. Sorry 'bout the curtain rods, Cari! Hope you all enjoy:

How many texts and emails have you gotten saying, "Don't buy gas on May 15th from either Exxon or Shell and prices will go down to 98 cents a gallon!"?... Yea right, and if you don't eat today you'll lose 36 pounds too! First of all, the gas station owner is the only guy you’ll be screwing with because he bought that gas from a jobber who bought it from another jobber who ultimately bought that from the oil company. So technically the oil company has been paid for that gas long before you ever put it in your car. Secondly, people will just buy double gas on May 14th and 16th. So to all you people out there who start these emails, I just have one thing to say to you: Have none of you ever taken an economics class? 3 words - supply and demand. When demand is high, prices go up. When demand is low and supply is high, prices go down. It's not rocket science. When everyone drives their boat-towing SUVs that get 14 MPG to Lake Powell for the weekend, thereby consuming massive amounts of a limited resource, prices will go up.

Since nobody else seems to be doing any research on the subject, I will do it for you.

#1: Mass consumption. This nation consumes more oil than it can make. The United States is the largest consumer of oil in the world at a whopping 20 million barrels a day! (A barrel is 42 gallons by the way.) The US Department of Energy states that at times we only produce about 5 million barrels a day which means that we are forced to import 75% of what we use. For all you non-economics majors out there, importing is expensive. By comparison, Venezuela (who produces almost 100% of the oil they consume and imports almost nil) enjoys prices around 17 cents a gallon for gasoline. Check this out: The United Arab Emirates (the guys we buy much of our oil from) just built the world's first 7-star hotel. They also built an indoor ski slope to go along with it. 15% of the world's large towers currently being built are in Dubai. The Burj Tower, which in 2008 will be the world's tallest skyscraper, is also under construction in Dubai. They are building the world's largest theme park called 'Dubailand' which will feature anamatronic life-size dinosaurs (guess they never watched Jurassic Park). They are also building a 59-story hotel where each floor slowly spins independently of the other floors - something similar to the Space Needle. Construction is in the hundreds of billions of dollars. And guess who's paying for all of it...YOU!

#2: Tree-huggers. Fact: There is more oil in southern Utah, Alaska, and off the coasts of Florida and California than in all the discovered oil deposits in the world COMBINED! Another fact: We aren't drilling any of it. Why, you ask? Because all of the special interest group tree-huggers have forced our senators to block access to these stockpiles. They also have not allowed us to build new refineries. They say that we will harm the environment by drilling and refining in these areas. You know that small patch of barren tundra up in Alaska that we will have to impose upon in order to drill...well preserving that barren tundra is costing you 3.19 a gallon. Hope it's worth it!

#3: Different blends. Each region of the United States demands their own specific blend of gasoline. As we enter the summer, gasoline formulas change to reduce emissions. Refiners must draw down their tanks to switch to these blends, which lowers available inventories. There are up to 18 different blends of gasoline running through the pipelines of this country at any given time. Refineries are much more expensive to operate when they have 18 independent recipes to make instead of just one. Think about it this way: What would be cheaper, making one type of cookie for your neighbors or 18 different recipes of cookies? For all you liberals out there, during his campaign, even John Kerry called for a reform of the "more than 300 local and state fuel regulations in the U.S."

#4: Understanding profits. Yes, oil companies made billions of dollars in profits this last year. But in the accounting world, percentages are more important than raw numbers. If I sold cars and only made one dollar of profit on each sale, but I sold a billion cars, does that mean that I'm price gouging because I made a billion dollars? Keep in mind that I only make one dollar per sale, that's not much. Remember, we use 20 million barrels a day. Even if oil companies made one cent per barrel, that's still one cent, 20 million times over, each day. Fact is we just use a TON of the oil companies' product which results in large numbers. But here, let me break it down and put things in real perspective by listing the profit margins of many industries in the U.S. These are real numbers and are verified and published by the IRS. The following numbers are percentages:

Pharmaceuticals and medicine: 21.6
Banks: 20.8
Beverage and Tobacco: 17.2
Electrical equipment: 14.2
Chemicals and Allied products: 13.7
Computers and Electronics: 13.4
Oil: 8.9

That means that your own bank is making 21 cents off your dollar and the drug companies make almost 22 cents of pure profit for every dollar we spend on their products!! Why then do we whine against the oil companies who make a measly 8 cents? According to Fortune magazine, Chevron's net profits per dollar of sales were the 185th highest in the nation. That means that 184 companies had higher net profits than Chevron. Some of these companies are Pfizer (#7), Google (#12), Microsoft (#13), and Bank of New York (#17). Another interesting fact, government taxes on oil are upwards of 60 cents a gallon in some states. If you don't believe me, it's posted right on the pump. That means that while the oil companies make 8 cents, your government is making a whopping 20 cents for every dollar you spend on gasoline! Now tell me, who are the real price gougers? Think about that the next time you hear Hillary or John Edwards say that we need an investigation into the oil companies profits while, in the mean time, they mandate taxes of almost 3 times that much. If you aren't mad enough at the government yet, then check this out. Summer of last year the government passed a new law demanding that ethanol be added to all gasoline blends, indefinitely. That one act alone made gasoline prices jump 30-40 cents overnight due to the higher costs of ethanol additives. That rate increase will never go away. Thank you senator! On another note, I was at Costco the other day and I saw that the newest version of Microsoft Office (not Vista, I'm talking Office) costs $578. Unbelievable! People complain against the oil companies' profits while Bill Gates (the richest man in the world I might add) charges you almost $600 for a computer program. You can buy an entire computer for cheaper than that! Now, some would argue that we "need" to buy gas, but we don't "need" to buy Office. I beg to differ. Tally up the amount of time you’ll spend on a computer today and compare that to the time in your car. Bet you'll be surprised.

