The Gasoline Noose

A friend of mine, after reading my blog requested that I investigate his question:
“Why are we (the consumer) paying so much for gasoline when oil companies are showing record profits?”

A good question and one that has been on the mind of many of us.

I would imagine that the question hits our consciousness, but then the initial thought is countered with what we’ve heard in the media regarding the price increases imposed by our oil providers – entities like OPEC. Then we slip into, “Those darn guys are driving up the price I pay at the pump. They’ve got plenty of oil. Why are they choking off the supply and driving up prices? (Pause.) Well, I guess I just have to pay, it’s outside my (and my government’s) control, until we move away from using fossil fuels.”

You might even start considering the fact that China has increased its demand for oil dramatically in the past two decades.

This is logical way to think. But what if the enemy wasn’t those darned outsiders and the enemy was really within?

Now is the time when many reading this article will think that I have moved into the paranoid realm of the conspiracy wacko.

Yes, the enemy can be found not outside the friendly confines of Western culture but within. Oil suppliers have deceased supply and this has had an effect on prices, but the real reason behind the latest price increases has to do within calculated moves within the oil industry in the last 10-15 years.

How did this come about?

In the past 15-20 years, there has been major consolidation of companies through mergers in the oil industry. 31 companies have dwindled to 21. Now this may not seem significant, but behind this is the fact between 80 to 90 percent of all oil refineries are consolidated within just a few major companies when in the past these refineries were spread through out a larger number of companies. Some can say that this consolidation has led to the increase in prices because competition has been reduced.

Oil companies have used these excuses to defend themselves:
> increased crude oil prices
> blaming the clean air act
> no new sources of oil

These new steps toward consolidation have set the ground rules for reducing efforts to find new resources (either more oil supplies or looking into alternative fuels) and for price setting, thus reducing market competitive forces. These newly consolidated companies also decided to reduce capacity to produce gasoline by not maintaining and expanding refinery capacity.
Some could say that this consolidation and these other decisions have been a major collusion effort on the industry’s part to choke off supply in the face of rising demand, in turn, allowing them to increase prices and greatly increase profits.

Maybe collusion is stretching it a bit, but you certainly can’t deny the fact the profits companies have had recently:
Exxon Mobil up 52%
ChevronTexaco up 82%
Shell Oil up 48%

Am I against profits? No. Every company should be able to make a healthy profit, but with a product that is so centrally tied to our economy and when increased to price levels that we have seen in the near recent past, I think the present price gouging going on is immoral and unethical and someone should be looking out for us – the little people. And who should that be, you might ask?

I think this is a perfect place for our political leaders to step in and offer some sort of effort to stem the tide of rising prices to protect the consumer.

But, with the risk of sounding even more like a wacko, our current President has historic ties to oil industry with a deep background in Texas oil. Several efforts to convince the administration to step in and protect consumers have been rebuffed.

For the middle income American, these increases in price are certainly having an effect. Traveling, heating, and the price of products we buy and use (because of the increased price of transportation to get them to store has to be passed on to the consumer) have seen great inflation in the past few years. These increased costs start to eat at the margin of our lives.

Maybe the administration is looking to the stock holders and say they are finally getting the windfall they deserve because as the oil companies profit, so do stock holders.

But really, do middle income American’s really see that sort of benefit? I would have to assume not. Middle income citizens don’t have the buffer in their budgets to absorb the effects of this multiplied effect of increased gas prices. Affluent people can take the hit, but I think (and this is only my humble opinion) that if this continues for any great duration, we will start to see a real drag on our economy. And this sort of drag starts to affect everyone.

Okay, to be fair, there is another culprit in this crime. It’s our burgeoning trade deficit and its effect to weaken the U.S. dollar. As the dollar has weakened, its inability to keep up with other currencies has increased by 7.5% in how much we have to pay for oil.

Another defense of the industry, booms are historically followed by busts in which oil companies face greatly decreased profits. Oil companies will claim that, historically, their profits are around seven cents a gallon. Today, though, they are looking at something around 10 times that at seventy-five cents a gallon.

My suggestion is that there should be a governor put in place to protect consumers from being taken advantage of by price gouging at times like these. Our economy and lives are inextricably intertwined with oil. Oil is used to make so many products that are essential to our lives. Gasoline is vital to transporting us and products we rely on. When the price of gasoline increases, it has such a far reaching effect on almost every product that we use in our day-to-day existence, I feel that our government needs to take measures to maintain a balance between profits for companies and cultivating a price structure that allows consumers to “tank up” without having to consider a second mortgage.

Some efforts have been made in the congress to do this, but they aren’t getting far. Senator Reid (D - Nevada) has asked that the FTC intervene in this price gouging effort by oil companies, but the FTC has stated they are still investigating the situation…while the oil companies reap record profits.


Senator Harry Reid said emphatically, “…this outrageous 58-cent increase in Nevada since January has not been driven by the rising cost of crude oil, but by corporate greed and profit.”

How far those words carry and how well they are received in the current political climate is yet to be calculated, but I would imagine that won’t be too effective.

Ultimately, we need to find a way to get out from under the “gasoline noose.” Efforts must be stepped up to find other sustainable and less tenuous supplies of energy to power our economies and cleanly provide products and transportation.

For now, my friend (responding to the initial question) I say start riding that bike again, walk, or better plan your trips out and about because, for the foreseeable future, this is where and how we live. And when you’re out, drop a letter to your representative to ask him or her to take a look and see what they can do.

Sources:
http:////www.forbes.com/2004/08/09/cx_pm_0809oilbrief_print.html

http://the-spark.net/newspaper/i744/6f12.html

http://www.consumersunion.org/pub/FTCBOOKf.pdf

http://www.google.com/search?sourceid=navclient&ie=UTF-8&rls=GGLD,GGLD:2004-47,GGLD:en&q=Oil+Company+Profits

http://www.google.com/search?sourceid=navclient&ie=UTF-8&rls=GGLD,GGLD:2004-47,GGLD:en&q=Oil+Company+Profits

http://www.google.com/search?sourceid=navclient&ie=UTF-8&rls=GGLD,GGLD:2004-47,GGLD:en&q=Oil+Company+Profits