As US consumers pay more and more for gasoline, heating oil and natural gas, the profits of the major oil companies soared in the third quarter of 2005. Led by the obscene profits of Exxon at $9.98 BILLION, more than the combined annual profits of 492 of the 500 firms that comprise the S&P 500 (Nick von Hoffman calculates this at $75,000 per second), profits of the other oil companies included Conoco Phillips at $3.8 billion, Royal Dutch Shell at $9.0 billion, BP at $6.5 billion and Chevron at $3.6 billion, although this "low" number was enough to cause concern on Wall Street about poor performance in comparison to its peers.
The American Petroleum Institute's chief economist, John Felmy, issue a statement that "earnings are a function of how well we manage our business. We are also producing record amounts of product, we are selling record amounts and we have cut our costs dramatically. So that really affects the bottom line as much as anything else."
Felmy's statement is pure bullshit. The reason that the oil companies are seeing record profits is because they are acting together as an unregulated monopoly, charging consumers what they can in the absence of competition in the oil industry.
Consider that one year ago, crude oil prices were around $36 per barrel, natural gas prices were around $6.85 per MMBTU. Today, natural gas prices are around $13.00 per MMBTU and crude oil is slightly over $60 per barrel. Why has the price of fossil fuels increased so greatly in the past year. Is it a lack of supply? Ah, according to the statistics, no.
Consider that a year ago there was 3,245 billion cubic feet (bcf) of natural gas in storage with a five year average storage value of 3,054 bcf. Today there is 3,062 bcf, slightly more than the five year average although 191 bcf less than last year, even though the effects of the gulf hurricanes locked in as much as 55 bcf per day of production. Does this 191 bcf (roughly 6 percent reduction from last year) justify a doubling of prices?
Actually, natural gas prices are closely tied to changes in crude oil prices, as consumers (both residential and industrial) can switch between fuels. So what about crude supplies? According to the Energy Information Administration (EIA) the US has about 18 million barrels less oil than this time last year but more finished gasoline in inventory.
The big increase in prices is because, to put it mildly, the oil companies can.
In 1999 Exxon swallowed up Mobil and a year later Chevron ate Texaco. These two mergers ended even the pretense of competition in the oil industry. In November 1999, oil prices were around $23 per barrel. By the flowing year they had increased to $34.
Saying that the mergers, by themselves, drove up oil prices is simplistic and probably incorrect. World oil prices have increased for a variety of reasons, including the so-called "terror premium" since 2001, a world economy that depends upon oil, including the growing Chinese and Indian economies. But, the mergers in the oil fields removed any competition.
One of my biggest pet peeves is the argument that supply and demand work in the US. Supply and demand don't work when you don't have competitive markets. We all hear so much about how competitive markets are good for consumers (which they are) and how supply and demand will work to resolve economic problems. But supply and demand requires competitive markets. There is no such thing as a supply curve when you are dealing with monopolies or oligopolies. Instead, the suppliers can charge whatever the market will bear. And when the demand is inelastic (an economic term that essentially means not sensitive to price increases) the premium that suppliers can charge increases.
Felmy's argument above that oil companies are making more money because they lowered costs is bogus because in a competitive economy, lowering costs means prices will decline (assuming commodity prices are constant) as competitors attempt to sell more. In the oil industry, competitors have no incentive to lower prices so long as consumers are purchasing their output. Which supplier would be the first to lower costs? All it means is that they lose potential profits as people purchase the same amount (roughly) of energy but at a lower cost. There is no competition to drive down prices.
And remember, as Exxon is making its $75,000 per second, the Bush Administration is pushing through tax cuts to encourage them to invest in their oil business.
There are two things we can do to lower prices. First, break up the oil companies. There was no reason to allow the majors to start merging. Of course, under this Administration this could never happen.
More importantly, develop alternatives. Coal gasification projects, like Montana's proposed small scale first step, are an important beginning. But it is important to keep the oil companies out of the process. Let them buy the oil, but not produce it. Otherwise, as with the OPEC oil supplies, they will work with the producing countries to keep prices high. It is in their interests to restrict supply artificially. The OPEC countries benefit, the oil companies benefit and screw the consumer. They have no alternatives. Encourage new, non-oil companies to develop refineries. Virgin Atlantic CEO Richard Branson has indicated he would like to open a refinery. Lots of people would if they could. But keep the existing refinery owners out. Otherwise, just like this year, they will use bogus outages and breakdowns to reduce refinery output and keep prices high.
Remember that historically the oil companies worked to restrict output. The free supply of oil would push prices down so low that wildcatters (like the Hunt family) could not prosper. Instead, the oil companies worked together to restrict supply and drive up prices. Nothing has changed in the world other than the oil companies have more power to harm the consumer than they have had in the past and an Administration that is in their pocket.