May 09 , 2008

No Reprieve from the Pain at the Gas Station

With the gasoline price touching almost four dollar a gallon, one tends to look for a respite from the attendant pain, if not misery, but without avail. For, those in a position to do something about it are themselves from the oil industry, for instance the President, the Vice President and the Secretary of State.
No wonder, energy policies are virtually written by the oil conglomerates that have raked in record profits from the price hike. Their take is worked out on the sale price of gas; the higher the sale proceeds, the bigger their share: as the price goes up, so does their profit. 
The lame duck President and two out of the three Presidential hopefuls did feel the vicarious pain, and came out with remedies that were scoffed at by their rivals and the media. 
The President contended at a White House press conference on April 29 that there was no quick fix for the problem. He was cool towards the proposals of Senators McCain and Hillary Clinton to give drivers a break by temporarily suspending the 18.4-cent-a-gallon federal tax on gasoline. He rejected similarly the idea of stopping deposits into the Strategic Petroleum Reserve calling it ineffective. Also, he argued that the reserves would be required in case of a terrorist attack on oil facilities. “On a cost-benefit analysis”, he maintained, “I do not think you get any benefit”.
The Reserve has a 700 million barrel emergency stockpile that is equivalent to two months’ worth of US petroleum imports.
The President simply dusted off his old proposals of opening up the Arctic Wildlife Refuge to oil drilling, encouraging the expansion of refining capacities, and of setting up more nuclear power plants.
Senator Charles Schumer (D-NY) thought that the President had closed his eyes and put his hands over his ears towards the growing crisis. A recent poll showed that 44 percent of the people thought the price of gasoline was a more serious problem for them than any other economic concern. Several skeptics even thought that the President’s proposals pandered to the greed of the oil industry. Democratic leaders accused him of being out of touch with struggling Americans “as he continues to pour money into the Iraq war at the expense of domestic priorities.”
As for the proposal of a temporary moratorium on tax, it was generally viewed as a cheap election gimmick which would actually put more money in the coffers of the oil companies; for they were unlikely to pass the benefit to the consumers. It was also pointed out that it would cost thousands of jobs and save an average driver around $28 only for the entire summer months. The efficacy of the proposal is thus open to question. A cynic called it a “holiday from reality”.
Summer moratorium of the federal gas tax, as suggested by McCain and Hillary Clinton, would cause a loss of $11 billion meant for the federal highway fund. Clinton wishes to recoup the loss by imposing a tax on the windfall profits of the oil companies. Mr. McCain has not bothered to even make a tentative suggestion.
The current sharp rise in gasoline prices is driven largely by the rise in crude oil prices, which touched $120 a barrel in the last week of April. Even the profit-chasing oil companies had regarded as inconceivable such a high price. What are the factors behind such an increase in the price of crude?  Rising demands from China and India and a weak US dollar, in which oil is priced, are usually presented as the prime factors. Yet, one of the principal factors is the flood of cash into basic commodities, including oil and food, as wealthy investors keep liquidating holdings in more risky financial assets and look for hedges on inflation. They have been investing billion of dollars in commodities, thus creating a bubble in commodity market and forcing billions of people around the world to pay higher prices generated by artificial demand.
In a Congressional testimony, one month back, Exxon Mobil’s senior executive, Stephen Simon, pointed out that the price of oil involved four components. (1) Supply and demand factors account for half the current price i.e. $50-55 per barrel; (2) Value of US dollar, that has lost 45% against Euro since 2001; crude oil prices are fixed in terms of US dollars; (3) “Geopolitical risk”, the US has been since 2003 committed to a trillion dollar war in Iraq – the heart of the turbulent oil-producing world; and (4) Speculation: investors have looked to commodities not only as a hedge against inflation but against the tumbling dollar too.
The ability of oil companies to maintain record profits has been greatly facilitated by the consolidation of the industry over the past 20 years. The top five energy companies now account for 15 percent of world oil production, 62 percent of the retail gasoline market, and 50 percent of US domestic refinery market.
As for the refining facilities, Mr. Bush has pointed out that there has been no addition to them over the past 30 years and incentives need be provided by government to encourage the oil industry to add to its existing capacity. Fact of the matter is that the companies operating refineries are unlikely to expand their facilities, despite incentives, as they are already making peak profits. Additional facilities will lead to increased competition and a fall in profits. 
While the drivers are tormented at the petrol pump, the oil companies are collecting unprecedented profits. For, instance the two oil giants, BP and Royal Dutch Shell, announced record profits at the end of April totaling $17 billion in the first three months of the current year  - 9.08 billion for Shell and $7.6 billion for BP. The total includes at least $2 billon for the two companies attributable solely to the recent rise in oil prices.
Analysts expect the profits of Exxon Mobil, the largest private energy company, to soar to $11.2 billion during the same quarter, a 22 percent increase over the profit a year back.
The US oil giants – Exxon and Chevron - are vertically integrated, including in their operations both oil extraction and refining. They are thus in a position to make windfall profits on either oil extraction or refining (upstream or downstream) sides of the energy market. They are among the major contributors to election funds.  Only a politician of an exceptionally high caliber and popularity can rub them on the wrong side and get away with it. Others will keep making noises and pretending to be protecting the interests of the common man.   
He will have to keep bearing the pain at the pump till greed yields place to a consideration for the low-income driver.
arifhussaini@hotmail.com