Ohio.com - 14/5/2006
If you close your eyes and concentrate as you pump the gasoline into your vehicle, you can actually feel the vibrations from the flowing fuel.
Suddenly, there is a loud click, the vibrations cease and money, er, gasoline quits flowing. You check out the damage. Twelve gallons at $2.899 a gallon. Congratulations! Your bill is less than $35!
You probably figured this out already, but somebody is getting rich at these prices. Perhaps you blame the oil company, the gasoline retailer or the foreign country where the crude oil was pumped.
Yup, yup, yup, all of the above.
Let's start pointing fingers:
ExxonMobil Corp. racked up $8.4 billion in first-quarter profits this year, and that was disappointing to financial analysts, who expected bigger things after the oil giant's $10.7 billion profit for the last quarter of 2005. That quarterly figure was the biggest ever for a public company.
Those are big numbers, to be sure. But oil industry defenders are quick to point out that ExxonMobil is the world's largest public corporation, weighing in with a $384 billion market capitalization. So that $8.4 billion amounts to 2 percent of the market cap, or the total value of the company's stock. Not bad for one quarter, but not dramatically better than many companies outside the energy industry.
This will undoubtedly come as no consolation as you replace the gas cap and hang up the pump nozzle, but even ExxonMobil looks like a small player when compared with the world energy market.
``ExxonMobil owns 1.1 percent of the world's oil resources; it produces 4 percent... so its ability to have market power is very, very limited,'' said Rayola Dougher, manager of energy market issues for the American Petroleum Institute, which represents the petroleum industry.
All oil companies combined hold only 6 percent of the world's oil reserves. Nationalized oil companies, like those run by the OPEC nations, own 77 percent of the reserves, and the balance is owned by various cooperatives.
According to the Central Intelligence Agency, Saudi Arabia pumped about 9.45 million barrels of oil each day last year. That works out to more than $661 million each day, based on a price of $70 a barrel. The United Arab Emirates pumped 2.4 million barrels for $168 million, and Iraq, 2.1 million barrels for $1.47 million.
``Nobody is trying to hide the fact that if you are bringing it out of the ground for (a cost of ) $25 a barrel and then you sell it for $65 a barrel, you're making money,'' said Terry Flemming of the Ohio Petroleum Council.
Perhaps as you were driving away from that gas pump, $35 lighter, you heard a radio report oftensionoverseas.
This is bad news for you, too.
Anything that threatens to disrupt supply can cause oil prices to rise. It doesn't even have to actually disrupt supplies, just the threat can have an effect.
Take the recent run-up as an example. Traders on the New York Mercantile Exchange heard about civil disruptions in Africa and war rumblings involving Iran. These traders acquired contracts to buy oil to be delivered in June at more than $70 a barrel. As a consequence, the daily price of oil went up, too.
If diplomacy prevails and the tensioneases, prices could go down. Good news for you; bad news for traders holding contracts for June at higher-than market prices. Their contract essentially is a promise to buy oil at more than $70 a barrel, so if the price falls to $65, they will take more than a $5 loss on every barrel.
One more thing about the markets.There are many different grades of crude oil traded at various prices. But ``light sweet crude'' is the most common and is reported as a benchmark in most news stories.
If a barrel of oil is going for $70, all of that money might go to the national oil company where it is drilled. A private company in the U.S. market often owns the oil from the wellhead, through its transportation to the refinery, where the oil becomes gasoline, and at least part of the way to the retailer. These companies don't start making money until the fuel gets sold.
Other domestic refineries purchase oil at the going rate and produce gasoline and other petroleum-based products.
Estimates vary, but refineries tack on 15 percent to 18 percent to the price of the fuel.
Even though you go to a gasoline station with a big oil company brand, you might not be dealing directly with Big Oil.
Many of the Citgo companies in the Akron area are owned by the much smaller Holland Oil company. BP is in the process of selling many of its local stations to concentrate on oil drilling, refining and transportation. The trend is for Big Oil to leave the retailing business, with its slim profit margins, to much smaller companies.
Retailers usually add 10 cents a gallon or less to the wholesale cost of gasoline. The real money in retailing comes from the sale of snack food, beer, coffee and other products in the convenience store that usually accompanies the station.
It's all about the Twinkies.
Even giant retailers like Wal-Mart are bringing in gas pumps to lure customers as much as profits.
That's why retailers sometimes complain that they make less profit when gasoline prices are high than when they are low -- they are reluctant to hike prices and turn away customers to the competitor across the street. Anything to sell more Twinkies.
``The retail station owner operator is right, his margins actually are squeezed,'' said Dougher. ``He could be losing money when the prices are going up, and they often are, and get their price when the prices are falling because it is smoother and that's where they make up for some of their losses.''
One more thing. As you pull onto the road, grumbling about prices, be sure to look into the mirror.
You might be sharing in the profits.
You might hold stock in Big Oil or a supplier.
Private pension funds hold 15 percent of oil stocks, federal and state pension funds hold 12 percent, and various owners of individual retirement accounts own an additional 14 percent.
Overall, various forms of pension plans own 49 percent of the oil companies.