Posts tagged “gas prices”
Unfair Profits or Lots of Volume?
Most people, if asked to name off the top of their head which industries were taking advantage of consumers to generate insanely high profits, would likely have the oil and gas industry at the top of their list. Isn’t it a well-known fact that with gas prices spiraling through the roof, “Big Oil” is by far the most profitable industry out there, hence they must be taking advantage of consumers?
Actually, it’s not that simple. But public opinion would have it otherwise.
In fact, industries such as internet information providers and personal computers rank well above major integrated oil and gas (Big Oil) when it comes to profit margins. The simple definition of profit margin is: A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Red Herrings: Speculation & Regulation
As I noted last week, I have been working on a short paper for ASP on gas prices. It was published earlier today with a title of “Cause & Effect: U.S. Gasoline Prices.” I also published an Op-Ed in The Hill “Running on empty: Failing to address high gas prices“ and was quoted in Reuters saying “The truth is, neither party is offering policies that will effectively address high gas prices.”
The report seeks to get beyond both party’s preferred narratives on gas prices and looks more deeply at the root causes of today’s high gasoline prices. Hopefully, it will puncture some of the assertions and rhetoric that both political parties use about gas prices, whether it’s shouting “speculation!” by those on the left or “too much regulation!” by those on the right.
Let’s Play ‘Blame the Speculators’
Most people would probably agree that speculation in the oil and gas markets is hurting American consumers. Consider the case of Aubrey McClendon. Mr. McClendon is the CEO of Chesapeake Energy, where he sells natural gas for a living. Natural gas prices have now been pushed down — by speculators — to below $2 per million BTU. This is a drop of more than 80% from 2008 prices. With these depressed prices, Mr. McClendon will have a hard time ever matching his $112 million of earnings in 2008. Mr. McClendon’s livelihood has been hurt by speculators.
Of course Aubrey McClendon is not your average person, and he isn’t likely to garner much sympathy over the decline in natural gas prices — especially since it has benefited consumers. But I use that example to illustrate the point that speculation is not a one-way street where the average consumer always loses. One of the frequently cited causes of high oil prices is from speculation. In fact, I agree that speculation is helping drive up oil prices. However, there are underlying fundamentals at work as well; otherwise the same speculators who are helping drive up oil prices would be doing the same with natural gas prices. Yet those underlying fundamentals are often overlooked in the rush to blame the speculators for spiking oil prices. CONTINUE»
In this week’s episode of R-Squared Energy TV, I talk about the impact I believe $5 gasoline will have on most people, and whether there are any environmentally friendly proppants that can be used for hydraulic fracturing.
Some of the topics discussed this week are:
- My observations here in Hawaii on the impact of $5 gasoline
- Why I think gasoline prices have peaked (for now)
- What proppants are and how they are used in hydraulic fracturing (fracking)
Who is to Blame?
I’ve been working for the past week on a fact-sheet for ASP on gas prices; what is causing this spike, and why they’re going so high. I will post a link to it when we publish it, but suffice it to say that we’re not going to come down and say that President Obama is responsible for high gas prices. Although I believe that there are some good reasons to be exploring for oil and gas here at home (e.g. balance of trade, new construction jobs), we should not delude ourselves into thinking that’s going to actually lower prices. More to come when we release the report next week, so keep an eye on this space.
I want to take a minute, though, to write about a few conclusions I’ve drawn after diving into the sometimes heated and nasty rhetoric around gas prices. One big conclusion that I’ve come to about gasoline in the U.S. is that we simply use too much of it; much more than is necessary. I think that’s mostly a factor of the low pump prices that we had grown accustomed to over generations. Though prices have been high and very unstable since 2005 when Katrina shut down refining in the Gulf, we have really only begun to change our economy to the new world of high prices. I wrote before about how the U.S. energy market is poised for a “Fundamental Shift” as we produce more oil and use less. However, I am somewhat surprised that it continues to take this long.
Gasoline prices differ substantially across different parts of the United States. For example, the average price in Illinois is currently 70 cents/gallon higher than that in Wyoming, and California motorists pay 86 cents/gallon more than the folks in Wyoming. Why is that? Source: GasBuddy.com. The biggest single factor is taxes. The tax on a gallon of gasoline in Illinois is 25 cents higher than in Wyoming, while the California tax is 35 cents higher. Source: American Petroleum Institute. But that still leaves 45 cents of the Illinois premium and 51 cents of the California premium unexplained. Political Calculations has created a map of average gasoline prices once you subtract out taxes. (His original map, like that from GasBuddy above, also… Continue»
Gas Price Breakdown: It’s All About the Cost of Crude Oil
“What am I paying for in a gallon of gas?” is a question on people’s minds and often posed by regular visitors to Consumer Energy Report. With the assistance of the Energy Information Administration, who provided the data (see the methodology they used for calculating the component percentages at the end of this column), I was able to break it down into a series of charts from 2000-2012.
For a more detailed look into the recent spike in gas prices, see: Charting the Dramatic Gas Price Rise of the Last Decade
Different Situation, But Prices Are Not Unprecedented
In a previous column, I pointed out that — perhaps surprisingly — the price we’ve been paying for gas lately, compared to 90 years ago, is not as high as people would think — that is, once the rate of inflation is factored in to the equation. For instance, while motorists may have been paying only $0.25/gallon in 1919, when converting that number to February 2012 dollars, the cost was $3.35/gallon — a mere 6.5 percent cheaper than 2011′s annual average of $3.57/gallon. The chart below shows the price movement (based on February 2012 dollars) from 1919-2011.
On Friday, the U.S. Bureau of Labor Statistics (BLS) released the February jobs report, showing an increase in employment by 227,000 – the third month in a row of job growth higher than 200,000. This report, coupled with strong numbers from the stock market and other leading indicators show that we may finally be entering a point of sustained economic recovery from the 2008 financial crisis. However, some people are speculating that the run-up in gasoline prices will push the recovery off track (see: LA Times, USA Today, Businessweek).
I think this run-up in gas prices is different than previous ones, because our economy is more balanced between oil producers, who benefit from high prices, and consumers, who are harmed. On balance, I agree with Professor Hamilton’s view over at Econbrowser: high gas prices won’t derail the U.S. economy.
During my interview last week with Alan Colmes (embedded below), a few points were discussed that warrant some elaboration.
The first is the conversion from winter to summer gasoline, which I have written about in more detail at Why Summer Gasoline Means Higher Prices. Just to be clear, this is an underlying reason that gasoline prices rise at this time every year, but it is not the reason that gas prices are higher today than they were at this time last year. We started the year at a higher level for other reasons, but summer gasoline explains why — even if you took the geopolitical factors out of the equation — that gasoline prices will normally rise from about February to May and then fall from August to November. We do notice this especially in election years, and use it to confirm our belief that politicians or oil companies are influencing prices to win elections.