Monday, August 28, 2006

Deception From America's Oil & Natural Gas Industry

Huffington Post
Raymond J. Learsy
Deception From America's Oil & Natural Gas Industry

This past week, a full page ad ran in the New York Times, labeled "A Message From America's Oil and Natural Gas Industry" purported to instruct us about "[The price at the pump]" and headlined accordingly. The ad's graphics depicted a dollar bill divided into three parts: 54% CRUDE OIL; 30% REFINING, DISTRIBUTION, & SERVICE
STATIONS; 16% TAXES- after having posed the question, "Where does your gasoline dollar go?"

The ad went on to make the statement "According to the Federal Trade Commission, the global price of crude oil is the single most important factor in what you pay at the fuel pump".

The operative word here is "global price of crude oil", implying that the industry was simply passing through to the consumer the cost of oil it was paying for crude. That may be true for those companies that are exclusively refiners, or certainly for the service stations referred to in the ad. And the implication in the ad is that in selling gasoline, the industry's earnings are 8.5 cents on every dollar of sales, without clearly defining what constitutes the "industry".

What is brushed over is that the major players in the industry aren't simply refiners or distributors, but they are major producers of crude oil as well, so that the "global price of oil" that constitutes 54% of a gallon of gasoline offers these companies their core profit base and not the sales price of gasoline as was implied in the ad.

Permit me to bore you with an example. ExxonMobil (always there when you need them) produced the oil equivalent of 4,162,000 barrels of crude oil per day in the second quarter of this year.

Earning 8.5% on every dollar of sales? Lets do some calculations. 4,162, 000 bbls a day at today's "global price of oil" at say $70 per/bbl ( I know it's higher, but let's not be piggy) is the equivalent of a cash income in dollars of $289,030,000 per day!

Now one needs to ask what are their production costs. Well, according to Reuters, as I had mentioned before (see "The Price of Oil Is Falling..." 8/18/06) the major oil companies remain cautious in their investment decisions, pricing new projects on the basis of $25/bbl oil. Even this seems high. In June 2000 Thierry Desmarest Chairman of France's oil giant Total, declared that his corporation would not invest in finding any oil that would be unprofitable at $13/bbl. Desmarest was certainly reflecting accepted wisdom in the oil patch at the time.

One can also assume that the major portion of ExxonMobil's production was in place predating 2000 and continues producing today. Being conservative and taking an average of $13 ceiling for installed capacity predating 2000 and the $25 ceiling today, a reasonable average production cost for ExxonMobil today could be calculated at a figure of $19 per barrel. The actual production costs are probably a great deal less given that drilling and infrastructure costs for much of their production have long since been amortized and the numbers cited are more representative of 'ceiling' numbers than much lower actuals. Let's stay with what we have, that is at an average production cost of $19/bbl, in all likelyhood with royalties included, one arrives at the following calculation:

Income- on 4.129 million bbls/day@ $70/bbl = $289,030,000 per day

Production Cost- on 4.129 million bbls/day@ $19/bbl= $78,451,000 per day

Or as the industry would phrase it, earnings of 368% on every dollar in crude oil equivalent sales!

Of course, to look better, that is to minimize the appearance of voraciousness, there are many ways of reducing net income, from capital expenditures to munificent salaries and golden handshakes such as ex Chairman Lee Raymond's $400 million plus "goodbye". In any case, I do hope Washington is listening. These guy's certainly need another tax allowance or royalty dispensation. It breaks ones heart to think of all those "K" Street lobbying bills they have to pay.

As for the American Petroleum Institute one can only thank them for their illuminating information and marvel at their abiding belief in our gullibility.

As for the rest of us, I think we should all remember that the gouging starts not with the local distributor nor at the gas station but at the wellhead.