Democrats & Liberals Archives

When collusion pays

Record prices at the pump. We’ve all heard that one, over and over again. It’s almost as if we’re comfortable paying $3+ a gallon at the pump. Who cares if those record prices are the product of collusion, right?

During the first half of 2006, the five major oil companies earned $63 billion. (link) That number is a staggering 20% ahead of last year’s numbers; which, if you recall, were considered ‘record-setting’ for 2005.

A barrel of crude is now at $73 (link) and when you combine that with the Middle East conflict, you have a good story to market to the American people. The message from the big 5 isn’t that the Oil companies are the bad guys; no quite the contrary. The Oil companies are merely a victim, just like all the rest of us. But we all know that’s untrue.

The big-5 Cartel created an artificial environment of high oil and gas prices. Last year they used hurricanes to push energy and fuel prices through the roof. This year the big 5 cartel used turmoil in the Middle East, since the hurricane season turned out to be a dud.

Yet the record profits keep coming.

Throughout America, prices for everything keep going up and up. Anything that requires the fuel increases the cost of producing and distributing that product. It makes sense; if the cost of manufacturing and distributing your goods increase, then the cost to the consumer increases as well.

In the food industry, a study (link) in 1997 had 3.5 cents out of every dollar going toward energy costs and 4 cents per dollar for transportation costs. Fuel costs, since then, have skyrocketed and consequently, the cost increase has been passed to the consumer. Yet the overall numbers in the food industry do not show record profits like the oil companies.

Why is that?

If one industry, take the oil industry, uses external factors for the increased prices at the pump and they post record profits, then why isn’t that same profit felt in other sectors? Sectors may have different variations but a model for the production of a product, be it, oil, gas, wheat or apples should apply equally. And if the cost of producing a gallon of gas increases because the cost of a barrel of oil increases then the profits should stay the same.

Yet, the big 5 have record profits.

The big 5, through opportunistic greed and the assistance of a lax government, helped create these inflated gas prices. In the past year, the average gallon of gas in 2005 was $2.32, now it’s $3.04, a 46.6% increase.

What has changed in a year? Has the price of crude increased that much? The crude price has increased, but not by 46%. So if the price of crude hasn’t increased 46% then why are the big 5 recording record profits?

Why? Because they can. And it can only happen if our elected officials allow it to happen. Our elected officials allowed a cartel to control our economy and we, as citizens, have little to affect its change. For a cartel success depends on a number of things: demand-side characteristics, the rate of technical change, the homogeneity of member firms, and organizational factors such as the decision-making procedure, as well as government policies. Government policies. That’s the one thing that the cartel themselves can’t directly manage.

You can’t have, in a free market like America, this type of collusion or cartel without the help and support of the political industry. The three branches, Executive, Legislative and Judicial, of our government have created an environment that a cartel, such as the big 5 is protected at all levels of our government and not be held accountable for their opportunistic greed.

I wish that once, in the future, maybe during my grandchildren’s time, there will be a government that represents their citizens rather than the corporations.


Posted by john trevisani at July 31, 2006 9:49 AM
Comments
Comment #172254

Great post.

U.S. Oil Cos haven’t truly invested in U.S. refining capacity for ages. That’s where the true bottleneck is. As long as there is a bottleneck, prices go skyhigh when some mishap occurs.

—————————————————————-
“U.S. Must Increase Refining Capacity, Subcommittee Witnesses Agree (07 15 2004)

Several witnesses, including Guy Caruso, administrator of the Energy Information Administration, noted that companies and investors alike need regulatory certainty in order to proceed.

Caruso said companies need more incentive to expand and greater certainty about the rules and regulations. “The higher these hurdles are, the higher the margins required to justify expansion,” he said.”

http://energycommerce.house.gov/108/News/07152004_1365.htm

————————————————————————-

Oil industry answer: “regulation and a lack of incentives are to blame”. Gimme a brake…

PS: Enron & co were allowed the same type of price manipulation, keeping capacity scarce (or even keeping it offline) in order to boost selling prices.


Posted by: Josh at July 31, 2006 10:19 AM
Comment #172267

Yea, 5 US oil companies can control the worldwide price of a barrel of oil.
It’s not like the Chinese or anyone else on planet earth are paying $73/bbl.
It’s not like US demand for gasoline has still held firm, or that ethanol additives are costly to produce and transport, and people are STILL driving their SUV’s around.
It’s not like there is a market for oil on exchanges worldwide, and the price has reached a similiar equilibrium on all of them.

