Robert Reich had an interesting but misguided essay out yesterday. He thought that the low price of oil had something to do with the glut of oil because of an economic slowdown. Clueless.
I wrote this several years ago when oil futures were sky high and pump prices were headed to $4.00...which, by the way, where I live, they reached. It would be the other side of the same coin.
"Living on the eastern end of Long Island is a lot like living on edge of the earth. We are a scant 100 miles from New York City and obviously on an island where there is no escape save a couple ferry routes. About 25 miles from here is an offshore oil download platform. It was owned by the Conoco oil company and now, well, I don't know, but it is operational. It remains a distribution point for this end of the Island.
Regular gas at our local pumps is about $3.40 a gallon now - well above the national $3.12 reported today. When the rest of the nation spiked $.03 a gallon this last week due to Egypt, we went up $.10. The petroleum downloaded at Conoco was purchased months ago at a far different price but that is another story.
My dad retired from Gulf Oil in the early 70s. Before he retired, he was hauled into Federal Court to testify to price fixing by the oil companies in Michigan. Gulf owned reserves in the middle east and the entire supply chain that stretched from there to the gas stations in his district. Soup to nuts as the saying goes. Big cheese lawyers from Chicago were sent out to defend Gulf Oil and I went with my dad to the federal courthouse as we were going trout fishing and this was only going to take a minute. I got my first introduction to the federal court system that day and the next and the next.
That was nearly 50 years ago. The sum total was that oil companies have about a zillion different places where they can add on costs and they can blame everything from the weather to Ma and Pa Kettle as to why the cost at the pump is what it is. It is so complex that no one.... no judge...no federal court.... no one...NO ONE can get through the smoke screen.
Father had a clear memo from headquarters. I think it was, in essence, there was a huge "oversupply" of distilled product (gas) and it was creating a storage overflow "so" Gulf had to dump inventory as it cost more to store it and stop up the pipeline than it did to take a small loss per gallon at the pump. My dad's hands were tied. He was just meeting the supply/demand issue and that was that. Never mind that Flint, Michigan had a number of independents or small local chains that bought bulk gas from Gulf and others at the supposedly reduced price and now were competing against them but charging 4 cents a gallon more. Gulf put them out of business and then bought them up. Never mind the Saturday night phone calls from dealers who wanted permission to undercut the competition and force them out of business.
About 20% of the crude oil that reaches us goes through the Suez Canal in Egypt. A lot more of it - a bigger percentage - goes to Europe. Actually we get most of our oil for refining from Mexico, Canada and Venezuela than the Gulf but you aren't supposed to know that. What you are supposed to believe is that the price is up because there is a threat to supply - key word "threat".
Traders who are either on big oil's trading floor or operating somewhere in the world are trading up prices - speculating. This upward price push isn't opposed by big oil. Not one bit. The oil on the tanker heading into the canal was purchased a long time ago and at a price a lot less than the speculation price. But when it is offloaded from the tanker it will suddenly and miraculously be at the new price which goes through the same refining/distribution system but at the new cost with all the markups and percentage add-ons in place. It is then just math and you are paying the new price on old oil. It is very simple really. If the price goes down next week it is ok - the oil companies will claim that it was purchased at the higher price and the new oil will be at the lower price although you won't remember and they don't care.
If you want proof of the price boondoggle, look at profits - up generally over 50%. If the profits reflected a high price for the product at the wellhead the profits wouldn't be there. Refinery profits are stagnant. The corner station isn't making more on a gallon. It is all this manipulation of product costs that is driving it.
Point is, whatever it is we pay has very little to do with supply and demand. The driver is speculation and unbridled profits. As the saying goes "with big oil, never get between the pig and the trough".