Did the oil barons tank the economy?

Published on September 1, 2005 By Gideon MacLeish In Current Events

OK, ground rules here, this is not a partisan attack. Just because George Bush and Dick Cheney made their money (and continue to make their private fortunes) in oil, does NOT mean I implicate them in having a direct effect on pricing oil. And I believe that any accusation of such impropriety should be backed with proof, NOT mere speculation.

That being said, I'm greatly concerned about the long range impact of this price spike. This comes immediately before one of the biggest driving weekends of the year. Many tourist destinations, theme parks, beaches, lakes, and national parks are financially dependent on the income that normally streams in during Labor Day weekend. But gas prices have risen so sharply, so quickly, that even fairly well off middle class individuals will have to be concerned about reserving money for gas purchases.

I also believe this will hit rural property values hard. Rural living requires the regular, consistent availability of reliable transportation to go to town for necessary purchases. Even in our little town, many residents are mulling a move to the larger community 12 miles away because they cannot afford the cost of transportation (the property values in town will probably rise as a result, making such housing less affordable for these same individuals).

I don't know if the price hikes were necessary. Only certain people do, and they have pretty low credibility as far as I'm concerned. But if these hikes were NOT necessary, if their actions are, in fact, price gouging, then we ALL stand to suffer for the greed of certain select individuals. And that suffering will probably be pretty long term, once retailers begin adding increased costs of transporting goods to the retail price of their products.

Comments

Dr Guy

on Sep 01, 2005

Gideon, why is that no one can understand the law of Supply and demand? There is too much demand, and not enough supply, so the price can only go up. It is not a conspiracy. Are the oil companies making a ton of money? yes, cause they got somethign that everyone wants. They did not cause this situation, but they are taking advantage from it. And there is no law against that. If you want to pass one, go right ahead. Then you can take advantage of gas at 2 bucks a gallon - if you can find it.

Gideon MacLeish

on Sep 01, 2005

I understand the law of supply and demand, Dr, very well. And I am highly opposed to any law against their actions.

But my argument is levelled on a moral plane, not necessarily a political one. They could well afford to reduce their profits as a way of helping to contribute; after all, this is a natural disaster and a time when we should be coming together and HELPING one another through it. But the individuals who set these prices are motivated purely by greed and desire to make a buck, and I think that's sad, personally.

But that's just my opinion.

citahellion

on Sep 01, 2005

To lay out the scenario a little more...

In order to post a profit, Major Oil Company needs to generate (let's say) $1 billion in revenue. Thanks to their ongoing refinery operations (8 refineries each turning out 50 million gallons a year), they can crank out 400 million gallons to sell. They can price it at $2.50 and make their profit.

Whack! One of their 8 refineries is knocked out. Now they can only create 350 million gallons, and they have to sink $50 million into fixing up the devastated refinery. So now they've got to earn $1.05 billion, selling only 350 million gallons. If they still want to post a profit, the price of their gas has to jump to $3.00 a gallon. If they continue to sell at $2.50 a gallon, they'll take a $175 million loss for the year.

(edit: I'm sure you do understand it, but I'll leave this here for the benefit of others claiming that the only reason for the hike is gouging or opportunism.)

Gideon MacLeish

on Sep 01, 2005

cita,

As I said, I understand how it works. But I think that they made a tactical mistake that will greatly compound Hurricane Katrina's effects (and, sadly, give fuel for every Democratic politician who claims it's "all Bush's fault!"

citahellion

on Sep 01, 2005

(Hopefully this won't be a second post in a row, but anyway.)

really, it's the loss of refinery capabilities that's driving the major price spike. We've got the strategic oil reserves, we've got excess drilling capacity. But the ability to turn oil into gas is strictly limited by the number of refineries and the areas where the specific blend created by those refineries can be sold. Before the hurricane, U.S. refineries (as an entire group) were operating at approximately 98% of their maximum capacity. We had practically NO margin to cope with a disaster. And now that we've had a disaster that's knocked several refineries out of operation, the oil companies simply CANNOT produce enough gas to meet the nation's ongoing demand. Artificially holding the prices low across the board will simply deplete whatever reserves they have faster, cause additional shortages elsewhere, and limit the oil companies' ability to recover.

(edit: I figured we might cross-post again...)

COL Gene

on Sep 01, 2005

Dr Guy is correct. It is supply and demand. Since 1973, we have not done what we should have to increase alternate energy and have not done enough to reduce demand by more efficient cars, SUV's etc. Bush and Cheney came to office from the oil business and did nothing to create alternate energy to compete with oil nor did they require higher mileage of the cars sold in the US to reduce demand. Even though they may not be in the oil business today, their policies, including 12 Billion to the oil companies in the energy bill, helps the oil companies and has done NOTHING to solve our long term needs! The impact on our economy will be significant and again will be most dificult for the low and middle income workers!

