Crude Oil Companies

Okay, let's see if we can figure out why you're now riding an old beat up Schwinn bicycle to work instead of driving your SUV.  That same Chevy Suburban LTZ you so lusted for a year ago, and bought, but that now costs you over $75 to fill up with gas

Some say the increase in gas prices is from the rising cost of 'crude' and blame it on all those #$%^@ oil companies.   In 2004 it was $45 a barrel, and now it's around $135.  Incidentally, whenever I hear a newscaster say 'Oil is now 1 bazillion dollars a barrel' I always envision the kind of barrels used by the those poor fools who went sailing over Niagara Falls in the early 1900's in hopes of promoting themselves (turns out drowning has a way of limiting your success along these lines).

Anyway, the feds claim that up to 70% of the price of a gallon of gas IS from the cost of crude.  'The rest is a complex mix of factors' - that phrase alone should set you at ease.  Let's see if we can follow the old 'Texas Gold' from its origins, and track the costs.

Oil gets pumped from the ground, that part's easy. Now, once out of the ground, it can either be sold to a refiner, or to what's called a 'spot market' - that's where oil companies and distributors buy and sell to each other.  Once it goes through the refiners it can be again sold on the market or to wholesalers who sell it to their own stations or to other retailers.

So, who sets the price of crude oil you ask?  Sad to say, it's not the oil companies.  I say sad, because that would be easy, and I could end the essay here, and we'd all go off with a good villain in our minds - incidentally those oil company guys should really consider a fashion makeover, or maybe hire a stand in, a woman, a young vogue model, someone, anyone but themselves - when you see them on network television answering questions from Senator Kennedy on Capital Hill, it's really hard to find much empathy anyway, turns out the price is set not by them, but by the open market.

By 'open market', we mean here, a bunch of guys betting on what the prices are going to be, not the actual cost of the stuff.  This is played out in the form of something that are called 'futures' contracts traded on various exchanges around the world.  Sometimes you'll hear them say that the cost of July crude oil futures was such and such a price.  That means someone is promising to pay that amount come July.  But no one at any of the exchanges ever actually walks over and slaps down $135,and drives off with a barrel of oil.  Instead, they sell it off to oil companies to refine.

Titania Jones, helped me out here:

The traders decide what the market price is based on whether they believe demand is increasing or decreasing.  However, because the number of contracts aren't really based on "supply and demand" but on the "funds trading as commercial traders", there is no way for traders to "gauge the real supply and demand market".  In other words, it's gambling.

Here's a quick overview so far.  Of the current $4.00 you spend for a gallon, 40 cents is federal and state taxes, cost to deliver it from the refinery to the gas station is 27 cents, refining is 40 cents, cost of crude 2.90 and the local gas station makes perhaps 20 cents.   The local guy doesn't make much, and in fact is struggling a bit to break even.

Titania continued (thinking she could actually help me out here)..

The breakdown for gas can be located at the California energy commission website.  The refiners have had low profit margins since the oil went up.  Right now, they've increased them, because they are playing catch up; they've actually lost money as refiners, in "the actual business of refining".   That doesn't mean they've lost money as producers, if they do that also, since this is only part of their balance sheet, if you see what I mean.

Thank you Titania, I sort of get it.

California Energy Commission Web site.

I wouldn't really click on that link if I were you, because if you do you'll only discover things like the 'State Underground Storage Tank Fee (it's a penny per gallon by the way).

So, the major cost for a gallon of gas is the cost of crude.  And who makes money on crude, you ask?  Two people: those that get it out of the ground, and those that bet on what the price is going to be in the future.  On the getting out of the ground side, it depends on whether you are an oil company that actually has all the equipment to take it from the ground.  If you are (think EXXonMobil) you post record profits, if you aren't, (think Sunoco and Tesoro) you might even loose money (they did this last quarter).

That leaves all those folks who buy and sell the 'futures'.  This from Titania:

Brokers are making the most money in trading commissions, on exchanges such as ICE, and other investment, trading firms and exchanges.  The money is distributed or withdrawn daily from the margin accounts.  If the price is always going up, the investment banks are the one's making the most money.  But that's not the problem, the problem is that they are pushing the price up, while profiting a lot less, and is that worth sinking the entire global economy?  So, while they make say a few hundred thousand a day, the effects throughout the world of this price increase are a few hundred billion? (just a guess), and it's all us consumers who have to pay for the price increases.

Okay, so now you know that more than half of the cost of a gallon of gasoline is the cost of crude, and that cost is set by gamblers betting on what the price is going to be, not what it is.  And what do the gamblers base their guesses on?  Well, according to the National Petroleum Council, the last quick raises in gas came in response to crude oil shortages caused by the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990.  Seems to be a pattern here.

Now, of course, you can heave a huge sigh of relief because we now have world stability ever since we arrived in Iraq okay I lied, the war in Iraq, our seemingly endless suggestions that something has to be done with, or to, Iran, and the whole region's less than glowing regard for the old U.S, has probably been one, if not, THE, major factor in the recent jump in prices.

This is all in spite of the fact that currently Americans, for probably the first time, are demanding less gasoline (mostly because if you're unemployed you tend to buy food before gas).

On the upside? That new SUV you've wanted?  Yours for a song, just run on down to your Chevy dealer - granted you'll probably cancel that trip you planned to the Grand Canyon based on the cost of gas, but it will at least look cool in your driveway this summer.

Here's the ironic part.  Back in 2004, one of the unspoken reasons for going into Iraq was to stabilize the region and the cost of oil.  Even in liberal California, where the war was never popular, you could hear the occasional 'well, at least gas will be cheap' conversation.  Well, those same countries are now making more money on their oil than ever before, we're beginning to see a crack in the U.S. as the only world power, the area is less stable than ever, and we're dipping into our retirement funds at the gas station.  

Oh, by the way along the way I discovered that according to the creationists all the world's oil was produced when the flood (2350 BC) swept away all the trees, vegetation, and animals (including humans), and covered them with sediment and squished them into oil.  Personally I like to think that the geologist's guess of 60+ million years is better, since humans weren't around, and I don't have to visualize the oil of humans squirting into my car's carburetor as I drive to work.




Sources:
AP story