Profits Drive Gasoline Prices, not Obama's Energy Policy

CNN - Newt Gingrich has been promising to get gasoline prices down to $2.50 per gallon (and also to build a colony on the moon). The sad thing is, many Republicans believe him.

"This is absurd," said Paul Bledsoe, a Bipartisan Policy Center scholar who spent more than 20 years working on energy policy in Washington. "Obviously the price of oil is set on a global market. In the immediate term there is almost nothing you can do."

For decades oil companies have always done what any corporation does, maximize its profits. That's no secret, and the fact that they have resorted to almost any measure possible to increase the cost of a barrel of oil is no secret either. To say that Obama's energy policy has something to do with the price of gasoline is just plain ignorant.

America could be the only producer of crude oil in the entire world, and if ExxonMobil can extract it for $11 a barrel with cheap leases on U.S. federal lands, and then sell it to China for $100 a barrel, they would...and we would still pay higher prices at the pump because of the "global economy". Unless of course, you think like me and Oliver Stone, and just blamed Obama for NOT nationalizing the energy industry.

From www.oil-price.net - "Though demand and supply is responsible for substantial hikes, "free enterprise" is to be blamed at all other occasions. And how? The moment there is speculation that crude will be trading higher, retailers usually increase their prices in an attempt to keep their margins intact for future purchases. Contrarily, when the price of the crude decreases, retailers are not inclined to lower rates as fast as they have raised it in order to maximize profits."

There also have been reports that some oil companies stockpile crude instead of sending it to the refineries when the prices are low. The logic is to make profits when the prices rise further in the global market.

DailyMail, November 2009 - "These tankers have been parked off our shores for months, refusing to unload their oil until prices have risen even higher. The delay makes millions for speculators... and keeps your petrol costs soaring."

Telegraph, February 2010 - "Oil stored at sea could mean bigger problems and prices in the future. "The use of temporary floating tankers has become so popular that even the investment banks had begun to charter ships, leaving the market with a shortage of vessels for transporting other commodities."

Under George W. Bush (on July 17, 2008) the average cost for a gallon of gasoline was at it highest level ever in U.S. history (at $4.11 a gallon). This was after the record peak of $145 for a barrel of West Texas Intermediate crude oil (WTI).. Where was all the Republican outrage then? They weren't crying about the Keystone pipeline in those days.

And then 5 months later on December 23, 2008, the WTI crude oil spot price fell to $30.28 a barrel, and the oil companies were still making profits.

Business Insider now makes the case that simple "supply and demand" drives the price of oil, but not based on the U.S. economy, but because of the global economy. "Demand is booming in Asia and the Former Soviet Union, offsetting mediocre demand in the U.S. and Europe."

Is it different today than during the 1979-1980 period of rapidly increasing prices? Saudi Arabia's oil minister Ahmed Yamani had repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears. Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to lower crude prices.

But it seems that now, no matter how efficient American cars become, or how low we turn our thermostats, or how depressed the demand for home heating oil is in the U.S., the price for oil and gasoline will still rise. Not because of how much we might drill, pump from Canada, or extract in cheap leases on domestic federal land, but the price is determined by how much the market can bear - by how much the oil companies can profit from the global economy.

Despite higher domestic oil production under Obama than under George W. Bush, and the lowest domestic demand for oil in the last 15 years, and one of the warmest winters on record for over 40 years, we still have higher gasoline prices. Why? Profits.

We also have less oil refineries processing the less profitable sweet crude oil (Brent). There's also the increased betting by hedge fund speculators. There was also a rising demand for oil to meet Brazil's and China's growing economies. And there is also Obama's expressed desire to raise taxes on oil companies (and cut their taxpayer subsidies).

Iranian threats is at the bottom of the list because all throughout history the domestic oil companies have always had the benefit of the U.S. military protecting their interests abroad (and the U.S. doesn't import Iranian oil).

Some argue that the Keystone XL pipeline, which would have increased the delivery of oil from Canada and North Dakota's Bakken Shale to Gulf Coast refineries could replace oil from Venezuela. But that would have little to no affect on world market prices, and what would it matter if that oil is sold to China anyway?

