"American OPEC"
by Scott Ryan

Much has been said about the rising price of crude oil  over the past months but one aspect that hasn't been the focus has been that while oil itself is still a fair distance from its all-time high of $147 a barrel (light-sweet), gasoline is now just pennies away from the all-time high of $4.11 per gallon.

While the pundits are focusing on our need to drill for more oil at home, they are not discussing this disparity between prices then and now and what might be done to mitigate the problem in the more immediate term.

Some of our major oil companies drill the oil, refine it and distribute gasoline.  Yet, despite having a lower cost on that which they themselves drill from their own wells, they also purchase oil on the open market at the higher costs in order to meet the demand for gasoline.
(1 barrel of crude oil = 42 US gallons. It produces from about 21 percent to 35 percent of gasoline or petrol)

This past week, oil giant Exxon Mobil Corp said its profit rose 69% to nearly $11 billion in the first quarter, as $100-a-barrel crude prices helped the company’s bottom line reach levels not seen since 2008.

Politicians pounced on that as they usually focus on the large number itself, instead of the actual profit -margins- of the oil companies as consumers are naturally feeling the pain at the pumps.  It is much easier to incite anger over a dollar figure than a profit - percentage.

To be sure, we can definitely use more oil supply; however, the blame is not being properly ascribed.  A great deal of the rise should rightfully be given to our spendthrift government.  They use the platitude of how we are addicted to oil but in reality it is their addiction to SPENDING that forced the Federal Reserve to implement the past two quantitative easing campaigns in order to buy up hundreds of billions of dollars worth of debt instruments issued by these prodigals.

Trillions of dollars worth of unsustainable debt is signaling to the financial markets that more QE is inevitable regardless of the jawboning rhetoric of Ben Bernanke who up until last week refused to admit that inflation even existed.  Heretofore, he was warning of DEFLATION at the outrage of the American consumers who are not struggling with de-flation when they try to put food on their tables, heat their homes and fill up their gas tanks.

If you look at the price of all the items essential to human sustenance and the commodities market as a whole, one could conclude that the rising price of oil is just one of many items escalating in price.  The enormous rise in cotton is NOT due to the inarguable fact that we need more drilling.  It is more so because we need to STOP PRINTING!  And a change in monetary policy isn't going to happen the way our government is resisting fiscal responsibility.

To put the icing on the cake, last week it was announced that new applications for unemployment benefits unexpectedly jumped by 25,000 to the highest level in three months, in a worrisome sign that recent improvement in hiring trends may have stalled.  So we have prices rapidly escalating and less people working.  Sounds like "stagflation". 

Then we have loons like Bill O'Reilly on a crusade against the evil "speculators".  That doesn't deserve much attention and I will just refer to my July 28, 2009 column (The Intellectual indolence of those who attack Speculators) in order to address the non-issue.

So now that much of the blame has been properly attributed, I do believe that gasoline prices could and should be somewhat cheaper.  Going back to my point regarding the disparity between gasoline being near the all-time high of when oil topped at $147 a barrel, an interesting statistic that is rarely the focus of the financial media is the refining capacity utilization rate.  Just as we have been outraged at OPEC for the cartel's manipulation of supply when they meet and arbitrarily decide to cut back on their output, I believe the periodically released statistics show that the oil companies do something similar here with their output of gasoline.

We have often contended that we need to "build more refineries" because "we haven't built one in thirty+ years" and we cite the environmental barriers to doing so.  I do not discount that being true; however, given the current utilization of the refineries that we DO HAVE, I don't believe that the oil companies would -want- to spend hundreds of billions of dollars of their capital even if they could do so without obstruction.  I believe that is because there is little incentive to invest so much capital when they can simply sell their refined product now at much higher prices.

To support my thesis, take a look at the U.S. Percent Utilization of Refinery Operable Capacity (Percent).  These monthly statistics of the percentage of refinery utilization from January 1985, when oil was MUCH cheaper than now - go all the way through February 2011, which were just released.  In the 80's and early 90's they naturally kept the refining low when their profits on gasoline were quite low.  Then in the late 90's when oil was at perhaps a fair and reasonable price (for the industry AND consumers) , they were refining at much higher capacity, all the way up to 99.8% in 1998. (continued below statistics)

