Comments

1. #1 Gingerbaker

   July 29, 2008

   James said:

   “First, you claim that the price of gasoline dropped right before each election… Seriously, I won’t accept what you say without evidence… why should I believe you?

   Well, first of all, you could look it up yourself. Second, you could look back and remember what most people who were even semi-conscious at the time remember – the blatant drop of retail gasoline prices before the 2004 and 2006 elections.

   But here are some tangential sources. Sorry, but I can not spend the time here today to find an oficial source for you.

   “Crude Oil Prices Rising / Gasoline Prices Dropping — What Does It Mean?”http://peakoil.blogspot.com/2004/08/crude-oil-prices-rising-gasoline.html

   “Those Darn Gas Price (Economics and Politics Edition)”http://www.poliblogger.com/?p=10722

   “Election week gas prices were year’s low; started rising again immediately afterwards”http://www.alternet.org/blogs/peek/44680/

   James said:

   “Because I have evidence refuting your claim that gas prices rose before the 2004 election. I already gave it in my 4:26 p.m. post! But here it is again, from the Illinois Oil and Gas Association, the Illinois Basin Posted Cude Oil Prices for June-December 2004:”

   You do not seem to be actually reading what I have been writing, James. For the second time, I am talking about gasoline prices, not crude oil prices. And again, the fact that gasoline prices went down, while crude prices went up is evidence against your assertion, and evidence for my assertion that foul play was seen.

   James said:

   “But why were some refiners rolling in cash and others weren’t? Perhaps because they were more efficient? Oh, no, just larger, right? But how did they get to be both larger and rolling in cash without being more efficient? And why would a small refiner sell out? Exxon and others can’t force them, after all.”

   For the second (or is it the third time?) Exxon is a vertically-integrated megacorporation. Homework assignment: Describe the marketplace advantages of vertical integration, and how that might allow the largest(?) corporation on Earth, sitting on $60B in cash, to buy out a small refiner.

   James said:

   “You pray, I answer your prayer. On what basis do you say Exxon has no need for more refineries? Is it just that you don’t think they need any more? Seriously, it’s really easy for any one of us outside a business to say what they need or don’t need, but it doesn’t mean anything for the very reason that we are on the outside. Did Exxon ever say they don’t need more refineries?”

   Yes, they did. From the same Congressional report I have been quoting from, found here: ( http://www.tradewatch.org/documents/House08.pdf)

   “The industry has plenty of incentive to intentionally keep refining markets tight.
   ExxonMobil’s new CEO told The Wall Street Journal that even though American fuel
   consumption will continue growing for the next decade, his company has no plans to
   build new refineries:
   Exxon Mobil Corp. says it believes that, by 2030, hybrid gasoline-and-electric
   cars and light trucks will account for nearly 30% of new-vehicle sales in the U.S.
   and Canada. That surge is part of a broader shift toward fuel efficiency that
   Exxon thinks will cause fuel consumption by North American cars and light
   trucks to peak around 2020–and then start to fall. “For that reason, we
   wouldn’t build a grassroots refinery” in the U.S., Rex Tillerson, Exxon’s
   chairman and chief executive, said in a recent interview. Exxon has continued to
   expand the capacity of its existing refineries. But building a new refinery from
   scratch, Exxon believes, would be bad for long-term business.8

   And here we see the advantages of vertical integration – by keeping supply of gasoline needlessly tight, it drives up the price.

   One way is to reduce refinery output:

   “The U.S. Federal Trade Commission found evidence of anti-competitive practices in the
   physical refined product market in its March 2001 Midwest Gasoline Price
   Investigation:

   An executive of [one] company made clear that he would rather sell less gasoline
   and earn a higher margin on each gallon sold than sell more gasoline and earn a
   lower margin. Another employee of this firm raised concerns about oversupplying the market and thereby reducing the high market prices.

   A decision to limit supply does not violate the antitrust laws, absent some
   agreement among firms. Firms that withheld or delayed shipping additional supply in the face of a price spike did not violate the antitrust laws. In each instance, the firms chose strategies they thought would maximize their profits.

   Another strategy is to reduce distribution access:

   “Concentration of refinery markets has been compounded by consolidation in gasoline
   marketing. Refiners get gasoline to the market by distributing their product through
   terminals, where jobbers then deliver to retail gas stations. The number of terminals
   available to jobbers in the U.S. was cut in half from 1982 to 1997, leaving retailers with
   fewer options if one terminal raises prices.14
   As a result of this strategy of keeping refining capacity tight, energy traders in New York are pushing the price of gasoline higher, and then trading the price of crude oil up to
   follow gasoline:

   “Last time, Mother Nature intervened in the market [in the form of Hurricane Katrina],” [Larry] Goldstein [president of New York-based Petroleum Industry Research Foundation] said. “This time, prices are being driven by market
   forces,” with gasoline pulling crude and other forms of fuel higher, he says.

   James said:

   “Ginger, you focused on profit per barrel, but didn’t focus on what really matters, profit margin. In fact you seem to have confused profits with profit margins. Your only evidentiary reference was to the profit per barrel, but you spoke of suspiciouly high “margins.” They’re not the same thing. In the big picture, oil industry profit margins are good, but not stunning, compared to other industries. The profit margin in the cigarette industry is more than twice as good, over 16%!”

   I used the terminology used in the Congressional report by analysts of the industry.

   They have some interesting things to say about your figures, BTW. I will quote them on that after saying this:

   Lest we forget Exxon spent many tens of billions over the last few years buying back their stock (and not building refineries with that money) and they paid out huge sums of dividends to their customers. These are business expenses and skew your figures badly.

   As the report points out:

   “And this monopoly control translates into unprecedented profits. When communicating to
   the general public and lawmakers, oil companies downplay these record earnings by
   calculating profits differently than they do when they speak to Wall Street and
   shareholders. Conversing with lawmakers and the general public, the oil industry
   highlights the small profit margins (typically around 8 to 10 percent) that measuring net
   income as a share of total revenues produces.
   But that’s not the calculation ExxonMobil and other energy companies use when talking to investors and Wall Street. For example, here’s an excerpt from the company’s 2005
   annual report:

   “ExxonMobil believes that return on average capital employed (ROCE) is the most relevant metric for measuring financial performance in a capital-intensive business such as” petroleum.

   ExxonMobil’s 2007 earning report shows that that the company’s global operations
   enjoyed a 32 percent rate of return on average capital employed. And the company’s rate of profit in the U.S. was even higher: domestic drilling provided a 35 percent rate of return on average capital employed, while

   Shell’s 2007 return on capital employed was 24.5 percent. ChevronTexaco has posted strong
   returns as well, reporting a 23 percent rate of return on average capital employed in
   2007– the median return on capital employed for Chevron over the last 19 years was only 8.7 percent.