Interesting article concerning current high US gasoline prices

[scsmith42]

The following is an excerpt from an Op-Ed that appeared in a recent Wall Street Journal article.  I've edited out the political BS and just included the issues affecting current US gas prices.  It's thought provoking, and provides additional understanding why prices are currently high.  Scott

"Oil prices hit $75 a barrel last week, while gas has reached a national average of about $2.85 a gallon.  A decent portion of the latest run-up in gas prices - and the entire cause of recent spot shortages - is the direct result of the energy bill Congress passed last summer. That self-serving legislation handed Congress's friends in the ethanol lobby a mandate that forces drivers to use 7.5 billion gallons annually of that oxygenate by 2012.

At the same time, Congress refused to provide liability protection to the makers of MTBD, a rival oxygenate getting hit with lawsuits.  So MTBE makers are leaving the market in a rush, while overstretched ethanol producers (despite their promises) are in no way equipped to compensate for the loss of MTBE in the fuel supply.  Ethanol is also difficult to ship and store outside of the Midwest, which is causing supply headaches and spot gas shortages along the East Coast and Texas.

These columns warned... this would happen.  As recently as last year, ethanol was selling for $1.45 a gallon. By December it had reached $2.00 and is now going for $2.77.  So refiners are now having to buy both oil and ethanol at sky-high prices.  In short, the only market manipulation has been by politicians.

For the record, the FTC has an entire crew that pores over weekly average gas prices in hundreds of cities, looking for evidence of gouging - to no avail.  Perhaps this is because no oil company controls enough of the market to exercise enough power to raise prices.

Beyond the ethanol fiasco, the oil markets are once again providing a tutorial in supply and demand in a global commodity market.  Strong economic growth from the U.S. to China is driving up demand, even as political uncertainty in oil-producing countries such as Venezuela and Iran is leading to supply worries and some speculation.  The Federal Reserve has also played a role by flooding the market with dollar liquidity that has produced higher prices across all commodity markets.

Congress could help a little in the short term if it asked the Bush Administration to end the 54 cent a gallon tariff on imported ethanol.  That would especially help drivers in coastal states suffering from spot shortages.  Naturally, however, the domestic ethanol industry is threatening retribution against any Member who suggests such a thing...

The [congressional leaders] might also refocus their attention on legislation the House passed last year to reduce the number of "boutique fuels" to six from 17.  These special gasoline blends are required in different parts of the country in the name of reducing pollution.  Their primary effect, however, is to raise gas prices and make it difficult to move gas around the country during shortfalls.  The Environmental Protection Agency could also ease environmental rules for those parts of the country suffering shortages.

Meanwhile, we're also hearing more about the country's reliance on "foreign oil."  But if Congress wants to ease that dependence, it will have to open more of the U.S. up to oil and gas exploration.  Had the Senate opened up the Arctic National Wildlife Refuge to exploration when it was requested in 2001, some of this oil might now be joining American supplies.  The same goes for natural gas drilling along the Outer Continental Shelf.  Yet the very same [politicians] who deplore foreign supplies and shout about high prices vote again and again to block domestic oil exploration. 

The last time the U.S. had a gasoline panic, in the wake of Katrina, some quick government action and private ingenuity eased the problem in record time. Gasoline prices that had climbed above $#3.00 a gallon quickly settled back closer to $2.00.  Markets will make the same adjustments today if they are allowed to send prices signals without Congress getting in the way."

[Paschale]

I think the author of this particular editorial is in the back pocket of the oil industry.   >:(  I don't give tons of credence to the suggest that the main reason oil prices are so high is simply because of requirements to include ethanol.  That seems a bit of a stretch to me.   :

[Gary_C]

It really isn't surprising that the oil companies are now blaming their arch enemy, Ethanol for the recent price hikes.  They are still mad that their own oxygenate, MBTE was found to be too hazardous to be used any longer and isn't that a shame that congress would not absolve them for the damage MBTE caused.  It sounds like the oil companys are becoming afraid of what congress may now do to them and they are trying to "get the monkey off their backs" by blaming someone else for the price hikes.

The first thing congress should do is take away those huge gifts of taxpayer funds the oil companies were given in the last energy bill.

Congress should then put very high tax rates on their profits that are not reinvested in more refining capacity.

[caryr]

I don't think ethanol is the main problem. I saw some stations today at $3.00/gallon and we have straight gas this time of year (no MTBE or ethanol). Plus I'm betting diesel has kept right up with everything else in areas that are having these supposed ethanol problems.

Cary

[getoverit]

can't build more refineries, the green people litigate them to death.
can't drill for more oil, the green people litigate them to death.

the list goes on...