Its because 5 US oil companies can manipulate the entire world market. Can someone back this claim up with numbers other than profit figures? Oh yea, Exxon-Mobil’s gets more revenues and profits from their NON-US operations. Check the last 10-K if you don’t believe me.

Posted by: Greg at July 31, 2006 11:04 AM
Comment #172269

I’m pretty sure that if you really follow the $$$ you will find some our our “elected” officials have also been making record profits.

Especially the oil cowpoke from Houston.

Posted by: ChristianLeft at July 31, 2006 11:05 AM
Comment #172270

All this is a waste of electronic ink.

1.) What type of society do we have? Capitolist?

Well, why don’t you invent a better mouse trap and put the big oil companies out of business instead of just sitting here and bitching and complaining?

Questions…

1.) Have you tried to invent a motor that runs on oxygen or nitrogen or something?

2.) Have you actively promoted alternative fuels that are not controlled by big oil?

3.) Have you tried to invent a cold fired nuclear FUSION reactor?

4.) Have you actively tried to get the ban on new nuclear reactors lifted?

5.) Have you actively promoted lifting the Endangered Species Act so as to allow us to “wallpaper” the Nevada desert with solar panels?

6.) Have you told Ted Kennedy that you don’t give a DAMN what windmills does to his “view”…that our need to generate cheap electicity superceeds his esthetic elitist sensabilities?

In fact, what have YOU done to lessen the stranglehold that big oil has on this country?

Nothing…except bitch, piss and moan?

See where the problem is?

Posted by: Jim T at July 31, 2006 11:06 AM
Comment #172287

geez, JimT, have you done these things?

Posted by: myles at July 31, 2006 12:07 PM
Comment #172296

Opening problematic practices up to debate, even to protest, is a laudable method of casting the limelight on them. That is where changes usually start, or explanations, if need be, begin.

Castigation of those calling attention to these practices is just name-calling.

Posted by: myles at July 31, 2006 12:34 PM
Comment #172301

I am working on a motor that runs on hot air. I just need a source…………Jim T can you help me out. Or maybe a piss and moan motor would work just as well. If I only could afford the time to work on these more.

Posted by: joe at July 31, 2006 12:55 PM
Comment #172311

We always think the problem is the oil companies. They are NOT the problem, perhaps a symptom. The problem lies in our citizens demanding cheap energy or feeling like they deserve it and it’s just not fair. Why is it that anytime someone or some company does well, it’s not fair to everyone else. How myopic…

I taught my children that there is no such thing as fair. My pat answer to them was, “What’s fair is when I have the advantage.”

Going after big oil is not the solution.

I know, I know…
But it it makes you feel better right…

Posted by: cliff at July 31, 2006 1:21 PM
Comment #172324

myles,

I’m not bitching, pissing and moaning about the big oil comanies. Seems to me someone ELSE here is doing that.

So, no. I haven’t done any of those things. See, I don’t give a rat’s ass HOW MUCH money the big oil companies make…so I can’t bitch, piss and moan.

Joe,

A motor that runs on hot air? Have you hooked it up in Washington, D.C.? Seems to me it ought to be turbo-powered if you do that.

Posted by: Jim T at July 31, 2006 2:05 PM
Comment #172332

Question:

Can anyone give me the names of at least 6 people who will profit the most from the increase in oil prices at the pump ???

Posted by: Mike Lukac at July 31, 2006 2:48 PM
Comment #172336

——-Jim—-Have you heard of Gouging? There is a law
that is designed just for that crime! Have the Feds.
threatened to use that law NO ? Over the past few the oil Cos. have Bought up twenty five Oil
Refineries, an closed them down an will not sell
them. Is this collusion, Yes Does the FTC know about
this? YES. Does our Government pay the oil Co.
millions of dollars for exploring for oil.? Yes
I think even a nit wit could find a big problem with this scenario. The question should then
be, why have none of our politicians said or
mentioned ,more or less tried solving this rip off? Ask Your Favorite Politician or Demand them!

Posted by: DAVID at July 31, 2006 2:52 PM
Comment #172338

Bush, Bush, Bush, Bush, Bush, and Bush Sr. No I really dont care about that. But I do know that it is someone that does not care about me or my views.

Posted by: joe at July 31, 2006 2:53 PM
Comment #172341

—-by the way, Some years ago Mich. had a large
recall of several politicians, which kept them in
tune with the voters, I believe they have since
thought we have forgotten how easy it was to setup
Re-Call Petitions, May be something to think about!

