I'm not so sure of this.

I see the price of gas sitting in the ground spike with the slight change in the price of oil or the slightest quiver of Middle Eastern politics. However, when the price of oil falls just as far or further just as fast, the price of gas takes a long time to return to drift down. I'm not so sure the price of gas for speculators ever sees anything close to an equivalent downside to it upsides.

Speculators perform a valuable service: They incur risk that other market participants don't want to bear. Many companies not in the oil/gas industry have oil or natural gas as a large portion of their costs. They want to have some kind of assurance that if the price spikes, they don't go out of business. So, they buy futures. From speculators who bear the risk (I'll deliver X barrels of oil to you in Y months at Z price, regardless of the market price in Y months.) The company reduces it's risk, and the speculator expects to make a profit. Both players in the market get something they want: the speculator a chance at a profit, the company reduces risk.

Full disclosure: I once worked at a division of a power company (electricity generation) that bought coal and sold electricity on (relatively) open markets in large part on the futures markets. Such markets would not exist without these speculators.

I drive a minivan and my normal commute is about half highway and half city. Driving normally I get around 17 MPG, but if I drive to save fuel I get 20 MPG. That's a 15% savings without changing where I drive only how I drive. When gas prices are in the $3.00 a gallon range I also think ahead and try to combine trips to reduce the number of miles I drive. It's not that I can't afford to pay $3 or even $5 a gallon, it's that I know some asshole is making lots of money on high gas prices, so I want to do my part to reduce demand. I expect many people could do the same thing, and if enough people did just that there would be a 10% to 20% drop in demand and prices would come down. I may even start driving my motorcycle to work and it gets over 50 MPG.

(moonbat warning: read no further if you hate Sean Hannity and Fox News):

Yesterday afternoon, Hannity had Neil Cavuto and Gene Henssler. I didn't catch all the discussion, but some points did stick in my mind.

- The government makes more "profit" in the form of taxes than the oil companies from the sale of gasoline.

- The market seems to believe that the price of oil is in a bubble based on the fact that the value of oil company shares is not higher. It is therefore reasonable to assume that the price of oil is going to fall dramatically in the near future.

- This sort of bubble has happened before (anybody remember in the '90s when oil was at something like $15 per barrel?). Oilmen remember it and, fearful of another bubble bursting, are not especially inclined to begin high cost / high risk projects such as oil exploration when the probability of VERY lean years is on the horizon.

- Government regulation does absolutely nothing to encourage oil exploration or refinery construction.

- Government regulation regarding additives and other blending that changes during the course of the year ("winter" gas vs. "summer" gas) combined with little or no surplus production capacity leads to supply shortages and hence price spikes as the seasons change.

I'm not an economist, but I suspect that the price of gas is controlled by rather more complex forces than simple greed on the part of the oil companies (thanks to AughtSix for providing another piece of the puzzle).

One of the problems with the entire debate about fuel prices is that too many people know absolutely nothing about how the market works. They run around making invalid assumptions and get all worked up over them.

During last summer's price spike, I heard the statement, "They're charging us more for oil they've already purchased," over and over again. Actually, the oil companies are not charging for the oil they already have, they are charging for the oil they will have to purchase to replace the oil they are selling.

The best analogy I have heard about this used coffee as an example. Suppose that you like to have 5 cans of coffee on your shelf. You are paying $2 a can for those 5 cans. Now, the price of coffee rises to $4 a can for whatever reason. I come to you and ask you to sell me a can of coffee. How much would you sell it to me for? If you sell it for the $2 you paid for it, you will lose $2 when you have to buy a replacement can since the price has risen. If you sell it to me for $4, you break even as it will cost you $2 to replace it. Unfortunately, the people accusing the oil companies of price gouging see the extra $2 as price gouging even though you ended up with no extra money in your pocket.

Everyone seems to forget the destruction of a large portion of our domestic oil industry in the late 80's when oil prices fell to ridiculously low levels. Producers couldn't even afford to pull oil out of the ground. As a result, the oil industry tanked and still hasn't fully recovered.

How did one occupant per gridlocked
vehicle in suburbia originate?

Politicians only give us what we
signal we want. We elected them.
Who's to blame for an electorate
that wants politicos who tell them
what they want to hear?