[Daren]

The crime in the whole deal is taxation. In Illinois there is a 5% state gas tax, so $3.00 gas the state takes $.15. Plus income tax on top of that from all distributors, delivery companies, gas stations... Have you noticed there are no "gas stations" anymore? Just "super gas marts" The profit margin on a gallon of gas is pennies, they make more money selling Pepsi and Snickers. The feds get a big cut right off the bat too (I would quote the number, but don't have anything to back it up). Why does the government (fed/state/local) get 40% of the price of a gallon and then all the politicians grandstand and say "We have to go after gougers". They are the gougers, they get thier preset % no matter what, the higher the gas price the more they get (and WASTE). My uncle was a fuel distributor, he was a Standard oil gas delivery man, and rural propane, fuel oil... He made $.04  per $1 of fuel. A 4% profit margin in any business is BAD. (like I said the state gets 5%, and he worked his butt of for 45 years) Sure the big oil companies are making money. They have alot of r/d, exploration,liability, overhead... What does the government do for their MAJORITY share of the profits? Have you ever noticed when you go to the gas station and buy a tankfull of gas, a cup of coffee and a donut the tax you pay on the coffee and donut is listed. Look real close, the gas price is just a total. The people who have thier hands WAY in your pocket have made it LAW that the tax on gas is not listed on the receipt.
A little of the topic, but I saw the word gas and have been steaming about this for awhile.

[Dan_Shade]

it steams me to know that our tax dollars pay farmers to cultivate weeds on good soil where we could be growing corn/soybeans/anything to make into biodiesel or alcohol.....

fixing that would be a good start.

[Ron Wenrich]

From what I heard on the radio, Fed tax is about 18 cents, and our state tax is about 32 cents.  Of course, if they didn't have the tax, then you would be complaining about the roads.   ;)

One thing about user taxes is that if you don't want to pay the taxes, then don't buy the product.  That's why they put high taxes on cigarettes, liquor, and other "sin" products.

Of course, we could also allow the prices to slide back by using less product.  But, from what I can see, we'll let the other guy do that while we go on our merry way.

We're having a big uproar in our state on property tax.  Property taxes are used to fund education.  In areas where there is a high amount of new population, they have to build schools.  So, property taxes go up. 

The anti-tax people want to put it out as a sales tax and eliminate the property tax.  That would make people in low taxed areas subsidize those in high tax areas.  They would also tax services, which would be more of an income tax than a sales tax. 

It seems that the only fair tax is the one that the other guy pays.   

[Daren]

From what I heard on the radio, Fed tax is about 18 cents, and our state tax is about 32 cents. Of course, if they didn't have the tax, then you would be complaining about the roads. ;)

I still complain about the roads :, It seems all our state tax money goes right to Chicago. Downstate gets the short end of the stick. We are taxed to death, if there wasn't so much waste it wouldn't drive me as nuts. I didn't mean to turn this into a tax discussion.
I am all for ethenol, my wife works for ADM and gets stock. Heck us just talking about it probably made the stock raise a $.01, her pension just grew :D

[Redonthehead]

That article is BS. The basic reason gasoline is high is because OIL is ~$73. When oil goes up it floats all energy prices up. Natural gas, coal, ethanol (as in the article) all go up as users try to switch energy sources. ie:  I work in a large plant that uses a lot of steam. We can run our boilers on a number of fuels, and switch around based on pricing.

Yes, because corn is cheap and ethonal is up, the ethanol producers are making a fortune now too.  I'm not really sure what sets the commodity pricing on ethanol - is it traded in Chicago? Seems to me it was closely tied to the futures on gasoline.

[beenthere]

Drill more wells, and build more refineries. The price will come down, and we can depend less on foreign suppliers. The oil is there, just have to go get it.
Got a good laugh today when I heard of a $100 rebate proposal being kicked around to appease the high price of gas complainers. What a joke. Just to buy votes, is all I can see. Solve the real problem - supply. A rebate won't do that, but only help the person buy more gas with it. Let's see, a couple tanks of gas is all it amounts to.  :

[GF]

 :D :D :D :D :D $100

We have some winners.   :D :D :D  :D

Then you have to pay tax on the $100.     :D :D :D :D  >:( >:(

Maybe they can also throw in a free voucher for an oil level check also.

Ever wonder how many gallons of fuel are used daily in Iraq?  :  I am sure that increases our demand.

[highpockets]

If someone can tell me where all of this oil is in the U.S. I can make you a millionare in a few days. 

