Living in an age such as our own has quite a many advantages. The most complete compendium of the world's knowledge is quite literally at our fingertips thanks to the ever present Internet, a double dozen twenty-four hour news stations inhabit our televisions to beam breaking news and “hard hitting political analysis” into our living rooms within moments of an event occurring, and there exists a veritable deluge of talk and opinion programming that inhabits all forms of media, providing nearly everyone with some sort of a megaphone through which their own philosophies, political or not, have the ability to be voiced, amplified, and trumped for all that care to hear them. For all of this, though, we live in an age that is hemorrhaging internally due to one particular flaw: bad information and its consequent ill informed opinions spread just as quickly (and often with more associated fervor) as accurate information, giving rise to a sort of authoritative ignorance that tends to satiate the less informed masses with a feeling of “Oh, I know ALL about that!” when they've only fallen prey to inaccurate information or twisted half truth. It is onto this wound of our otherwise grand and astounding information age that I intend to, in my own fashion, apply a bandage in the form of this article.
Despite the importance of issues surrounding fuel costs, alternative technologies, et cetera, and no doubt as a corollary to the empty headed hot air being spewed from both sides of the political spectrum, there exists an immense amount of misconception and ignorance concerning the topics at hand. In this lays the intent and hopeful accomplishment of the purpose of this writing. I wish to address and either dispel or confirm the major points of contention concerning these issues, and to combat the tide of ignorance that is so hampering the efforts to find viable solutions.
ASSERTION: WE ARE BEING ROBBED AT THE PUMP BECAUSE “BIG OIL” IS GREEDY, CORRUPT, AND IN CONGRESS WITH THE DEVIL
You'll have to excuse the title a bit... since I first heard the phrase in my youth, I've always wanted to incorporate the phrase “In congress with the devil” into an intellectual discussion. Deus volent, this shan't be the last time. But moving on...
I have chosen to place this myth at the top of the list not only because it seems to have become a general consensus, but because of it's utter, unblinking stupidity.
To begin, let's take a look at the profit margins (or the percentage of the total sale price of a given commodity-- in this case, a barrel of oil-- that is pocketed by the producing entity as profit) of some given businesses:
Health care facilities: 48%
Publishing, periodicals, and magazines: 34%
Information delivery services: 23%
Application software industry: 22%
Tobacco products: 19%
Drug manufacturers: 17%
Insurance brokers: 16%
Long distance carriers: 15.8%
Beverages, wineries, distilleries: 15%
Hotel/motels: 10.6%
Asset management: 10.5%
Resorts and casinos: 10.5%
With the publishing industry making 34 cents on every dollar that they invest in their products and distilleries that require only yeast, sugar, some sort of grain or corn, and a heating apparatus running at half that figure, one would imagine that a complex and international entity such as BIG OIL must be running somewhere around 85%, right?
Try one tenth of that.
BIG OIL operates, on average, at an 8.5% profit margin. For balance, I include below the margins of some of the most profitable BIG OIL companies, as “on average” can sometimes be a deceiving statement. However, I doubt that the highest figure involved will make anyone blink when they realize it's only one cent above the profit margin of your local Motel 6:
(Figures as of 2007)
Exxon Mobile: 11.65%
Chevron: 9.49%
Total SA: 8.87%
BP: 8.09%
While I feel as if little argument is left following such figures, I cannot resist the temptation, given the prevalence of this nonsense, to press the issue further. Below I am going to demonstrate some math that proves these figures, so as to assure that any such fool that cries “right wing propaganda” will be doing so in the face of figures that cannot be fooled. This is an accounting of the “anatomy” of a gallon of gasoline, in that it dissects how much money and/or cost is related to the final price at the pump and outlines where that money goes:
(Figures taken from CNNMoney.com, calculated when oil was $110 per barrel and the price at the pump was $3.27 per gallon of gasoline on average. All figures rounded to the national average where applicable, or the industry average.)
Producers of Crude Oil: $2.07
Refiners: $.26 cents
Transportation: $.24 cents
State and Government Taxes: $.40 cents
Gas Station Profit: $.10
------------------------------------------------
Total Cost: $3.07
Oil Company Profit: $.20
Profit Margin (Profit divided by Cost of Commodity, or .20/3.27 ): 06%
Well, at the very least we can conclusively say that this particular gallon of gasoline was not purchased from Exxon, Chevron, Total SA, or BP.
Mathematics is amazing, nyet?
Before departing this issue for good, I wish to address one other fact that seems to slip under the rug when discussing the apparent evil of BIG OIL... income taxes.
In 2006, ExxonMobile's EBT (earnings before tax) was approximately 67.4 billion. Of that figure, Exxon paid out $27.9 billion, or around 41% of their total income for the year. No, your eyes aren't deceiving you. Very nearly half of ExxonMobile's total income was paid out in taxes. But of course, it's the evil corporation that's in congress with the devil (I told you it wouldn't be the last time!) that are gouging us at the pump.
If you wish to see the largest drop in gas prices in the history of petroleum, simply write to your congressman and ask him to repeal all taxes on gasoline. Next, you may as well ask that he persuade the tides to roll back at his behest, as one is about as likely as the other.