"V" asked the same question in his
purloined video conference to the
populace:

"And where once you had the freedom to object, think, and speak as you saw fit, you now have sensors and systems of surveillence coercing your conformity and soliciting your submission. How did this happen? Who's to blame? Well certainly there are those more responsible than others, and they will be held accountable, but again truth be told, if you're looking for the guilty,

YOU NEED ONLY LOOK IN THE MIRROR."

Government requirements, national and especially regional, are a major component of the current spikes. There is an ethanol shortage right when they are having to drop MTBE and move to ethanol, for instance. And this is the season for moving from winter to summer blends, inherently disruptive as it shuts down refining completely briefly for the changeover, when there is no refining capacity to spare, thanks to our pals Nimby and - wow - the government.

There's a great post linked in the latest Carnival of the Capitalists that ends with a map showing all the different blend requirements. I had no idea it was that bad.

- Government regulation regarding additives and other blending that changes during the course of the year ("winter" gas vs. "summer" gas) combined with little or no surplus production capacity leads to supply shortages and hence price spikes as the seasons change.

I wish I could find the national map of fuel blends. It's amazing how many there are. Lifting those requirements, meaning any gas could be shipped to anywhere in the nation, would do a lot to lower prices.

Steve L

Your coffee analogy is not bad. The only problem is that when the replacement cost reverses, the pricing policy lags way behind or occurs not at all.

If the oil companies were simply recovering their raw material cost increses, there would not be the absurdity of their obscene 4th quarter profit increases. Cost recovery should not result in the sort of profit increases that were posted in December.

The 1st quarter oil company reports are due this week or next & the widely held anticipation is that they will again be outrageous.

I'd like to have anyone who can, explain why cost recovery also produces obscene profit increases.

There is no doubt that market forces drive the cost of gas at the pump. I won't even go into that discussion.

The real problem is that we are dependent on a resource we don't control. We have put ourselves at the mercy of foriegn countries who are going to sell to the highest bidder. You can't blame them for that since most of them have no other resources to sell. Saudia Arabia would still be a nomadic society if it were not sitting on top of an oil field.

Since we have not developed an alternative to oil on a large enough scale to stop using gasoline as our primary fuel, we either must buy from foriegn sources or develop our own sources at home.

We have allowed environmentalists to dictate energy policy by preventing drilling in areas where there are known reserves and by preventing exploration for oil in other areas.We have also allowed them to prevent the construction of refineries to process the oil when it is available.

We have nobody to blame but ourselves for putting politicians in office who roll over for the environmentalists.

I remember what Signal Hill in Long Beach, Ca and what Huntington Beach, Ca looked like in the 60's when oil derricks were sitting there uglying up the area. I don't advocate a return to that careless approach but drilling and extraction technology has developed to the point where an oil field can be almost invisible. Additionallt, drilling and extraction can be clean.

We need to develop our own resources and refining capacities.
Chuck

The Bush family fortune is based largely on oil. Isn't the dope in chief's request for an investigation into high gasoline prices sort of like putting the fox in charge of the hen house?

We are still not paying European prices at the pump.

maggysturn:

Actually, the Bush money doesn't come directly from oil.

It comes from selling supplies and services to people who look for oil.

OPEN ANWAR!

If oil companies, as the sock-puppet apologists are wont to claim, are just recovering costs or passing costs along to the consumer, why do oil company profits skyrocket even faster than prices at the pump?

I mean, if I buy a can of coffee for $2 and sell it for $2.50, my profit is fifty cents. If the price of coffee goes up to $2.25, and all I'm doing is raising my selling price in a normal, reasonable, and commensurate fashion, how come suddenly my coffee store is making $36 billion *more* a year?

Also, I'd like to see just one of these sockpuppets who pathologically squeal, "It's NOT price gouging" when the oil companies raise their prices in lockstep, show me a valid, actual example of something that *would* be price gouging. Then I'd like to see them stammer out an explanation of how - *exactly* - this valid example of price gouging differs from what the oil companies are doing right now.

Sheesh.

SS

Damn, mak44, that was a cogent and well-stated point. The counter to it, why last years record profits were by no means "obscene," is the huge financial risk oil campanies were under during the hurricane season. If Rita had hit slightly differently, they'd have been out pretty much that entire profit margin.