[Paschale]

Just heard on the news today that the oil companies were reporting their first quarter earnings.  Chevron's profits were up 49%, with their total profit being $4 Billion.  That was their PROFIT!  It equated to a $1.80 profit per share, doled out to the shareholders.  Conoco Phillips and some other oil companies also reported record profits.  Record high gas prices, and record high profits, by all oil companies?   >:(

Those buggers are taking us to the cleaners, and it certainly isn't because of ethanol.   >:(

[maple flats]

AMEN!!!!! They are gouging us, but we keep taking it. The politicians waste, tax more, waste more. The oil companies raise the price by using less od their capacity. The GREEN sayers keep expansion at bay. They also restrict new supply expansion. Rumor has it that the US has a huge supply in the ground but many things keep it from getting used. We have the technology but are too slow to put it to use. Yes, we use more than the rest but we need more til we can develope other sources. Price does foster inventiveness and we will someday see the fruits of that (or our children or children's children will). Most of us use close to the same amt of energy if the price is $1/gal or $3/gal. Our use is curtailed a little and for a short amt of time but then we go about using as though the price matters not.

[Onthesauk]

Chevron just announced record earnings, some billions of dollars so went out and did a little checking:

     net profit margin        7.11%
     net profit margin, 5 year average     5.82%
     effective tax rate        44.05%

Have to keep the numbers in perspective.  When the government has trillions in debt you have to remember what billions are and how they relate.

[Daren]

Chevron just announced record earnings, some billions of dollars so went out and did a little checking:

net profit margin 7.11%

That is the number NET, 7.11%. Sure they make billions...only through volume. A 7% margin is not great. I can make that + in the markets. I wish I could just impose a tax to make my money without all the work and collect the money even if a business was going broke, then if they couldn't pay I would seize their assets and sell them... ah shoot someone already thought of that.

[Ron Wenrich]

When you're looking at those profit percentages, you have to remember that the underlying product has gone up in price.  5% of a $2 product is only 10 cents, 7% of a $3 product is 21 cents.  Percentage doesn't rise that much, but the income produced doubles.  Is that a windfall?

This price rise is not a supply driven event.  There is plenty of product on the market, and reserves are to near capacity.  But, that capacity increase in price as the market goes up.  Is that a windfall?

I really don't think they should tax windfall profits.  But, I don't think they should be subsidizing the oil companies the way they have been.  Any industry that makes that kind of profit doesn't need any money from the government. 

[oldsaw]

Chevron just announced record earnings, some billions of dollars so went out and did a little checking:

     net profit margin        7.11%
     net profit margin, 5 year average     5.82%
     effective tax rate        44.05%

Have to keep the numbers in perspective.  When the government has trillions in debt you have to remember what billions are and how they relate.

Keep in mind a couple of things as well.  Chevron is currently made up of 3 or 4 "big" oil companies that have merged.  The profits are big because of volume as was stated elsewhere.  When the price starts to creep downward, things will change quickly, and it will again.

I don't buy into the whole "gouging" thing or any other conspiracy theories.  I've got a degree in Finance, with minors in Accounting and Economics, so I've got a bit more of a grasp on the issue than many folks do.  However, when it comes to high gas prices, you don't have to look very far to figure out the problems (there are many).  Most of the guys here have already figured it out...Uncle Sugar.  The government does more to screw up markets than any other force in the marketplace.  The legal system is also part of that.  You have to keep in mind that current pricing is from a lot of different things, not just one.  The only conspiracy is all of these things working together, not some "master plan", politicians aren't that smart.

MTBE, yes, oil companies are running away from that as fast as they can.  It is bad stuff, at least according to the reports.  If you don't use MTBE, then you must use:

Ethanol.  Ethanol has a couple of problems, one of them was mentioned.  Our capacity is limited, which plays into the original post.  We don't have the infrastructure to manufacture enough ethanol to keep up with GOVERNMENT mandates.  The other problem is that we do it wrong.  We make our ethanol from corn grain (which makes great whiskey btw), which is horribly inefficient for fuel, actually netting less energy than it took to make it.  Instead of using just the grains of corn off of the cob, we need to do what Brazil does, use the stalk and all.  Bear with me here, becuase they use sugar cane and not corn, but you get the idea.  Alcohol is derived from sugars, and the stalk has many times more sugar than the kernels of corn themselves.  Silage.  Brazil is using chemicals along with it to break down even more of the stalk to yield even more ethanol.  Still (pun here?), we currently have the problem of:

Not enough production capacity, since we haven't built a new refinery for over 30 years because the environmental lobby keeps things going the way they want it in:

Congress, who passes the legislation for taxation, environmental issues, and is currently telling the US that it isn't going to allow drilling in Alaska, the Gulf of Mexico, or off of California.  Even the announcement of drilling to start next winter in Alaska would bring down oil prices because speculators are banking on limited supply and:

Increased consumption worldwide, especially in China and India, but US and European use is way up as well.  Prices will remain high until more oil and more refining capacity gets into the pipeline, which gets right back to Congress.

