Thursday, February 24, 2011

A scam coming to a gas station near you?

Normally, when I am writing about scams I read on the internet, it is to warn people that the information they have been sent is either a hoax or some kind of scam to get information or money. This time I am warning people about one that I see that is all around us. It isn't exactly a scam though. It is more like cooperative pricing while taking advantage of the public's ignorance about how their industry works. They also do nothing to correct misinformation. I am speaking here about the major oil companies who dominate the gasoline and fuel markets. It is surprising to me that so many people in the media today simply take whatever information is fed to them and then repeat it over and over. Pretty soon the public believes it. What we hear from the media and many politicians is that we have world oil shortages, not enough supply for the US, and that is why we have rising gasoline prices. Nothing could be further from the truth. I don't want others simply to believe me. They should verify what I tell them, because all of it is publically available information from the government and the industry itself. It just isn't very well known.

We are told that we are dependent on Middle Eastern countries like Saudi Arabia for our oil and that all of our money is going to Islamic sheiks. Let's discuss this for moment. Where does our oil come from? More than half is produced right in the United States. Canada, Mexico, and Venezuela account for another 20% with the Caribbean and other South American countries making up most of the imports. Did you know that Saudi Arabia accounts for only about 5% and the entire Persian Gulf region is only 8.8%. Do you think that the United States refineries use all the oil that those companies produce here and import are for consumption in the US? The total amount of oil used by oil companies is about 18.7 million barrels per day. They import from Canada alone about 2.5 million barrels per day. They export to other countries about 2.5 million barrels a day of crude and refined oil products such as gasoline, liquefied gas, jet fuel, diesel, and so on. That means they export for the consumption of other countries about the same amount of refined product as they import from our largest oil trade partner. If these energy products were kept in the US, we wouldn't even need the Persian Gulf or Venezuela oil. Yet aren't you told we must drill more wells? Aren't we told we are shipping all of our money to the Arabs?

Who owns all this oil? Most is owned directly by 5 major oil companies who dominate the markets in the US and Western Europe. Most of the brands you see are all owned by these companies and those who aren't must often buy their gasoline from them. These same companies own many of their own wells, just like BP in the Gulf of Mexico and Exxon in Alaska. They simply pay extraction fees for oil pumped from leased proprieties. They drill, pump the oil, and refine. Most of these wells were drilled years ago, paid for, and fully depreciated. They aren't paying those enormous prices you see on TV for spot market oil. In fact the price you hear on TV isn't really even spot market prices, but are the price of the "front-month" oil futures contracts traded by investment companies and speculators. Those contracts have very little to do with any oil that these oil companies are using. It certainly isn't what oil companies are paying for oil. Those who do buy on the spot market are those who don't have their own. Oil companies might supplement their supplies on the spot market, but when you own your wells to feed your own refineries, you are paying very little per barrel.

So why are you and I paying so much at the pump? The answer is simple. Because they can charge it and you are willing to pay it. If all competitors charge the same prices, what choice do you have? It isn't as if every one of these companies has identical cost structures. They don't and all are different, but they learned decades ago that there is no advantage to any company to start a price war. They just cooperatively price so as not to drive prices down, but drive them up. All win that way, with no losers, and since most of the small guys have already been driven out, there is no need to scramble for market share. They just let the oil speculators on the financial exchanges play with the open spot market and that prepares the consuming public for the supply and demand argument. Most Americans are now well trained on that message.

The problem here is not conspiracy among businesses. They are simply maximizing profits for their investors as all business does. The problem here is that Congress has done nothing since the early 1900s to control monopoly formation. Oil companies have merged over and over and now form virtual oligopolies. Unless competition is reestablished, this will get even worse, driving up inflation to even higher levels. The answer may be to break up these companies as they did in the past to force competition back into this industry that is now draining the economy of enormous amounts of economic resource.

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