#5: OPEC. Many of you have heard this word, but some may not know what it means. OPEC stands for the Organization of the Petroleum Exporting Countries and is comprised of 11 countries (the U.S. is NOT one of them) which are responsible for 40% of the world's oil production. They also control 2/3 of the world's oil reserves. Sometimes, for whatever reason, OPEC decides it wants to decrease supply (thereby increasing prices). There is no world government to stop them from doing this, so they continue to do it at their own pleasure. Now, many advanced economic factors are involved here and they can’t just raise the price to $5,000 a barrel; there is some restriction on them as far as world market demands are concerned. But the point is that we are the puppets dangling at the fingers of a handful of extremely wealthy individuals and governments who have a large amount of control over a vital world market commodity.

#6: Old technology. Those same tree-huggers mentioned above have not allowed us to build a new refinery in 30 years! In the last 30 years we have cracked the genetic code, cloned animals, and even made robots that can walk, talk, and think for themselves. But our refineries use none of that technology! Imagine how much more efficiently we could refine gasoline with modern technology and equipment. But we can’t because our senators have blocked the oil companies’ ability to build new, state-of-the-art facilities that refine gasoline more efficiently than 30-year-old machines. Let’s see, we get mad at the oil companies for charging so much, but we don’t allow them to build new refineries that will make prices go down. Am I the only one who thinks that doesn’t make sense?!?! Also, our government mandates that refineries be shut down from time to time for maintenance and inspection. This shut down requires that any particular refinery be off-line for a period of at least 14 days. Think of all the refineries that aren’t in commission as you read this because they are being inspected and repaired. Less production=less supply. Less supply=higher prices. I’m not complaining about this fact. Actually, I appreciate that frequent inspections are performed to prevent explosions, leaks, etc. I just point it out so that you understand another of the many factors that push prices up.

#7: War in the Middle East. One thing that everybody needs to understand is that oil is traded on a world market, something similar to the NYSE. In the case of oil, this is called a futures market. A futures market means that someone is paying in advance for something and paying for it at the estimated price it will be at a specific point in the future. It also means that the product may not be delivered until that point in the future. For oil, this future date is around 9 months. This means that the gas you put into your car today came from a barrel of crude oil that was purchased on the futures market at least 9 months ago. Since we don’t know what will happen in 9 months, many factors can affect the price of oil. For example, if Mahmoud (a.k.a. Adolf) Ahmadinejad tells the world that he is going to Nuke Israel in 2 weeks, that will surely drive the price per barrel up instantly because we don’t know how dire the situation will be 9 months from now. We simply have to assume that he really will nuke Israel and cause mass calamity and destruction and, thereby, drive up the price of a natural resource. Tensions in the Middle East hurt oil futures trading because the world market assumes that the worst will happen and oil will be worth more money 9 months from now which drives up the price today.

#8: Up and coming superpowers. As I just mentioned, oil is traded on a world market, just like gold, wheat, and barley. The scary thing is that India and China are growing at exponential rates. You don’t know it, but many of us may ultimately lose our jobs to outsourcing to India and if China could maintain its rate of growth, they would pass us as the world’s leading superpower in less than 10 years. In order to fuel this growth, they need fuel. India and China are buying mass amounts of oil and driving the world price up to all new highs. Some say, why don’t the oil companies pull the whole “Wal-Mart” strategy and lower their prices to push the other companies out of business? Ok, and while you’re at it why don’t you sell me your diamond wedding ring for 5 bucks? Oil is a natural resource just like that diamond. And just like that diamond, oil has a certain market value and price that people are willing to pay. Let me put it this way: If I had 100 barrels of oil and you had 100 barrels and you decided to sell your oil for $1 per barrel, then you are a fool and probably would be selling me that ring already. Sure, you would sell all of your oil first, but the funny thing is that I can sell mine for $65 per barrel and I would sell out too. So you are at no advantage to sell something that is worth so much for so cheap. India or China will buy it. Let me use one more example. If I was a wheat farmer and the U.S. came to me and said they’d buy my wheat for $60, but then China came to me and said they’d pay $65 for it, who do you think I would sell to? Same thing with oil. As I said before, India and China are buying tons of oil and they are pushing up the market price that neither Chevron nor Exxon nor BP have control over. They don’t set the price. Sale goes to the highest bidder. That’s it.

Ok, now I’ve laid out some of the main reasons for high oil prices, but before I move on, I want everybody to know that it sucks for me when I fill up too. I filled up today and 17 gallons was $55. Trust me, I wasn’t happy about it. But it’s much easier to deal with when you understand that oil companies aren’t just gouging us silly. In fact, they aren’t gouging at all. So then many ask, what can we do? The answer is simpler than you might expect. Here’s what all those texts and emails should be saying: Ride a bike. Take trax. Walk to the neighbors house instead of driving to it. Carpool. Do all your errands in one trip instead of 5. Remember, less demand + more supply = lower prices. Have a nice day!

PS – To keep this posting clean, I did not post any of my data sources. But if anybody wants to see them, I would be happy to forward them to you.


Cookies said...

What do you think about alternate energy sources power vehicles? -Evan

Kathryn said...

Hey Mike, I believe you. :) Thanks for all your research. Now that gives me my fill of politics for a while (wonder where Cari gets it from?) and I'm going to go back and look at more pictures of Kayla! :) :)

Mike said...

The problem with alternate energy sources is that they aren't much cheaper than fossil fuels. In fact, in many cases they are even more expensive, although cleaner. Hybrids are neat, but if you go out today and buy a new hybrid just to save a few bucks on gas, you might want to reconsider. If you spend $35,000 on a new hybrid, it would take 13.4 years before it finally paid for itself