Reduce the number of special blends, make that a federal issue rather than state...standardize the blends to allow more production out of current refineries and simplify shipping nationally to fill spot shortages.  Build more refineries, drill for more oil domestically, keep government out of the process, and things will get better fast.  BTW, when inflation is considered, we are paying about what we paid for gas in 1981, and slightly more than in 1974.  Just for your information.

Mark

[Paschale]

Chevron just announced record earnings, some billions of dollars so went out and did a little checking:

     net profit margin        7.11%
     net profit margin, 5 year average     5.82%
     effective tax rate        44.05%

Have to keep the numbers in perspective.  When the government has trillions in debt you have to remember what billions are and how they relate.

I'd like to see this information.  Can you post a link where you saw this?  When all the news reports state that a company has had a 49% increase in profits, and profits of $4 Billion, I tend to believe that, flat out.  Regardless of a profit of 8% or the like, they're making 50% more than they did a year ago, and we're paying for it, and that makes me steaming mad.  As to the effective tax rate, is this what the effective tax rate is on the gas companies?  By all accounts, one of the biggest issues in the marketplace of ideas right now is how much of a tax break the gas companies have been enjoying for years upon years.  I don't get all up knots if I see they have a tax rate of 44% then.

This is a fairly conservative forum, I'd say.   ;D  I'm a born and bred conservative, and I firmly believe in capitalism.  But, capitalism, in my opinion, isn't infallible all the time--people get greedy, and in my opinion, I just can't get all excited about defending the power of the market to take care of these problems, in this current situation.  I can't be an ardent defender of this particular part of the free market.  I think there are some serious questions that need to be asked by the FTC, and I hope they do it soon. 

Interesting article from Slate.com talking about the current profits.

[scsmith42]

My purpose in starting this thread was to seek to open more dialog into the factors influencing the runup in fuel prices.  It's easy to say " the oil companies are making a killing", but to me that's only a piece of a much larger puzzle.

There have been many insightful comments, and in particular I commend Mark (Onthesauk) for his financial and other observations.

Verizon's "net profit" margin recently was in excess of 40%.  Microsoft's was over 30%, along with a host of other companies.

If you look at the entire fortune 500, Big Oil's net profit margins are typically in the bottom quartile.  Also, profit margins do not reflect capital expenditures - only the interest on any debt borrowed and the depreciation percentage of the asset purchased with the capital.  So the street may report that a company made a million bucks, but if they spent 1.2 million on capital expenditures for the future then they are actually running in a negative cash flow situation.

I may not "like" the increased fuel prices, but I can deal with them better if I understand the true causes of the increases.

[Onthesauk]

Those stats came from "Raging Bull" but any investment site will have the same thing.  My point was if you just listen to the politicians or the news you can be led to believe anything.  Sure they had record profits but nothing great relative to a lot of other industries.

This whole thing is a little like retirement, Social Security or Medicare.  They have been telling us for years the problem was coming, everyone kind of nodded their head and ignored it and now it's here.

[beenthere]

I agree with oldsaw's information, and heard a good report last night that said nearly the same thing. The earnings are no different than some average stock, and an average or below average business.  Numbers are being tossed around by the media to hype (not that it is unusual, as they do it all the time) the issue, and make it sound bad so we vote out the supposed perpetrators.

The interview last night said prices are set every day by what bidders are willing to pay for fuel. I assume it is similar to an auction or board of trade, but I don't agree with any Gov't messing around with something they know nothing about.  Stop this nonsense about restrictions on refinery and drilling, if we want lower prices. Otherwise, let the demand set the price and when the time comes, alternate fuels will be developed that will compete. However those alternate fuels will NOT be cheaper, they will merely compete at whatever the other fuel is priced at. 
I don't want to see a subsidized fuel, if that is what is going on with ethanol (and I here reports that it is happening that way).
Fuel is still relatively cheap, IMO. 
I would rather see it below a buck a gallon, but todays $3 a gallon will look cheap compared to the future $6 a gallon. 

[Don_Papenburg]

Look to the CBOT for the reason for high prices.   Those speculators could not care what something cost as long as they are makeing their percentages on the trade .   A lot of the runup is from large funds speculating , with lots of money.

[Don_Papenburg]

Dan Shade ,  Don't get too steamed , farmers are not getting paid to grow weeds.  But they are getting rent from the govenment to plant filter strips along creeks and rivers  to cut down on siltation and waterway pollution. If they do not plant and maintain the proper mix of plants they will lose the payment and be assesed a penalty.