Sansouci:

Citicorp posted 33% profit for Q4 '05.

That obscene enough for you?

J.

And how many are going to donate to GREENPEACE to oppose drilling in the ANWR? i say SCREW GREENPEACE

Jay

something else to put in your pipe & smoke...

On the other Wizbang gas thread, Kim, in her original post, points out that the poor besieged oil companies barely manage to eke out an infinitesimal 9 cents/gal. profit.

Poor thangs... Exxon paid its CEO Raymand $51 mil in 2005 & relegated him to post retirement poverty w/ a paltry 400 mil tin parachute retirement package.

At 9 cents/ gal, Exxon would have to acquire 255,721,649 barrels of oil w/ resulting gas production of 19.4 gallons of gasoline/barrel in order to just break even for this one retirement cost package.

How rude for the Middle Class American to bitch about filling his gas tank when companies like Exxon are faced w/ such monumentally serious cost factors.

BTW at 21 mil. barrels/day US usage, that's a 12+ day supply of energy for 280,000,000 people, not counting the 12 to 20 million illegals that are in the US sopping up extra quantities of energy.

And that's just 1 executive. No wonder that poor Big Oil is so unfairly encumbered. Afterall, there's so many executive salary & retirement packages that have yet to be funded &, with diminishing proven oil reserves, so little oil left to fund them.

Hmmm.

1. What I'm curious about is where is drilling in ANWAR amidst all of this? What about the restrictions on drilling off the east coast of the USA? The fact that oil companies are forbidden from drilling off the coast of Florida?

2. Ethanol also cannot currently be carried by pipelines, only by truck. So this regulatory boondoggle by the federal and state governments forces the price of gasoline upwards, irrespective of any ethanol shortages.

...

Frankly all of this is just an artifact of government meddling.

It's worth noting that 9 cents per gallon, at current prices, is at or slightly below 3%.

I have a bank savings account that pays 3%.

Obscene, isn't it?

Hmmmm.

@ mak44

The 1st quarter oil company reports are due this week or next & the widely held anticipation is that they will again be outrageous.

When you've got gross sales in excess of $300 billion dollars then your profits are going to be large in number, but not necessarily in percentage. It's the same principle in taxation that tends to trip people up.

Does it offend you that Exxon-Mobil makes about 9.2% profit on gross sales? If that's the case then would it really piss you off to realise that Microsoft makes about 4 times that?

So why aren't you screaming at Microsoft?

Well, well, well (ptp) John Irving

So now, not only do the pitiful beleagured Oil Companies need to cope w/ obnoxious gov. regs, shareholder expectations, outrageous Greenpeace machinations and greedy A-Rab well-head producers, but now they must cope w/ SERIOUS HURRICANE RISKS and so must recover even more in profits to salve & heal their battered corporate bodies after having barred Katrina & Wilma at the door. Of course their obscene profits are after the costs of the hurricanes, but they are surely entitled to some good compensation & rewards for the mighty service they have rendered during National Tragedies.

No doubt, in the Golden Age of so-called robber barrons, poor ole John Rockefeller was much maligned for being the first to begin w/ profit accumulation to plan for the coming 21st century hurricanes.

Just as in Toynbee's History of Civilizations, Western Civilization was unique to have had 3 Ages of Expansion thru the development of 3 different phases of capitalism, beginning w/ Mercantile capitalism in the Rennaissance as the Instrument of Expansion.

As most of us know, all good things come to an end; we have reached that end with the 4th Age of Capitalism & it is called Predatory Capitalism.

Ed

you show a few dim signs of rational thinking, but then your light goes out.

For example: When you've got gross sales in excess of $300 billion dollars then your profits are going to be large in number, but not necessarily in percentage

If total sales include vastly increased cost run-ups of the natural resource, please explain why profits increase.

AND you say further above: Ethanol also cannot currently be carried by pipelines, only by truck. So this regulatory boondoggle by the federal and state governments forces the price of gasoline upwards, irrespective of any ethanol shortages.

