Why wouldn't they be happy? It's set up so the less that is produced the more profit they make, so the refinery companies are giving them exactly what they want more profit while screwing over the rest of us.
Crockett, please outline for us the relative profitability of an independent refiner marketer (from the refining business) and chart that back to, say, 1973. Perhaps you could also run a graph of WTI in relationship to the value of the dollar back to about 2000. Give me your feedback on what the latest move to drop interest rates will produce relative to oil prices. Look also at the returns and investment activity relative to refining operations charted back until at least 1973.
Consider the fact that refining carries with it a tremendous overhead, and that refining profits are not that great on a gallon of gasoline. For example, March 3 08 Califoirnia:
Cost of a gallon of gas: $3.46
Distribution Costs, Marketing Costs and Profits (the retailer gross profits): $0.07
Curde oil costs and profits (OPEC, E&P, etc.): $2.44
Refinery Cost and Profits: $0.31
Total state and federal fees and taxes: $0.61
Now, as you can see refining is not a major profit center in that gallon of gasoline. It also carries with it a tremendous amount of overhead, and faces import competition. When times are bad for refiners, and they will be again, that sector sees little investment. Refining is so marginal that most major integrated oil companies have moved at least some extent away from refining. They are sprinting away from any direct involvement at the retail level. Long term, the oil sector, even at the E&P level is a marginal investment. Of course, nobody much cares with prices are at $10 to $15 per bbl because of the market and world conditions and a drop in demand, and then people start investing in things like Amazon.com instead of ExxonMobil or Valero. However, these oil companies and refiners know that investing in overcapacity is a really bad move, because the slow times will come again. Of course we could nationalize domestic refining (easier than the whole multinational oil industry itself). The net result, though, would be higher gasoline prices when overall crude prices drop, less efficiency and more waste – such as significant idle capacity (paid for by taxpayer support) -- and likely comparable gasoline to higher gasoline prices in general even during “shock” periods relative to world markets since we can’t control the vast majority of the price of a gallon of gasoline -- the cuude oil component.
I just spoke with Peter Beutel of Cameron Hanover. I've interviewed him in the past and gave him a call again after coming across a Time Magazine article from 1987 on the oil glut in place at that time where he was quoted. It showed some deeper insight (for me) in how the process works. Here’s a link to that 87 article and his quote at the end of the article:
Enjoy Now, Pay Later
To everyone who has bitter memories of the oil shocks of the 1970s, when the Organization of Petroleum Exporting Countries drove oil prices to intolerable heights, today's bargain-basement values seem like sweet vengeance indeed. The U.S. has learned once again to love cheap energy, and why not? Gasoline and home-heating fuels are in plentiful supply. Inexpensive oil helped keep * inflation last year at its lowest level in 25 years, sent interest rates to nine-year troughs and aided in sustaining a four-year-old economic expansion.
But the thrill of cheap energy may prove perilously intoxicating. As U.S. energy consumption increases, imports are reaching alarming levels. At the same time, depressed oil prices have caused U.S. petroleum production and exploration to dwindle dangerously. This means, experts caution, that America is setting a time bomb. The scary possibility is that by the mid-1990s, as the U.S. becomes dependent on foreign oil for more and more of its consumption, OPEC could suddenly and steeply raise prices, throwing the economy into chaos. Warns Interior Secretary Donald Hodel: "OPEC is being placed back in the driver's seat. The U.S. is being set up for a majoroil-price shock."
…The national debate over how the U.S. can best stave off a future energy crisis is just beginning. Peter Beutel, an analyst with Elders Futures, a major Wall Street oil-trading firm, believes that despite America's current infatuation with cheap oil, most people can readily recall what it means to suffer through an energy shortage. Says Beutel: "We were caught napping twice. We would have to be extraordinarily foolish to fall into the same trap again." Maybe so. This much is certain: the oil shocks of the 1970s came as a complete surprise. The next one will not.
Duh. The first shock, an artificial one, hit with Gulf War 1. The reactions to those high prices resulted in the follow up glut that lasted until 2001 with 9/11. Katrina and 9/11 aside, the current shock is fallout from the 1990s glut in the convoluted game played between supply and demand with OPEC in the middle, china on the side and our latest SUV fetish playing its role. The commodities market is the foundation. Stability does not factor into the energy markets to any great extend, unfortunately. It could, potentially, but human behavior dictates it wont.
And now, we have the added devaluation of the dollar that eats up about $30 of a barrel of crude, and dropping interest rates in the US will further negatively impact the US price of crude. We are digging our own hole with those relative to the world. Basically, when oil is super cheap production and capacity are brought offline, investment money goes into other sectors and CONSUMER behavior changes. Walk into a parking lot in 1883 and what you would see would be dramatically different from the same lot in 1997 but perhaps not to what you will see in 2010. If you walked into a parking lot in 1997 and saw the same efficient, power neutered vehicles from 1983 and we had continued make common sense reductions in overall energy usage than even with globalization we would not likely be feeling the "pain" we are feeling today. Similarly, if the Middle East was pacified we would be in a much more relaxed pricing situation.
Beutel actually predicts a dramatic drop in oil prices 4-8 years down the road. Guess what, unless a lot of the new alternative energy companies have properly hedged at current prices they will be toast. Tar sands and ethanol can make sense at $60+ bbl of oil (in some cases with a lot of taxpayer help), but not at $20 or $10. So bye, bye. Like they said in The Right Stuff, it's funding that makes the rocket fly, not engineering or science. No profits, no alternative energy. There is only so much artificial market share we can create through taxpayer subsidies. But then no one will give a poop. Woo Hoo, cheap oil! I bet that will last forever! Time to drop the hybrid again for the next road monster, perhaps a full retro return to the tailfin cars of the 1950s this time. And the cycle will continue.
Charon