Year   Jan   Feb   Mar   Apr   May   Jun   Jul   Aug   Sep   Oct   Nov  Dec

1985 74.0 73.8 73.7 76.5 78.4 79.3 80.8 77.7 76.9 78.6 80.3 81.2

1986 81.4 77.9 75.9 81.5 86.0 86.3 84.1 86.8 85.5 82.6 83.7 83.6

1988 82.8 80.9 83.3 84.0 85.7 86.0 86.5 87.4 83.7 83.4 83.9 85.1

1989 86.2 82.8 83.8 83.7 86.5 89.6 88.9 89.3 88.4 86.1 86.1 84.0

1990 87.8 87.9 83.9 85.0 87.1 89.1 92.4 90.7 91.1 83.5 84.2 82.8

1991 82.5 84.4 83.2 84.6 87.5 89.8 88.8 89.1 88.3 83.4 83.7 86.6

1992 83.4 81.3 85.1 85.5 89.4 92.4 91.9 89.1 90.7 89.3 90.1 87.5

1993 86.8 86.6 89.3 91.3 92.8 95.1 95.1 92.7 92.8 91.8 91.9 91.2

1994 89.8 88.7 87.6 92.4 95.4 95.8 95.5 96.4 94.4 89.8 92.7 92.6

1995 89.6 87.9 86.7 90.5 94.0 95.6 94.0 94.0 95.6 90.5 92.1 93.3

1996 90.6 90.2 91.8 95.0 95.8 96.4 94.9 95.0 95.9 94.6 94.2 94.3

1997 89.1 88.0 90.6 92.6 97.5 97.8 97.1 98.9 99.6 97.0 95.8 97.2

1998 93.3 90.7 94.7 97.5 98.4 99.1 99.2 99.9 95.0 89.6 94.8 95.1

1999 90.4 90.0 90.9 94.6 93.9 93.5 94.9 95.5 94.1 91.1 92.0 90.4

2000 85.7 86.4 89.7 92.6 94.7 96.2 96.8 95.8 94.2 92.2 92.6 93.9

2001 90.2 90.5 89.4 94.9 96.4 95.6 93.9 93.3 92.2 92.0 92.2 90.2

2002 87.7 86.6 87.9 93.0 91.5 93.1 93.5 92.9 90.4 87.5 92.6 91.1

2003 87.2 87.4 90.5 94.1 95.8 94.7 94.0 95.0 93.1 92.4 93.6 93.0

2004 89.1 88.8 88.5 92.5 95.6 97.5 96.8 97.1 90.1 90.2 94.4 95.0

2005 91.3 90.6 90.8 92.8 94.2 97.1 94.2 92.7 83.6 81.3 89.3 89.4

2006 87.0 86.5 85.8 88.0 91.2 93.0 92.5 93.2 93.0 87.9 88.0 90.6

2007 88.2 84.7 87.1 88.1 89.7 88.5 91.2 90.8 88.9 87.4 88.9 88.7

2008 85.8 85.0 83.2 86.2 88.8 89.5 88.8 87.1 74.6 85.3 85.8 83.9

2009 82.3 81.5 81.5 82.7 84.0 86.0 84.2 84.1 84.9 81.5 81.1 81.3

2010 80.0 81.2 83.1 88.6 88.0 90.2 90.9 88.9 86.5 82.2 86.0 88.4

2011 84.9 79.8

If you look just above at the refining rate from February 2011, considering recent evidence demonstrating that the oil companies are not by any means HURTING for profit, it seems that it would be difficult to justify a reason why these companies should only be utilizing their refining capacity at a LOW that we have only seen for one month since 1987.  That's only the second time refining has seen the 70 percent range in the past 24 years!

I am not saying that the elected spendthrifts of all people have any right to step in and force them to increase refining.  I AM saying that the oil companies have a moral obligation to step up the refining regardless of the fact that they are buying oil in the open market, even if it means making a little less profit.  Sometimes people who run companies can be short sighted and make decisions based upon short term profits at the expense of their long term interests, especially publicly held companies where those running it are compensated by the exercise of short term stock options - as opposed to the old days when companies were run by the majority owners.

In the LONG TERM, it may be worth shaving a few billion from the quarterly profit if they can help to prevent the nation's economy from spiraling into a depression.  I know I will get e-mails telling me about the different locations from which the oil is shipped, the various types of crude and the couple weeks lag-time of gas prices versus the price of crude.  That has already been taken into account here.  I am talking about a macro trend and there is no way that they should be refining at an appalling 79% of capacity during a potential financial, inflation induced meltdown waiting to happen.  This is not much different than the actions of OPEC except that I'm not saying there is an actual meeting between the oil companies agreeing to reduce output of their product.  That can be accomplished with a nod and a wink.

Contact: mrarbitrage@tableofwisdom.com