Then kindly explain how Brazil,w/ a 2nd world economy and w/ a land mass similar to the USA, has been able to achieve total ethanol independence thru, gawd forbid, government edict; or are we just ignorant? Brazil's energy neeeds weren't solved by government edict but rather a super stealth capitalistic initiated enterprise that no one saw coming in spite of a dumb government?

The Republican administration has done a piss-poor job of preparing this nation for the inevitables we all knew were coming.

IGNORING global warming...

FAILING to seure our borders...

DOING NOTHING about our dependence on foriegn oil...

Let's not even talk about the failure to reform Social Security....

It's time for Americans to flush the toilet and rid our government of the do-nothing, self-serving Republicans currently in power.

Mak44
If you dont like their products price , than dont buy it! simple enough to just ride your bike.

mak44, if I'm not mistaken, ethanol is still a minor energy source in Brazil although they have made great strides in preparing for its larger role by mandating the increased availability of "Flex-vehicles". I was under the impression their energy independence is very much due to the increased mining of domestic oil supplies. Along that line we would do well to revisit the ANWR I guess.

LEE
I live in minnesota, there is no global warming! its colder than hell 75% of the year, it froze this morning even.
All of the other things You stated have been blocked by the dems, your beef is with them.

Yep, by golly, we need to inact all of those "stick it to those evil oil company" tactics like windfall profit taxes and/or price controls that worked oh so well when they were tried in the 70's. Worked like a charm back then didn't it?

Here's an even better idea, let's pass a law requiring oil companies to be "not for profit" corporations. By my quick math, back out about $.60 of gas taxes, and then removing the 12% profit margin that XOM reported last period, would drop the local price of gas here from $2.95 to $2.67. All would be right with the world at that price, right?

If you think that "profits" or a questionable payout to one exec is the root cause of our pain at the pump, you're not seeing the big picture. Wall Street and its analysts tend to be "big picture" types, go look at how the stock prices of "big oil" has fared in the last 12 months (the period of the most egregious "obscene profits"). Compare the price tracks of major oil companies like Exxon-Mobil (XOM), Chevron (CVX), Shell (RDS-B), and BP (BP) against the standards of the DJIA, NASDAQ, and S&P. During this period those companies have at best "kept pace" with some of the stock barometers, but mostly have fared worse on average. Exxon-Mobil has underperformed all three standards in the past 12 months. If you want to maximize your profit in the stock market, "big oil" looks pretty lack luster. For an industry fueled by money, Wall Street doesn't seem too impressed with the oil profits that are making all of those headlines. If "Big Oil" were gouging, don't you think Wall Street would reward them via their stock price?

Dave D

Anwr has proven resources that could supply the US in total for a mere 100 to 200 days. Not much relief there.As to Brazil, they are energy independent w/ ethanol accounting for 40%. So I was in error about complete ethanol reliance.

In the 1980's Brazil imported 80% of its energy. But thru gov regs & mandates they are independent.

The cars that run totally on ethanol can be fueled at half the cost of a gasoline fill-up in Brazil.

AND my basic point in the above post was that Brazil has solved the ethanol transport problem that some other blogger was using as an excuse for the situation in the USA.

Gizmo

Better keep your day job cause you'd be out on The Street panhandling as an ex-broker.

In the past year, BP shares have increased by 25%, COP by about 32%, Occidental Petroleum (OXY) 48%, MRO by 65%, SUN by 68.5%.

The fact that XOM was a piddling 14% increase in share yalue over 1 year just points out the outrageousness of the CEO Raymond 451 million package, which, as I pointed out before would require the processing of nearly 256 million barrels of oil w/ a 9cents/gal markup just to pay out the package.

That XOM was an underperformer is likely reflected in its management compensation packages.
Even so XOM's y-t-y stock increase easily exceeds the DOW, Nasdaq and S&P.

Perhaps the stock yards are your real area of expertise rather than the stock market.

How can your summation of Anwar be correct or validated, 100-200 days proven reserves? we have,nt used it so it cannot be proven.

Ethanol is no answer , it would be taxed with the same vigor as our current fueling options, that is the base problem here "TAXES"thats the real gouging going on, state and fedral beauracrasies using oil sales and social security taxes/witholdings. this is what has to be dealt with! and until it is if you vote for the same idiots its your problem.

CurlyLarryMoe

how appropo your moniker; it presages the content of your post.