Tuesday, February 28, 2012

Are greedy oil companies responsible for higher gasoline prices?

Commentary by James H. Shott

When something unpleasant happens, it’s helpful to have a scapegoat, and when there’s an economic crisis during a presidential re-election campaign, assessing blame is campaign strategy. With the recent rise in gasoline prices, the finger-pointers have been giving their digits a vigorous workout telling us who they want you to believe is responsible for the rising gas prices.

Blaming oil companies or speculators or George W. Bush may make people feel better about something they can’t control, and put political points on the board, but those things aren’t the problem. These price increases are a matter of basic economics, magnified by foolish energy policies.

Before the financial crisis hit in 2008, the price of West Texas Intermediate reached its high on July 14 at $145.16, and average gasoline prices reached their high the same day at $4.05 per gallon. The downward economic trend thereafter pushed oil down to $30.28 a barrel and pushed gasoline prices to an average low a week later at $1.59 per gallon.

As world economic growth picked up, so did oil prices, reaching a high of more than $109 a barrel last Friday, and gasoline prices also hit a recent high of over $3.60 a gallon. However, the change in both oil and gasoline prices fairly closely parallel world GDP growth.

Oil is the biggest factor in the cost of gasoline. John Felmy, chief economist at the American Petroleum Institute, explained last week that “when crude is at $100 for a standard 42‐gallon barrel … a refiner pays almost $2.40 for each gallon of that crude to make a gallon of gasoline” that is priced around $3.60 a gallon. “The next biggest component is taxes,” he continued. “They now average almost 49 cents a gallon, including federal, state and local taxes.” Crude oil and taxes comprise $2.89 of the cost per gallon of gasoline, more than 80 percent.

Further, he reports “crude oil prices are up because of supply and demand. World demand for crude is increasing as the economies of the world begin to recover, and the world’s excess oil production capacity is shrinking. Buyers of crude oil also are clearly concerned about the instability of major oil producing nations in North Africa and the Middle East.”

Some criticize oil companies for exporting fuel overseas. However, the weak economy and more efficient vehicles have left the US with a surplus of fuel; hence there is excess product that must be sold somewhere else. Exporting unsold US supplies keeps Americans working, many at good paying US refinery jobs, and also lowers the trade deficit. There are 9.2 million jobs in the oil and natural-gas industry in this country, and it accounts for 8 percent of GDP and is responsible for 78 percent of total domestic energy production. Imagine where those numbers would be if the Obama administration wasn’t committed to killing traditional American energy production.

Some think that “big oil” is greedy. Profits reached a high in 2008 of 10.12 percent, and have been 5.46 percent, 6.56 percent, and 7.31 percent since. If your company is making only six to 10 cents on a dollar of investment, that ain’t greedy, folks.

All of this is academic where President Barack Obama is concerned. Whatever complaint he may voice over gasoline prices is really just “gas,” because high prices are precisely what he wants. As long as traditional energy and traditional motor vehicles are affordable and popular, the green energy-driven nation that Mr. Obama obsesses about will not become reality.

In 2008 Steven Chu, who is now Secretary of Energy, said: “Somehow, we have to figure out how to boost the price of gasoline to levels in Europe.” Mr. Chu and his boss think that ideally Americans ought to be paying around $10 a gallon for gasoline. And President Obama himself stated that a gradual increase to European levels would be a good thing.

Toward that end, a new Environmental Protection Agency proposal requires the sulfur content in gasoline to drop from 30 parts per million to 10 parts per million, and according to a letter to EPA Administrator Lisa Jackson from six US Senators (4 Republicans, 2 Democrats), this mandate will raise gasoline prices by 12 to 25 cents a gallon. The dream of European fuel prices gets a little closer to reality.

Democrat National Committee chair Rep. Debbie Wasserman Schultz (D-FL) said recently that “the Republican field … thinks that we just need to remain tethered and dependent on foreign oil because all they would do is more and more drilling.” This Alice-in-Wonderland assessment assumes that drilling for our own oil will keep us dependent on foreign oil. So much for Democrat energy policy.

Oil production has increased of late, “higher than it's been in eight years," the White House boasts. But this occurred in spite of, rather than because of, the Obama energy policy. Remember that Mr. Obama declared most offshore areas off limits, substantially decreased oil and gas leases in the Rockies, and rejected the Keystone XL pipeline. The increase in production comes from wells on private property where Mr. Obama cannot stop it, and that production began under George W. Bush.

Cross-posted from Observations

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