Posted by: DAVID at July 31, 2006 3:02 PM
Comment #172348

JimT -

This really isn’t about HOW MUCH the oil companies are making, it’s about how they are making SO much at OUR EXPENSE. People get bitchy and pissy when they feel they are being robbed.

Posted by: myles at July 31, 2006 3:18 PM
Comment #172350

—-Mike Lukac—Look in the Wall Street Journal
under oil, or just look under the increases profits
section you will see their new worth per share!

Posted by: DAVID at July 31, 2006 3:21 PM
Comment #172362

Yes, people get upset when they feel that they are being ripped off.

But there are two things they can do about it.

1.) Do what I suggested in my first post.

2.) Bitch and moan (in other words…nothing).

There is a 3rd option which I have not suggested. BUY STOCK IN BIG OIL. Then you can be one of the rip-ers instead of one of the rip-ees.

Posted by: Jim T at July 31, 2006 4:02 PM
Comment #172366

ahhh, so the only things to do are what YOU say to do… how republicant of you to point that out…

How about also look into the idea that there may be collusion, gouging, price-fixing? A little bit of investigating to start things off, before we head off to our laboratories to start our inventing.

Posted by: myles at July 31, 2006 4:51 PM
Comment #172384

cliff wrote:

“We always think the problem is the oil companies. They are NOT the problem, perhaps a symptom. The problem lies in our citizens demanding cheap energy or feeling like they deserve it and it’s just not fair. Why is it that anytime someone or some company does well, it’s not fair to everyone else. How myopic…”

————————————————————————

Cliff,

Stock market quoted companies have not other mission but to generate as much profit as possible for shareholders. That is the only thing that shareholders mandate upper management to do so. If they can “buy” enough political support through pleasure cruises and lobbying to the bone to have a sufficient return on their investment, they will do that.

You are absolutely right, though, to put the onus on us as prime contributors to the current energy crisis. We consume more energy then anyone in the world. We buy more goods than ever before at prices you never thought you could afford, some with loans never thought you would ever get. This is a standard of living we can only afford because these goods are “made in China(/Indonesia/…)”.

And for a strategy for bringing demand down? Well, the oil companies have succesfully lobbied against common sense (i.e. bringing our demand for oil down) for it was against their business interest.

For example, here comes too little too late:

“20.07.06 Bipartisan push in senate to increase US fuel economy

A bipartisan group of senators introduced legislation yesterday that sets targets for mileage rates in American vehicles, breaking a legislative logjam that has prevented fuel economy standards from being raised for over 20 years.”

( http://www.pointcarbon.com/Home/News/All%20news/Kyoto%20International/article16715-472.html )

That’s for the demand side. As to the supply side, the shortage of crude oil refining capacity on U.S. soil greatly determines prices at the pump. You saw what Katrina did to local prices, because it hit refinery assets. Pump prices increased a lot more in percentage terms than crude oil prices did because of the shortage of refining capacity.

Common sense may seem to be to increase margin capacity and start earning a profit on it, as there is enourmous capacity shortage in the market. Oil companies, however, have used excuses such as “too much legislation” and “not enough incentives (i.e. money from the government/taxpayers) to do so” for not significantly upping oil refining capacity. In fact, refining capacity is way lower than a couple of decades ago, while consumption has gone through the roof.

This lucrative supply shortage artificially increases prices in the open market to be paid by consumers, while netting fat profits for oil companies. It’s the same as the power companies did in the California blackout crisis. As no company has any interest in going for less easy profits (no supply shortage hence no artificially high pump prices) over profits you have to work for (building up refining capacity until their is more supply then demand, and then having to undercut fellow oil companies in order to gain more ground in the competitive refined oil market).

They like the status quo. We’ll be paying more and more, they will be earning more and more, all “for our shareholders”.

Posted by: Josh at July 31, 2006 5:46 PM
Comment #172387

myles,

Don’t you think the dems would be all over it if it was indeed true? They would raise a huge stink…

We’ve had cheap gas for so long, we are lucky it’s not higher then this…

Besides, take all the profits divided by the total gallons of fuel sold…I’ve heard it’s about 9 cents a gallon…Will that make you happy? I don’t think so…

So what’s your point…

Posted by: cliff at July 31, 2006 5:48 PM
Comment #172388

——Jimmy——Sounds like you have rubbed your little
jennyass a little to hard, looks as if he is blowing smoke out his butt! You can be a spinmiester all you want, but the American People
Will get our politicians to take care of this
gauaging by election time, or they may well feel our wrath. Nothing wrong if you come up with some new
geanyass way to invent some new energy source!