At this, I shall rest. I can only hope that for those reading these words, the myth of BIG OIL being the source of all of our woes is finally dispelled.
But let us endure with the topic of taxes...
ASSERTION: WE SHOULD TAX “BIG OIL” TO PUNISH THEM FOR THEIR GREED
This entry, in contrast to that which precedes it, shall be short, as both falsehoods in the statement have already been properly identified and disproved.
BIG OIL is not greedy, or at least no more so than the owner of your average hotel chain. As seen above in two languages (English and mathematics) taxes will not only do nothing to lower the price at the pump, it will raise that price higher than it would be otherwise, as the effect of any ancillary taxes will be passed on to the consumer, not absorbed by the corporations. The only way that this sort of narrow minded foolishness could possibly work would be to tax BIG OIL so heavily that the price at the pump reached towards the $20-$30 per gallon range, forcing the public to buy bicycles or use public transportation and effectively making gasoline and other petroleum a commodity too expensive to be used and exploited by any but the super rich and therefore essentially unprofitable. I refuse to extrapolate all of the negative effects that this course of action could have, and utterly refuse to discuss why this would be a death nail for our country and our economy. If you, Dear Reader, need such things explained to you, then you're beyond my ability to help you.
ASSERTION: SPECULATORS ARE AS GREEDY AS BIG OIL AND THE CAUSE OF HIGH PRICES AT THE PUMP
Let us begin with as concise a definition of speculation as can be made: speculation, essentially, is the act of buying amounts of a given commodity (in this case, oil) at the “today” price with the sole intention of turning around and selling it for a profit at a later date. In other words, if I suspected that cheese (remember the cheese, it'll be important later) was going to suddenly become scarce, I would buy cheese today at, say, $2 a pound, then, if my “speculation” was correct, the price of cheese would go up-- say, to $3 a pound-- and I would sell it off to a buyer, netting a profit of $1 for every pound of cheese. As simple as this definition sounds, the whole process can become extremely complicated (such as the distinction between buying “futures” as opposed to buying the actual product, but we'll get to that in a moment), but for the purposes of this writing it shall suffice.
The above definition, when applied to oil, leads to the common misconception (common not just among Joe Consumer, but among most on Capitol Hill) that oil speculators are creating artificial demand-- read: driving up oil prices-- through their speculation, in that it would appear that they're buying up massive amounts of oil at today's prices and therefore making it unavailable for consumers. Sadly, and most importantly, nothing could be further from the truth. You see, speculators are not buying up actual oil. Oh, no. Rarely if ever will a speculator take a delivery of a single shipment of oil.
What they are doing is known as engaging in “futures trading,” an oil future being an agreement between a buyer (Mr. John Q. Speculator) and a seller (BIG OIL) to deliver a set amount of oil at a specific price on a specific date. Contrary to common knowledge, however, the value of that contract can rise or fall all the way up until the delivery. For example, if John Speculator were to sign a contract today (Monday, July 14th) to receive 1,000 barrels of oil priced at $170 a barrel from BIG OIL on December 5th, 2008, he would be bound by the contract even if the price per barrel world wide had dipped down to $150 per barrel by the time the contract was due. In other words, it's a gamble on the part of the speculator as to if the price at which he has agreed to purchase the commodity in his “future” will have risen or fallen. Now, if a whole slew of speculators get together and make a run on the oil market all at once, buying up massive amounts of the commodity, IN THEORY, the price of oil will spike due to the fact that the supply will have suddenly decreased without the market having had time to react on the demand side of the economic equation, causing as a consequence a huge rise in price. This is the accusation that so many have leveled at speculators, which has resulted in the huge outcry as to their blame in our high prices at the pump. Unfortunately for those looking for a scapegoat, this outcry is utterly unmerited.
You see, as stated previously, speculators rarely if ever actually receive the oil on which they have made their “bet.” It is a rare instance indeed that any speculator even has the ability to house such a commodity were they to take such a delivery. Instead, they tend to sell off their oil futures to a third party (commonly other corporate entities that consume vast amounts of fuel, such as airlines or shipping institutions) a few days before it comes due. An understanding of this fact is absolutely essential in understanding the falsity in the statement that speculators are creating artificial demand, in that it is IMPOSSIBLE for any entity to create an artificial demand for a commodity WITHOUT taking it off the market. But you don't have to take my word for it. Instead I offer to you the words of energy markets expert and finance professor at the University of Houston's Bauer College of Business, Craig Pirrong:
“For speculators to be propping up the price of oil, they somehow have to be taking physical oil off the market.”
Professor Pirrong also goes on to analogize the government's attempt to bolster the price of cheese (I told you to remember the cheese) in the 1970's to the current situation. At that time, the government did so by purchasing massive warehouses full of cheese and intentionally keeping them off the market. In reference to the idiotic assertion that today's oil speculation is similar to this instance of creating artificial demand, he says:
“Well, where's the cheese now? Where's all the oil that the speculators have held off the market?”
It doesn't exist, Friend, nor does any real amount of blame to lay upon the well clothed shoulders of speculators.
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