But many people will always find criticism for President Obama, "The reality is that most of the increase in U.S. oil and gas production has come despite of the Obama Administration."

Prices are high for no other reason than to keep the margin of oil profits high. Some suggested that a tighter monetary policy is the best choice under the current economic circumstances (the high cost of oil in relation to the value of the dollar), but that has also been dismissed out of hand.

The current run-up in prices comes despite sinking demand in the U.S. - “Petrol demand is as low as it’s been since April 1997,” says Tom Kloza, chief oil analyst for the Oil Price Information Service. “People are properly puzzled by the fact that we’re using less gas than we have in years, yet we’re paying more.”

Kloza believes much of the increase is due to speculative money that’s flowed into gasoline futures contracts since the beginning of the year, mostly from hedge funds and large money managers. “We’ve seen about $11 billion of speculative money come in on the long side of gas futures,” he says. “Each of the last three weeks we’ve seen a record net long position being taken.”

It appears that speculation in oil futures (by those who never actually take delivery) is the biggest driving force of oil prices. Goldman Sach’s alone has huge blocks of stock in oil companies and trades vast quantities of oil futures.

Forbes reported last year: "Rex Tillerson, the boss of ExxonMobil admitted last week that the price of oil (based purely on supply and demand) should be in the $60 to $70 a barrel range. The reason it’s above $100 a barrel, Tillerson explained, is due to the oil majors using futures contracts to lock in current high prices, and speculation that is engineered by the high-frequency trading of quantitative hedge funds."

Forbes also reported that "the average cost of producing 1 barrel of oil was $11...and that "the profits for the big 6 oil companies was $36 billion in the year’s first quarter. A large part of the $36 billion was used to buyback shares or pay dividends to shareholders."

Buying back shares increases share value with less outstanding shares, also increases the value of stock options paid as executive compensation for "performance" to oil executives. CEOs like Rex Tillerson, who are shareholders with stock options, can get paid more when they can sell their oil for more. And Tillerson also pays Mitt Romney's tax rate - - 15% on capital gains made on his stock options.

Refineries have also been getting squeezed by higher crude prices over the past several months, forcing some of them to shut down rather than operate at a loss, says Stevens.

The more likely reason behind the price increase for gasoline is the recent spate of refinery closures in the U.S. Over the past year, refineries have faced a classic margin squeeze. Prices for Brent crude have gone up, but demand for gasoline in the U.S. is at a 15-year low. That means refineries haven’t been able to pass on the higher prices to their customers. As a result, companies have chosen to shut down a handful of large refineries rather than continue to "lose money" on them. (To mean, earn less profit.)

The U.S. refining industry is being split in two. On one hand are the older refineries, mostly on the East and Gulf Coasts, that are set up to handle only the higher quality Brent “sweet” crude—the stuff that comes from the Middle East and the North Sea. Brent is easier to refine, though it’s gotten considerably more expensive recently. (Certainly another reason for higher gas prices.)

Then there are the plants able to refine the heavier, dirtier West Texas Intermediate (WTI), the stuff that comes from Canadian tar sands, the deep water of the Gulf of Mexico, and the newer outposts in North Dakota, which just passed Ecuador in oil production. These refineries tend to be clustered in the Midwest - - places such as Oklahoma, Kansas, and outside Chicago.

While the price of Brent crude has closed at over $120 a barrel in recent days, WTI is trading at closer to $106. That simple differential is the reason older refineries that can handle only Brent are "hemorrhaging cash" and shutting down, while refineries that can handle WTI are on markets (greater profits).

And then there's Obama repeated proposal that "now is the time to raise taxes on oil and gas companies."

America is pumping more oil out of the ground now than it has in years, thanks to a surge in onshore drilling - - and U.S. refineries are producing more gasoline and diesel than ever. But Americans’ gasoline consumption is at an 14-year-low.

So with all that supply and not much demand, why have gasoline prices risen high enough this year to resurface as a national political issue? The short answer, experts say, is that the "global economy and geopolitics", not the U.S. industry or economy, are driving gasoline prices. (profits)

The Wall Street Journal's Tom Fowler tries his best to explain why gas prices balk supply and demand. Download MP3. But between now and Election Day, gasoline prices will be most influenced by the price of oil, traded in global markets, not U.S. supply and demand.

