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By Robert Rapier on Apr 27, 2006 with no responses

I’m Being Gouged!

Where’s the Outrage?

They reported profits today of $2.89 billion in the first quarter on revenues of $10.9 billion. Their profit margin on sales was 26.5%! I was expecting outrage. Yet I haven’t heard anyone call for their tax records, to make sure they “aren’t taking a taking a speed pass by the tax man”. (1) I haven’t heard anyone propose legislation to cap their profits. I haven’t heard anyone propose that their CEO be called to Capitol Hill to defend his company’s profits. Why not? Because we are talking about Microsoft, and the rules seem to apply differently when we are talking about “optional” purchases like software instead of “mandatory” purchases like gasoline. (Of course software permeates every facet of our society, so you just think you can avoid contributing to Microsoft’s profits).

On the other hand, Exxon Mobil today reported profits of $8.4 billion on sales of $88.98 billion. Their profit margin on sales was 9.4%. The public is outraged. The media is reporting the story with highly inflammatory sound bites. The politicians are in a tizzy, groping for some answer to these outrageous profits. Subpoenas are being issued. Legislation is being prepared.

So, here are some questions. Who is more profitable: Microsoft, with a 26.5% profit margin, or Exxon Mobil, with a 9.4% profit margin? Which seems like a more lucrative investment? If you had $1000 to invest, which do you think would give you a better return?

Priceless Commentary

A tip of the hat to Gristmill, where I ran across the following link. This is a great article showing what we are up against with politicians on both sides:

Lawmakers talk gas, drive away in SUVs

A lot of lawmakers are driving a block in their gas guzzlers to hold press conferences to rail against gas prices. The lawmakers’ parking lots are full of gas guzzlers. This is a priceless commentary on why real solutions aren’t being offered.

Editorial Coverage

I want to comment on a couple of editorials I read today. Believe me, I am almost finished beating this dead horse for a while, and I have some alternative energy articles coming up. But these editorials struck me as particularly timely.

The first is from The Paducah Sun:

Apr. 27–The recent spike in demagoguery over rising gasoline prices probably will have little impact beyond wasting political energy in Washington.

But it’s possible that Congress will foolishly repeat past mistakes such as imposing price controls on oil or a windfall profits tax on the oil companies. If the populist table-thumping about the darned ol’ big oil companies turns into legislative action that interferes with the workings of the market, motorists will likely see $4 per gallon gas — if they’re able to find any gas in the midst of artificially created shortages. (2)

As big a mistake as I think it will be, I believe the politicians, in their desperation to save their skins, will make some very short-sighted choices here that will cause big problems down the road.

No evidence exists to substantiate claims of a conspiracy to manipulate prices by the oil companies or retailers who sell gasoline. Over the past 25 years, the federal government has conducted a number of investigations of suspected gouging by the oil companies, but none of those probes uncovered widespread illegal manipulation of prices.

The fact is, oil is not an especially profitable industry. Jerry Taylor and Peter Van Doren of the Cato Institute point out that profit margins for the major oil companies in 2005 averaged about 8.8 cents on every dollar of sales. Yahoo and Apple enjoyed profit margins of 45 percent and 22 percent, respectively, but no one is calling for legislation to reign in the profits of the computer industry.

Is this really that difficult to understand? I guess that the public just requires an enemy, and Big Oil fits the bill. If we focus our anger on Big Oil, perhaps we won’t focus it on the politicians by throwing them out of office.

Many factors have contributed to the sharp rise in the price of crude oil. An analysis by a writer for the Knight Ridder newspapers noted the following: growing global demand for oil, spurred by economic expansion in India and China; a contraction in the supply related to political unrest in several oil-producing nations — most notably, Nigeria and Venezuela — as well as reduced production in the Gulf of Mexico caused by Hurricanes Katrina and Rita; and market jitters sparked by worries about a possible confrontation between Western nations and Iran, the world’s fourth-largest oil producer, over the Islamic country’s nuclear program.

Supply and demand, sprinkled with a dab of fear. Just like I have been saying.

A fear is that Congress will respond to public complaints about gas prices with ill-conceived legislation aimed at controlling the oil market. In the past Congress has tried price controls and a windfall profits tax, with unfortunate results. This kind of interference in the market invariably leads to decreased supply and higher prices as oil companies respond to the politically contrived disincentives for production.

But who’s worried about a little gas shortage, when reelection is at stake?

From the Appeal Democrat:

Apr. 27–April 27, 2006 – If only automobiles could run on hot air from politicians bloviating about high gasoline prices. Then we might have something.

President Bush is the latest to jump on a bandwagon overcrowded with the likes of Chuck Schumer, Nancy Pelosi, Bill Frist, Dennis Hastert, Arlen Specter, Dianne Feinstein and Arnold Schwarzenegger, announcing a probe into possible “price gouging” by oil companies and ordering a temporary halt to deposits in the Strategic Petroleum Reserve. (3)

I wish both sides would stop pointing fingers at each other. This situation is so much worse because it is an election year. Getting the parties to work together to address the long term issues is probably hopeless. We’re in serious trouble if we can’t get a plan in place well in advance of Peak Oil. We may already be too late for that.

Oil companies would no doubt love to dictate and manipulate the prices of oil and gasoline if they could. But none has the market power to do so. The current price of oil, at something more than $70 a barrel, up about 20 percent since January, is the result of high demand due to a number of factors, including conversion to ethanol from MTBE, as well as economic growth, mainly in the United States and China, along with political uncertainty in oil-producing countries like Venezuela, Iraq and Iran. Oil companies benefit from these high prices, but the prices are determined by supply and demand.

One thing I have realized lately is that very few people in the country actually understand how markets work. They seem to think that oil companies look at production costs, and say “Let’s charge $3.00; that should cover costs and provide a nice profit.” It just doesn’t work like that.

If Congress were serious about reducing gasoline prices, it would start by repealing the energy bill it passed last year, especially the ethanol mandate. Ethanol is difficult to store and ship outside the Midwest, and corn farmers cannot yet supply the amounts mandated. So the price has risen from $1.45 a gallon to $2.77.

They obviously hate the environment. :)

Coming Attractions

A comment left by a visitor sparked an interest in doing some research on biomass to liquids (BTL). I am going to devote an upcoming essay to a review of gas to liquids (GTL), coal to liquids (CTL), and BTL. These technologies have the potential to offset some of our usage of petroleum, but the capital costs are very high, and 2 of the 3 still rely on non-renewable energy. I will also discuss the “L” portion that is common between the technologies: The Fischer-Tropsch reaction and why it is very important.

References

1. This was Sen. Charles Grassley’s reasoning for requesting tax records of all the major oil companies.
2. “Gasbags”, The Paducah Sun , April 27, 2006.
3. “Big Oil doesn’t cause high prices at the gas pump”, Appeal Democrat , April 27, 2006.