Before Rabbits of the Rabid Right start convulsively thumping their hind feet and frothing that President Biden intentionally increased gas prices to harm America, that he personally fuels inflation while downloading buckets of cash from biolabs in Ukraine creating the next COVID…
(“What? They have? But I just made that up… ” Sigh.)
A couple of columns ago I sortakinda fingered Big Oil, which is making profit by the barrel (smile), for the climb in gas prices.
That was incomplete. Profit is not bad. It allows for investment, and in the case of Big Oil, their profits might make it possible to go back to fracking, drill for oil off the coasts of California and Massachussets, or in the Arctic, and reduce what we pay for gas at the pump.
Is that a bad thing? There’s a shortage, and nobody knows how long it will last. (Hint: Longer than we think.)
But Big Oil is not the only player in the fuel supply industry. There are refiners, which may or may not be subsidiaries of Big Oil. Refiners also are mopping up money. Again, making a profit is not “bad.” Companies without profits fail.
Around 18 months ago, refining revenues were suddenly cut in half, according to Bloomberg. (I have a subscription. Hopefully you can read the source) Their “paper” (borrowing) was steeply discounted as investors wondered if they’d make good on repayment. One refining executive said there was “too damn much inventory.”
For a while, a barrel of oil cost more to store than it was worth. Unlike cattle ranchers, refiners can’t just shoot a barrel in the head and bury it. But they can shut down refineries. And they did.
Some refineries were “idled,” meaning they can be brought back online, but that takes a while. Others, the less efficient, were decommissioned and are gone. “In total, more than 1 million barrels a day of crude oil refining capacity—or about 5% overall—has shut since the beginning of the pandemic.” — Bloomberg
But now, a year and a half later, after COVID recovery and a war, driving has nearly returned to pre COVID levels and there is “damn too little inventory.” The “margins” on gasoline are the highest since 2013. (Margin, oversimplified, is the difference in what it costs versus what it sells for).
It’s not just a shortage of gasoline or diesel. The other day I went into my local autoparts store to get a gallon of a lubricant I use in all my vehicles. “We don’t have any,” the guy at the counter said. “We used to keep it on the shelf, but now it only comes in once in a while.”
According to the industry publication “Lubes'n'Greases,” (Okay, I have a subscription.) when less oil is refined into gasoline, diesel oil and jet fuel, there is less “feed stock” to make the lubricants and greases that keep the rest of the economy (even windmills) spinning.
Back to refiners. Old fashioned economics would hold that high profit would draw more players into the industry until supply rises to meet demand. But refineries are very expensive and not easy to build today. So, rather than make more fuel, refiners are pledging to send the “extra cash from operations to … shareholders.”
Are they “profiteering?” Making a profit is not “profiteering,” which is a relative term. Opinion varies on what it means or if it even exists. Here’s definition from Mirriam-Webster: “: …the act or activity of making an unreasonable profit on the sale of essential goods especially during times of emergency…” I count two adjectives and an undefined phrase in there, all open to interpretation.
Let’s pretend for a moment that you and I run America’s largest refiner. We have decisions to make.
Less than two years ago our company’s income suddenly dropped to half because people stopped driving during COVID, which has not gone away.
Nobody wants us to build a refinery in their back yard, especially where most people live, where demand is greatest, and they wrap us in endless red tape to protect endangered vampire gnats.
Tesla has become the most valuable automobile company in the world because their cars don’t burn our gasoline. The most popular vehicle in America, the Ford F150, will be joined by an electric version this month, and our industry just lost a major battle to build a pipeline across the country because about half the population blames us, rightly or wrongly, for melting icebergs and raging forest fires.
All of which might make us a bit cautious about putting a huge amount of money into building new refineries to serve an uncertain future. Turmoil now over high prices might even make us feel vindicated, if not smug, after suffering a public flogging for a few decades.
Are we likely to holster our 7-iron on the 8th hole and rush back to the office to become the villain again? When we can be raking in the cash while lining up a put?
We’ll probably finish our golf game, and later, send cash on to shareholders who got hammered when our stock was down, put a wad in our own pocket, and see how all this is going to play out. There might be a price where we’ll risk an increase in our refining capacity, but it will be closer to $8 or even $10 a gallon rather than $5.
Capitalism is often not fun, nor is it intended to be. It is simply a mechanism for allocating goods and services. People who work hard just to get by are actually part of the dynamic of price control. We are just part of a market. We’ll pay until we can’t, or decide not to. Our pain brings markets into balance.
The other day a phrase in The Economist (yeah, I know) caught my eye. It was something like, “Capitalism rewards efficiency, not resilience.”
Which has damn little to do with who is president.
(All readers are appreciated, and paid subscribers help keep The OWL online. Thank you.)
Want to balance this issue?
Simple!
Stop rhe purchase of all o related oil products for 1 day,
(Willing)
The attention span of all facets of this indutry,
would wake up, Oil is not just the base of fuel products, But in almost every product we consume daily. Food clothing, shelter, medicine , manufacturing, energy,
Best to Ya,
Cowboy Out,
Inquiring minds want to know, how much time a day on average do you spend reading?
I don't always agree with your point of view but you do get me to think and I appreciate that.