Dr Guy

on Sep 01, 2005

But the individuals who set these prices are motivated purely by greed and desire to make a buck, and I think that's sad, personally.

Did you post on Moderateman's site about "you would do anything it takes to survive"?

A corporation is just a different form of family (call it a hive). They are not being any more greedy than you are by protecting your family "no matter what". To assign some evilness to them is to convey that which does not (normally) exist.

mgosh

on Sep 01, 2005

First to be correct, it is congress's job to pass laws not Bush/Cheny's so to fault Bush/Cheny for a lack of an energy policy is to lay the blame at the top while letting go the responsibility of congress as a whole. In the market economy that is exactly what is happening. Before there was an artifical oil glut because of Sadam trying to wreck the economy of the Arab world so he could achieve power. Now that supply has decreased and demand has been on the rise, oil prices will continue to escalate.

The ability to lower demand would be several fold and consisting of policy changes. More than just requiring car companies to create vechilies with greater gasoline milage, I would like to add the idea of adding an ethenol blend into the gasoline and modifying the engines so they can burn the mixture. Ethenol is produced by formenting corn, which we have an abundance of. Instead of paying farmers not to produce one year out of seven we can pay the farmers to produce the ethenol we need to add into the gasoline. Gasoline will burn cleaner, but more importantly demand will be reduced.

The bigger picture is that developing counties (India, Pakistan, China) are having more people with automobolies and thus they are increasing demand upon fuel consumption. This is what happens at the Global level and what needs to be done are policy changes. Not just increasing fuel efficiency but a switch to smaller vehelices, less SUVs and sport models, less driving, more car pooling, less demand and consumption.

Of course this isn't even factoring in oil and natural gas consumed to heat your homes or to provide electricy.

COL Gene

on Sep 01, 2005

Policy suggestions generally come from the White House and the President tries to get Congress to act. Bush set up his commission that produced a Christmas Tree for the energy companies. It is a complete failure of both the President and the leadership in Congress and it is the little guy that pays for their inaction!

As I have said, Bush has not provided the leadership needed to solve the many issues that face America!

citahellion

on Sep 01, 2005

Col Gene wrote:
(a) the trouble started in 1973
(

It's All Bush's Fault.
(c) However, blame may also be spread to the rest of the Republican Party, if desired.

I'd intended for this to be a summary of COL Gene's argument in this thread, but somehow it feels like I could drop this summary in anywhere that he posts....

Chaos Manager

on Sep 01, 2005

Is it supply and demand for a station to go from $2.49 @ 9:30 the other night to $2.59 last night and then $2.89 this morning, $2.99 about 1 PM EDT, and then $3.09 by 6 PM EDT? All of this in less than 48 hours and most of it within 36?

terpfan1980

on Sep 01, 2005

Dr Guy is correct. It is supply and demand. Since 1973, we have not done what we should have

What we should have done is build more refineries, but we didn't -- we didn't because of environmentalists, NIMBY's and others that didn't want them built, wouldn't allow them to be built, and helped to place onerous requirements on their operation in the name of helping to create a cleaner environment.

This has gone on for years and years. Democrats that controlled Congress helped keep us all away from new sources of oil (ANWR), and helped restrict other sources that we know are available. In some cases the restrictions are for greater benefit, but in many, it's in the name of protecting the environment in ways that it really doesn't need.

Refinery capacity dropped in the 80's when the bottom dropped out of the oil market. The old joke was How do you get to be a Texas Oil Millionaire? Start out as a Billionaire.... or something to that effect. The market took such a hard drive that it ruined the lives of many people that were (in the early 80's) headed towards fame and fortune via careers as Petroleum Engineers, Geologists, and other related fields. It also ruined the careers of the oil field workers and others, when oil prices bottomed out and it made absolutely no sense to pump the stuff from the ground.

There's money to be made now by jumping into the refining business, but then again, there's a huge up-front investment costs that only a few companies could meet. Which keeps competitors out of the business, and leaves the market place at the mercy of the current providers.

The best answer remains conservation. Stop consuming gasoline. Take time off from work. Ask supervisors if you can work at home if possible, or work more hours over fewer days in the week. Don't make unnecessary trips. Don't warm up your engine. Don't run the air conditioner if you can live without it. Don't sit idling the car waiting for a passenger that is just shopping for a few items in the store. Walk a bit more, drive a bit less. And a host of other common sense things that can be done to help turn off the gas pumps at the local service stations, which in turn leaves a surplus of gasoline for refiners to sell, who in turn get to cut their prices to meet the new market's demands.

Dr Guy

on Sep 02, 2005

I'd intended for this to be a summary of COL Gene's argument in this thread, but somehow it feels like I could drop this summary in anywhere that he posts....

That is very concise and accurate.

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