Oil Buisiness For Idiots

Every so often the nightly, local news will tell us where most of the money paid for gasoline goes. The punch line is always something like - "So, don't hit your gas dealer, the government is driving up the price."

The illustration on the right from the US DOE is a fairly recent break down of where the money goes. Stop to think about it for a second, the governments, which do zero to produce anything, charge you 18% of your gasoline bill. 18%. So, do you think they really care about driving down the pump price?

The "Crude Oil" part is 56%. When winding up to rail at an oil company, you have to figure out what that oil company does. If it not producing the oil, it does not participate in the crude part. If it does, you need to see how much cost is required to produce the oil.

As noted on the left, investment in production and exploration in the U.S. has doubled from 2002 to 2006. Thus, not all the recent rise in revenue has gone to President Bush and his oil barons, as the dim bulbs complain. The theory is - if a price is spiking ,then you want to find more of the product to sell. If you are fast, you will make a quick hit. The magic of the free market is everyone tries to do the same thing, thereby relieving the upside pressure - increasing supply.

A good way to look at the oil business is to compare it with the profit margins of other industries. On the right, you can see the oil industry was under 10 percent in 2006, 3rd Quarter. This is very high for the industry.

As the graph clearly implies the O & G business' ROI is much less than other industries. Sure, sure, I know - all the numbers are a conspiracy. For now, however, lets assume that not everyone on the planet is lying and oil moguls can't buy off the IRS, the SEC, the financial media, banks, the shareholders, and employees.

On a percentage basis, then, there is hardly an argument to be made for obscene profits. It cannot be denied that the oil industry profit margin is up from, say, the normal 5-6-7 percent region. A few years ago, the margin was very low - but no one suggested we subsidize the oil companies, which is the legitimate converse of extra high taxes when returns are 9%.
Here is a representation of the profits made by the oil and gas industry. The numbers are from 2000 - 2005 and show the combined return was 5.9%, slightly higher than ALL industries combined. When looking at this, be sure to glance up and look at the drug business for a comparison of the scope of profitability. That business is almost 4 times more profitable.

Most of us would not start a company knowing that our rate of return was 6%. For a mature company, that is not too bad, actually, but it is not attractive to fresh capital and dreams of wealth.

Another complaint made against the industry is that "it" takes advantage of a crises. Glossing over the nonsense of there being an "it," let us look at the gross numbers.

As you can see, the rate of growth of socialist programs far outstrip those of the sectors that produce a return on investment.

The "Medical Care' industry is essentially a monopoly protected by the government, the FDA, and AMA, so that would be an example of more governmental failure. If you think the FDA is looking out for you, rather than protecting the drug companies, start looking into the matter.

Oh, look down at gasoline. It has grown in cost at a rate less than food and housing, those bastard oil cartels. No, I don't know the difference between rent and housing. Keep this in mind: a gallon of gasoline costs less than a gallon of spring water.

So, the rate of growth does not reflect any outstripping of the economy. It is a small part of the inflation factors. Further, one can live without driving.

The feds did a study regarding the spike after Katrina, since they live and die by what the news media says is our opinion. The results showed no price gouging. Check the web site, but here is a summary:

The FTC report, released in May 2006, included these findings:

* No evidence that refiners manipulated prices by running refineries below full production capacity, restricting gasoline production or diverting gasoline from the U.S. market to less lucrative foreign markets.
* No evidence to suggest refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices.
* No evidence to suggest companies reduced inventories to increase or manipulate prices or exacerbate price spikes.
* No situations that might allow one firm – or a small collusive group – to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline.

The U.S. government has investigated gasoline prices about 30 times over the last 20 years but oil companies were never found to have “fixed” prices. [Yes, the Democrats found this to be true.]

A key problem in the US is the failure to build new refineries. It is stupid to import refined gas. It is this pinch in the pipeline, along with regional additive requirements, that can create seasonal spikes.

I recently tried to fill in the caverns in the knowledge of a compatriot regarding our need for gas refineries. I hit a wall when I let slip that the Democrats were the ones blocking the building of new refineries. If I had said it were the Republicans, I am sure I would have won over a convert. This technique works well. Re the GOP's 2005 attempt to build more refineries, a revealing comment:

The legislation is "socialism to help big oil," said Senator Barbara Boxer, a California Democrat.

"It is help to the cronies – that is what this is about," said Boxer, who raised concerns the legislation, if passed, would also have to be merged with a controversial refinery bill approved earlier this month by the House.

The pathological level of illness and rage of this comment forbids counter argument. To argue with a madwoman is to sound like a fool. She ought to see who the shareholders are of "big oil." If anyone doubts it is the Democrats who are blocking the new refineries, just do a simple Google search, unless you now think it is good idea.

The Dems also have blocked the building of new nuclear power plants. This is not entirely their fault as it was a KGB strategy in the 1960's to fund leftists and green organizations to block the plants, so that our economy would start to gyrate and be subject to foreign pressure. The leftists have taken control of the Democratic Party and convinced normal people that these anti-American schemes are somehow "liberal," which has a new meaning. The Russians are better long-term thinkers than we are. More on this, another day.

In President Bush's Energy Plan, yes he had one for years and, I know, you never read about it in the papers, he has been pushing for both more refineries and building of nuclear plants, as well as funding alternative fuel research. Oh, I should have said it was Boxer's plan. Then, you might have believed it was a good idea.

OK, I can't take anymore either.

Bye.