Myth and Reality

Lately the oil industry has rally been taking it in the chin. Some of it is because the industry has not done an adequate job educating the public about the energy business. It's negative image has been further reinfirced by politicians looking for political advantage with a public poorly educated about simply supply and demand economics.

There have many stories in the media about the oil industry's obscene profits. I want to know when profits become obscene, at what point. The media and politicians continue to feed a myth of a runaway industry that manipulate prices to lines their pockets with profits on the backs of middle class America.

Well here are some of the facts:

• Gasoline prices in the US are determined by supply and demand of crude oil and refined products, plus taxes. Based on a gas pump price of $2.85 the cost of crude oil accounts for about 54 % of the cost per gallon or $1.54. The second component, refining, transportation and marketing account for about 30% of the price or $0.85 based on the $2.85 price. The third element of the price is taxes both state and federal, which average $0.46 nationwide or 16% of the cost of gasoline per gallon.
• Most Americans believe that the oil industry's profits are obscene and outline with other industries. The facts indicate otherwise, on a dollar for dollar basis the oil industry's profits are generally in line with the average of all U.S. industry. The second quarter of 2005 shows that the oil and gas industry earned 7.7 cents on every sales dollar as compared to an average of 7.9 cents for all of U.S. industry. In comparison the banking industry earned for the same period 19.6 cents on the dollar and the drug industry earned18.6 cents. Also for the same period, the software industry earned 17 cents on the dollar, insurance industry 10.7 cents and telecommunications 9.6.
• Recently there has been some talk of reviving the windfall profits tax. However according to a 1990 report of the Congressional Research Service the tax drained approximately $79 billion in industry revenues in the 80's that could have been invested in new oil and gas production. The result was domestic production was reduced by as much as 6% and increased foreign imports of oil by 16%.
• Recent Gulf of Mexico hurricanes have temporarily reduced energy supplies on a significant scale. As of mid-October, approximately 20% of the U.S. refinery capacity was still down or restarting as a result of the damage by Katrina and Rita. Also as of mid-October, the combined production "shut-ins" as a result of the two hurricanes were 19% of U.S. daily crude oil production and 10% of daily natural gas production.
• Global demand for energy over the past three years has been accelerating while spare production capacity greatly narrowed. Because of growing economies of the U.S., China, India and other countries, the demand for oil has risen at nearly twice the average growth rate over the prior decade. During this same period spare production capacity reached historic lows. Crude prices have risen as a result of these market fundementals.

Does anyone remember politicans being so concerned when the industry was going through rough times about a decade ago. I hope these facts exposes the falsehoods of the myth of "Big Oil".