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Speculators & Oil Cost Are To Blame For Gas Prices, Not The Middle East

Posted Mar 10 2011 9:00am

by Jamie Court, author of The Progressive’s Guide to Raising Hell .

While skirmishes in Libya and uncertainty in the Middle East are nice cover for outrageous gasoline prices, the fact is the same old suspects are making a killing from sky-high gas prices approaching $4 dollars per gallon in California: big oil companies and greedy speculators.

The speculative market may have driven crude oil prices up, but that’s not the price oil companies pay for the crude oil that goes into our gasoline. America’s big oil companies use crude oil that they have harvested from the ground or bought much cheaper on long term contracts to refine into gasoline. You’ll see the results in next quarter’s profit statements: big profits from both crude oil sales and refineries that make gasoline, what’s called “upstream’ and “downstream” operations in profit reports.

Consumer Watchdog has for years both tried to curb the opaqueness of the volatile speculative market for oil and to regulate supplies at gasoline refineries because oil companies game both systems, creating artificial shortages in the markets to jack up prices or exploiting historical events to justify obscene profits.  Today’s sky high gasoline prices are the result of oil companies shutting down refineries and playing the speculative markets for big gains.

The deafening silence from the White House and  groups in DC loyal to the President who know better is the most astonishing thing.

Obama campaigned against oil company greed on the campaign trail but now he seems to have lost his voice on the subject. Republicans are taking the offensive, but the oil industry that has nourished in their bosoms for decades is at the heart of the crisis. Oil companies have kept the nation running on such short supplies of gasoline that any jolt to the system sends gas prices through the roof and makes the economy pay.

What follows is the five facts of life I have learned from more than a decade fighting oil companies, battles I recount in my book The Progressive’s Guide To Raising Hell.  It’s about time the White House started educating Americans about these facts of life and fighting back against  the real perpetrators of the pain at the pump.

• Rather than compete with each other to provide more cheaper gasoline, oil companies cheat together to withhold needed gasoline supply from the market. Consistently, the companies artificially pull back refinery production of gasoline in order to reduce supply coming in during periods of peak demand so they can increase prices. It’s legal so long as there is no smoky back room where they talk about it, but they don’t need to since industry data about supply flows freely on corporate computer screens. This behavior has been documented by government agencies like the Federal Trade Commission, which found, for example, in an investigation of Midwest gasoline price spikes, that one refiner admitted keeping supply out of a region in need because it would boost prices.

• Oil companies failed to build ample refining capacity to meet demand. Over the last twenty years,America’s demand for gasoline increased 30 percent and refinery capacity at existing refineries increased only 10 percent. No new American refinery has come on line during the last thirty years. Internal memos and documents from the big oil companies show they deliberately shut down refining capacity in order to have a greater command over the market.

• The big oil companies have their own crude oil production operations and control substantial foreign production of crude oil. They profit wildly when the price of crude oil skyrockets, so they have an interest in driving up the price, despite the fact that they blame OPEC for those crude oil increases. The crude oil producers can even drive up the price of crude by restricting gasoline production and trading crude oil among their own subsidiaries to drive up the price paid for crude by others.Traders with connections to the oil companies can also make big bets on the opaque crude oil futures market to drive up the price and also drive up the value of their Exxon shares.

• The crude oil that big integrated oil companies use in their own refineries is mostly bought on long-term contracts or through their own production, so the oil companies don’t pay the world price for crude oil when it’s high. Their raw material costs are much lower than they would like us to believe. So when the companies raise the price of gasoline in tandem with the run-up in crude oil prices, they are making big profits because Exxon’s crude oil unit is charging its own refining unit a higher price for crude than is necessary. The accounting shenanigans result in an overall windfall profit but show the companies’ gasoline refineries making little profit, and “upstream” crude-oil production divisions making the lion’s share.

Read the original article on The Huffington Post .

The Progressive’s Guide to Raising Hell is available now.

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