Texas oil production is higher than it’s been since 1985. It has doubled in less than three years, and the boom doesn’t seem to be stopping anytime soon. Meanwhile, gas prices keep going up. Why?
The most major reason is inflation. If you look at an inflation-adjusted curve for gasoline prices, you’ll notice that inflation-adjusted prices have gone up and down over the past eighty years or so based on supply and demand, but during that fluctuation, the non-adjusted price of gas has done nothing but rise.
The constant refrain we’ve been hearing about “record oil company profits” only works because most of us assume that the steadily increasing prices in gasoline are due to either the consumption of a fixed resource or the greed of big oil. Let’s tackle both of those issues.
People think that oil is a non-renewable resource. They assume the price of oil is rising because we are using up oil, and as we use more of it, it becomes more scarce. All the while, demand for it is also increasing. So it seems like simple economics: rising demand and fixed supply equals steadily rising prices. But the oil price graph indicates otherwise. There have been great fluctuations in the availability and production of oil. Most people assume that, like gold, new sources of oil may be found, but new oil itself cannot be generated. I believe this is false, as I have written elsewhere.
I also do not believe that oil companies are making unreasonable profits. The crux of the misunderstanding lies in the fact that it isn’t about profits, it’s about profit margins. Sure, there is a tanker-load of money in oil. It’s a fairly expensive international commodity with a huge daily demand. So of course, lots of money is involved. But people focus too much on the dollars being generated rather than on the percentage of initial capital investment those dollars represent. Rich Smith crunches the numbers:
When you consider that $41 billion [Exxon’s profit in 2011] is less than 10% [the profit margin] of the revenues that Exxon started with, it turns out that Big Oil isn’t really all that profitable a business. ((Also consider that the civil government (federal, state, and local) adds an average of 48.8 cents onto every gallon of gas you purchase. The daily average for a gallon of regular unleaded gas yesterday (July 11, 2013) was $3.518. That means that the civil government made 13.87% “profit” and they didn’t have to do anything at all. Outrageous!))
For example, car companies aren’t often considered profit monsters. . . . Yet somehow, Ford Motor manages to earn a profit margin of better than 13% on its cars and trucks.
What about the granddaddy of all profit machines, Apple? It boasts a jaw-dropping profit margin of 27%. That means that when somebody walks into an Apple Store and spends $1,000 on the latest hot Apple products, Apple can expect to end up, on average, $270 richer—after paying all the costs of inventing, manufacturing, and shipping the gizmos to the store, software included.
Yet somehow, you never hear consumers wailing and gnashing their teeth, demanding that Apple’s dominance of the smartphone market be “broken up” or otherwise “regulated.”
I imagine that many of the bloggers, reporters, pundits, and whistleblowers who are demonizing Big Oil are writing up their rants on Mac computers and smart devices. Somewhat ironic.
In the end, neither the supply of oil nor big oil profits can account for steadily rising prices at the pump. In the end, the biggest culprit is inflation. Your dollar just isn’t worth as much today as it was yesterday. And the major perpetrator of inflation: your overgrown federal government. On a related note, the second biggest culprit is environmental regulations that drive up the price of oil while subsidizing less efficient means of producing energy. And the culprit there? You guessed it again: your overgrown federal government.
So I guess it’s true: oil prices are up because a corrupt, money-greased, inefficient bureacracy of elitist fat cats profit from high oil prices and inflation. We’re just pointing the finger at the wrong fat cats.