In the past, the price of U.S. oil at a key storage hub in Cushing, Oklahoma, most directly influenced U.S. gasoline prices. But that price of U.S. crude, known as West Texas Intermediate, has strayed far below crude from other parts of the globe that is actually used by many U.S. refineries, particularly along the coasts.

Thus the price of oil from the North Sea, known as Brent, has become the benchmark most tied to U.S. retail gasoline prices. About half of the U.S.'s gasoline is refined from overseas crude oil.

Some argue that an unstable situation in the Middle East, especially the turmoil over Iran tensions, has sent global crude prices surging. "There's a war risk premium that is weighing heavily on the markets," said Amy Myers Jaffe, senior energy adviser at Rice University's Baker Institute.

But for whatever reasons, the oil companies never suffer for inflation or the higher cost of production. Any "perceived threat" in the Middle-East or elsewhere is just used as another reason to raise prices...to stuff more profits into the pockets of the oil executives and the investment bankers.

Forbes reports that ExxonMobil's CEO Rex Tillerson has a 5-year compensation plan earning him $40.2 million, while half of all working Americans earn less than $27,000 a year - - when the poverty line for a family of four is $22,314. These are the people that the Republicans chastise and falsely accuse* for not paying federal taxes.

Cheap leases, scant royalties, taxpayers' obligations, and environmental hazards - the burden to American citizens for gas and oil profits that still exist in Obama's energy policy. The Institute for Policy Studies: Although Obama's Interior Department budget proposal refers to reforms in royalties paid for private companies to use public lands and the collection of $3 billion over 10 years, this does not go far enough. Revenue could be far greater and the costs to the taxpayer far lower if the 1872 mining law, which allows mining companies to stake a claim on public lands for a mere $5 an acre (still!), while mining for highly lucrative oil, gas, gold and other minerals, were brought into the 21st century. Environmental protections are non-existent in these claims, resulting in the headwaters of roughly 40 percent of Western U.S. watersheds being polluted, according to the EPA, and the taxpayer picking up the bill for cleanup, estimated by Earthworks and others at roughly $32-72 billion. An amendment to this law could generate income on the order of $122 billion for U.S. taxpayers on public lands, discourage wasteful, hazardous and speculative investment on public lands, and ensure that highly profitable mining companies are forced to clean up their own messes. A new study shows that fracking for natural gas causes 8 percent of the gas to escape into the atmosphere, where it is 105 times more potent than CO2 over its 20-year lifespan. Chemicals considered "trade secrets" for the gas industry (thanks to an energy policy developed in secret meetings by former Vice President Dick Cheney) have residents living near fracking wells complaining of health problems. In some cases, they can literally light the water coming out of their taps on fire. In addition, scientists have started to link earthquakes — such as the rare ones that have been shaking Ohio, New York, and Arkansas — with fracking. * Any "surplus" in the domestic production of oil and gas will be sold at "market value" in the global economy, and won't necessarily reduce energy costs to American businesses and for American citizens. "Energy independence" is a myth so long as oil and and gas corporations are allowed to continue to exploit America's natural resources for personal financial gain.

* The Heritage Foundation, a right-wing think tank, boldly claims: Nearly Half of All Americans Don’t Pay Income Taxes. But these figures also include children, the retired, and others who do not participate in the labor force. In one sentence the Heritage Foundation explains: "That means 151.7 million Americans paid nothing in 2009. By comparison, 34.8 million tax filers paid no taxes in 1984."

How can 151.7 million not pay any taxes when that is about 100% of our work force? It’s a myth that those Americans don't pay taxes. In truth 86% pay federal income taxes. Here is the full quote from the Tax Policy Center,

"The fraction of tax units paying no income tax varies widely by filing status and type of unit. About 47 percent of single filers will owe no tax, compared with 38 percent of joint filers and 72 percent of heads of household. More than half of elderly tax units and tax units with children will pay no income tax this year."

But unlike most of those poor people, CEOs like Rex Tillerson, and politicians like Newt Gingrich and Mitt Romney, don't worry about the price of a gallon of gasoline - - or the cost of home heating oil.

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