Posted by: DAVID at July 31, 2006 5:49 PM
Comment #172392

josh,

I agree for the most part…when energy prices rise to the right level, we’ll have plenty of energy available…

Meanwhile we’ll have to pay…AND I do not want the fed involved…they screw up everything they touch…

Posted by: Cliff at July 31, 2006 5:53 PM
Comment #172402

cliff,

“My point” is I don’t like seeing people try to tell other people what to think, what to do, what their “only” choices are. I don’t have a problem with these prices (yet) but I didn’t start this blog - I was just reading through it. My comments are in that regard, for the most part.

As for “profits divided by gallons,” look a little deeper. Profits are not made by gas alone. The price of a barrel of oil is up, what, 150% over the last not-too-many years? and the price of gas is up almost 100% over that same time. So, it seems to me that while the market sets the price of oil, and the oil companies profit from that, there really doesn’t seem to be any real reason for the price of gas to be rising at the same rate. It is internal accounting (refining buying from production at the higher prices) that is justifying this. Granted, there is a bit more to it than this (e.g., some refineries don’t have production arms, so have to buy at higher prices) but the whole thing just might deserve a bit of look-see by someone.

But overall, your first statement is probably correct - if there was something so blatant going on, someone would already be on it. Cracks in the armor such as divesting divisions and internal accounting practices need legislation and regulation to counter, and no one is ready to re-enter that arena.

So like I said, my point was to illustrate the castigation as the real do-nothing behavior, while the writing about it (as in this blog) is at least expressing concern, drawing attention to a worrisome condition the author sees.

Is there a problem with that? Is all this indeed “a waste of electronic ink”?

Posted by: myles at July 31, 2006 6:51 PM
Comment #172408

I hear a lot about the excess profit that the oil companys make. Can anyone here tell me what the PROFIT MARGIN is with these companies? I’ve heard it is a lot lower than a lot of industries.

Posted by: tomd at July 31, 2006 7:22 PM
Comment #172411

tomd,

I have some oil company stock (I used to work in exploration) and their reports are as follows.

Profit Margin (ttm): 7.77%
Operating Margin (ttm): 12.34%
Return on Assets (ttm): 15.83%
Return on Equity (ttm): 27.67%

Posted by: myles at July 31, 2006 7:34 PM
Comment #172480

ttm Myles?

Posted by: gergle at August 1, 2006 1:49 AM
Comment #172483

Personally, I hope oil goes to $150/barrell or whatever price it takes for alternatives fuels to get a stronger foothold. It’s already starting to happen in a visible way, but there’s still not enough focus on it. We need to get energy independent, period.

Posted by: Rene at August 1, 2006 2:00 AM
Comment #172508

Jim T:
Based on your comments, it appears that you appreciate the efforts of grass roots campaigns. i too also support such campaigns.

In my area, neighbors have organized joint grocery store trips to save on gas. We’ve banded together for carpools to and from the local train station that many have switched to use, since prices skyrocketed. These types of things are great for America as a whole.

Let me pose this question:
- Say your electricity goes out and you are without power for days. The local grocery store chain that carries dry ice and other survival materials (like candles, matches, etc..) decides to close all but one store and raises the price of these essentials by a staggering amount. Would you boycott this chain in the future their brash brand of opportunism? Or would you say, that they can do whatever they want; it’s America.

Posted by: john trevisani at August 1, 2006 8:20 AM
Comment #172510

gergle,

ttm - trailing twelve months

Posted by: myles at August 1, 2006 8:27 AM
Comment #172620

—-john trevisani—- Perhaps you forgot what happened in the sixty’s an early seventies, when
things got tight. Remember all the little party
stores across most large big cities almost doubled
an some tripled their prices. What happened then
This country began seeing some of the worst
riots in our history. I can still remember the tanks
running up an down the roads. Then people started
sit in an did very destructive things because the
dirty little Viet-nam incursion, We had a complete
change in politics an the way Businesses treated
the American people. A much more complicated
period, than I have time or you all are inspired in.

Posted by: DAVID at August 1, 2006 5:26 PM
Comment #172639

For anyone interested…

Posted by: myles at August 1, 2006 6:51 PM
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