Oil Economics

The gas pump price collapsed this winter. It was projected to remain low. Then prices jumped 30-cents. Lately they skyrocketed another 50-cents. That says a lot about the earlier projections. Here’s what’s happening.

Some of these things you know in your heart to be true. Others you suspected. But now we have the goods on the oil industry.

First, summer fuel stock is formulated differently than winter fuel blends. Summer’s fuel is designed to ignite faster despite warm and humid temperatures. That’s why there is a summer formulation different from winter. Also, volatility is different to improve efficiency in hotter climates and mountain regions. Supposedly oil refineries pay more for this blend of gasoline. I don’t think the facts have ever been shared with the public on this pricing aspect. Oh yes, refineries have to be reprogrammed to produce the seasonal fuel formulations, but then they would have to maintain, shut down, and deep clean the refineries periodically anyway. They also do this to switch production to different products throughout the year. The question is: is it really necessary to increase the cost of fuel for these reasons? And by so much? I doubt the industry is being fully honest with us on this point.

Second, refineries shut down routinely for maintenance, modernization, and replacement engineering projects. These shutdowns only moderately influence overall production quotas and supply/demand ratios are normally unaffected. The shutdowns are planned and well calculated in production and pricing routines.

Third, an explosion or fire that destroys one refinery will not affect the fuel supply chain to the point of altering pricing. It just doesn't. Refinery capacity in America and overseas is more than sufficient to adjust supply calculations adequately to avoid price impacts to the consumer.

Fourth, the oil industry carefully reduced refinery capacity during the 1990’s to remove overcapacity from their price calculations. This is the single largest reason behind the pricing debacle by the industry. They attempted to make this happen so they were still in control of their pricing protocols. Shame on them.

Fifth, overcapacity in oil production exists throughout the globe. Why else is Russia in the economic pickle it is in now? Oil and natural gas sales is its ace in the hole for foreign currency. Without energy sales, Russia is without the ability to pay its bills on the world market for any and all goods produced outside of Russia. Russia would dearly like to sell all of its energy supplies to earn the funds to pay its bills. There is no energy fuel shortage in Russia. Or in Saudi Arabia or even in the war torn Middle Eastern region.

If supply is plentiful, why are prices at the gas pump higher? Because they can be anything the oil industry wants them to be. That’s why.

Christmas and New Year’s Holidays? Gas prices zoom. Same for Spring Break, Palm Sunday weekend and Easter Weekend. Also for Thanksgiving weekend. Any time the social calendar suggests family auto travel, the price of gas rises. It’s been this way for generations. Why would it be any different today?

All of the above is an ugly truth the oil industry continues to hide. But there is more.

The oil industry continues to shake the seats of power in Washington DC so its bidding is well served. Oil interests have donated funds to politicians for well over a hundred years so those same politicians would earn their keep by passing legislation favorable to the industry. Back home the congressmen claim this is saving jobs in their districts. But what it is really doing is saving his or her seat in congress. $150,000 or $300,000 goes a long way in re-electing a congressman every two years. In fact, fund raising for re-election is a constant job. That’s why the office holder is always looking for the funding hand that feeds him. It is only natural after a few years to assume oil industry legislative goals are a slam dunk.

Is this cynical? No! It is an honest assertion of the way life is in Washington DC.

So oil interests continue to be supported and nurtured at every turn.

The same goes for the oil industry’s sister industry – automotive manufacturing. You see, it is in the interest of the oil industry that car manufacturers continue to make gas-burning vehicles so there is a ready market for their energy products. And congress goes along with this.

The point is major: as a nation we need to find alternate energy sources to replace oil as it is depleted from the planet. Same with natural gas. These two energy sources are finite. One day they will cease to be. It is prudent we find replacement energy. Not alternate energy. Replacement.

It is only natural the oil industry does not want this to happen. They have a huge investment in their drilling, supply line and refinery facilities. They don’t relish writing these investments off to zero. Yet they are the very people who have the most to lose if they do nothing; they are also the very people who have the most to gain by discovering new energy sources and converting society to that new replacement energy source. They have the infrastructure to do this, they have the know-how, the research and development tools, and the funding to accomplish this herculean task.

With universities and governments assisting, the energy industry can succeed at this.

Why don’t they? Because they earn far too much from penny ante antics today to make it worth their while.

It’s time we called them out on it. And called our elected officials out on this as well. Who’s working for whom?

Congressmen – your job is to lead. Do so!

March 30, 2015