Politics » Politics Feature

GADFLY: Gasonomics 101

by

comment

Those of you who are in a business where a substantial portion of your cost is the raw material you use or convert into a finished product will recognize the concept I'm about to run by you. It's an elementary principle, Economics 101 if you will, that, all other things (i.e., occupancy and personnel expense) being equal, when the price of your raw material increases, your profit decreases. So, if you're a shoemaker and the price of leather goes up, that cuts into your profit. Same for a furniture maker with the price of wood, a baker with the price of flour, a newspaper with the price of ink or newsprint, and so on.

But, when you're an oil company, the ordinary laws of economics don't apply, see, because you've figured out a way to turn that economic principle on its head: when the cost of your major raw material (oil) goes up, so does your profit. In fact, the more the cost of oil goes up, the more money you make. There are a lot of shoemakers and bakers out there who would like to know your secret. But, in fact, it's not that complicated. In order to compensate for the increased cost of a raw material, all you have to do is increase the price you charge your customer. In fact, we've seen many companies do that as a result of the increased price of fuel (e.g., airlines and trucking companies), both of which have started tacking "surcharges" onto the bills for their services. But, as the economic travails of the airlines indicates, they haven't figured out how to actually increase their profits as a result of increased fuel costs, much less avoid the imminence of bankruptcy.

No, only the oil companies have figured out the secret of making more money as the cost of your raw material goes up. It doesn't hurt, of course, that oil companies, unlike the baker or shoemaker, control the product they sell from its raw to its finished state. Not too many businesses can say that. And, of course, many businesses that are hit by increases in their cost of goods sold recognize they can't increase their prices, dollar for dollar, to their customers who won't put up with that because, in a normal market environment, if one supplier increases its prices to compensate for increased costs, they risk losing customers to competitors who choose to absorb some, or all, of that increased cost in order to maintain those customers. Oil companies, of course, don't have to worry about that because, no matter how much they increase what they charge us for gasoline, we'll continue to buy it because we don't have a choice, since there is no competition between oil companies when it comes to the price at which they sell us their precious commodity. Can you say "monopoly?"

Now the government, the oil companies, the politicians and the corporate media would have you believe the current spike in gas prices is entirely a function of "the market." They're not to blame; it's all a matter of supply and demand. It's the Chinese, the Indians, and ethanol's fault. And, of course, it's our fault as consumers: if we just used less gasoline, the price would go down (like less sales is what anyone who's in the sales business wants to promote). The oil companies are innocent, they tell us. Price manipulation or collusion? Gouging? Perish the thought. So, how do they do it?

Historically, no matter how much the price of oil goes up, the price of gasoline goes up more, and sometimes substantially more. That shouldn't surprise anyone, given the record profits oil companies are reporting in an increasing oil price environment. And thanks to this topsy-turvy economic model, oil company executives enjoy some of the highest annual compensation packages in the universe (not to mention the generous retirement package given to Exxon's CEO, the cost of which exceeds the gross national product of many countries).

A recent study by a consumer watchdog group is very instructive on this score. In that study, The Foundation for Taxpayer and Consumer Rights, a California consumer protection group (and remember, Californians know all about how energy vendors can rip you off---they learned that lesson the hard way, a multi-billion dollar ripoff at the hands of Enron), found that 70% of the recent price spike is attributable to the oil companies increasing their refinery and marketing profit margins. They found that, contrary to the oil companies' talking points (which virtually every story about gas prices on TV or in the newspapers mimics, sometimes verbatim), oil companies are insulated from the fluctuations in the spot market by long-term contracts, and by harvesting their own oil. As a result, they've been able to increase their profit margins by spiking the price of gasoline even more than most people realize, because everyone assumes their cost is based on the spot market price of oil. The report also goes on to debunk the "ethanol is the culprit" argument. The FTCR finds that: "Oil companies are opportunistically using the rising world price for crude oil as an excuse to excessively raise gasoline prices and pump up their profits, even though the spot market price for crude has gone up far more slowly than gasoline prices."

So, what's our government doing (or going to do) about this? Up until now, the federal government has been the major enabler of oil company profiteering. We already know about the influence of the oil companies on the oil patch duo (Bush and Cheney), and energy legislation that's resulted in billions of dollars in giveaways to the oil industry. My favorite partnership between the government and the oil companies is the Energy Department which publishes periodic reports on energy prices, and has been doing so since the first oil crisis in the '70's, in which, among other things, it predicts what the price of gasoline is going to be, for example, next week. And guess what---in an increasing price environment, like we're in now, that prediction almost always comes true. How's that for cooperation between government and industry?

Now, if you're one of those poor saps running a business and haven't figured out how to increase (much less maintain) your profit when your costs go up, I guess the only thing for you to do is sell your business and buy an oil company. 

Add a comment