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Sunday, April 23, 2006

Oil Companies Record Profits Effect The Economy

What headline makes more sense? "Fuel prices to exceed $3 per gallon this summer", or "World oil reserves at an 8 year high"?

A couple more recent headlines … “Oil companies making record high profits”, and “Oil executive retires with $100 Million bonus”.

With the prices we are paying at the pump you would think that the first headline is true, especially since in most places it has already topped $3 per gallon. The problem here is that the second headline is also true. We have seen both headlines recently.

We are fed the notion that the root cause of the high gas prices is based on supply and demand, but in real life economics the second headline would cancel out the first due to the supply and demand the oil companies claim as their price basis. If the supply is so great that the demand is not using it up then in a real world market the cost goes down. That's basic economics.

Basic economics is one thing, but what about the advanced economics of this issue? What about the "unintended consequences"?

That’s why I chose the above cartoon for this post. I am pointing out here the dangers to not just our economy, but for each of us as citizens living in this economy.

We live on fuel; use fuel in manufacturing, product delivery, product storage, and living life (as in cooking, heating, hot water, driving to and from work, etc.). There are many uses of fuel in America.

When fuel prices rise, so do the costs of doing business, which can lead to companies cutting back workers to cover these added expenses. People become unemployed, no one is hiring, and the economy goes bust.

What about the "unintended consequences" from the consumer/worker point of view?

When the cost of living rises, (i.e.: fuel to go to and from work, cost of necessary products going up, electricity up 12% already, etc.), what are the fallouts? We have already seen stories in the news of people going to pawn shops to get gas money to get to work.

Most homes live on a budget, and most are tight … some barely make it. The companies they work for are seeing increasing costs so raises are out … be glad the job isn’t gone … yet. So what happens?

Budget cuts, and not the congressional kind where they say that next month we’ll spend $20 billion more instead of $21 billion more so that’s a cut.

You have to buy gas to get back and forth to work, you have to pay the electric what they want or it’s cut off. There are many “have to’s”, and even though you can cut back usage … that’s minimal to the overall budget effect with these types of increases.

Examples? Sure … A $400 electric bill just became $450 (+$50), a $100 gasoline budget just became $175 (+75), (or in my case $300 just became $525 / +$225). Just there alone is an increase to the average household of $125. “Cutting back” MAY save $25? Less? What to do about the other $100 in budget increase …

Maybe you just don’t buy food and use that money for gas, maybe you let the electric be turned off and buy gas with that money, maybe you sell everything you worked to get over the years until you run out of “stuff” … if it has any value … if you have anything of value that is.

You hear constantly the ideas, usually by people with plenty of money anyways, like buy a more fuel efficient car – drive less – car pool – public transportation … etc. Here’s a news flash, not everyone can afford to ADD costs to their already over extended budget, some people cannot car pool, use public transportation or drive less.

Some people are just trying to get by on what they make, see more of it taken from them, and get mad at the record profits the oil companies are making while they do without.

Are the oil companies trying to bring down the American and the American economy on purpose?

Now don’t get me wrong here, I believe in Capitalism. I believe that businesses are in business to make profit. I hear the argument about how the oil companies were making less profit at $10 per barrel oil and no one was complaining it was low profit … BUT … it WAS a profit!

Our complaint is that they chose to take rising prices and raise them more while they could to obtain RECORD PROFITS. If their profit wasn’t good enough at $1 per gallon, then why wasn’t it $1.03 THEN? That would have been the same billions in additional profit then as it is now with the added $1 + per gallon excess.(Without busting the average Americans budget into bankrupcy).

“The profits were low so we couldn’t afford to build refineries” … BULLEVERY business makes whatever profit the market allows and expands AS THEY CAN … save up for it … take loans (and with no government grants to do it with usually too!)

(updated thought: No new refineries have been built in over 30+ years. Can you honestly tell me that over all that time the profits haven't been there to have paid for them already? What percentage of the past 30+ years profits would that have been? Why do oil companies apparently think they do NOT have to reinvest their profits, like every other business, but wait and one day the government will do it with our tax dollars?)

No collusion? BULL! … I dare you to go to Wal-mart, Sears, JC Penney, K-mart, etc. etc. etc. and compare prices on pants, milk, cereal, whatever … and I guaranty you they will NOT be exactly the same prices … to the tenth of a cent like 4 gas stations from 4 different companies on the same corner.

Guess what … these oil companies buy their oil in a fluctuating market where one company buys it cheaper the day before the other … have different refining costs, operating costs, overhead costs … yet they will all charge the EXACT SAME TO THE TENTH OF A PENNY AT THE PUMP? THAT’S NOT COLLUSION?

Collusion Defined:

collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole.

Practices that facilitate tacit collusion include:
Uniform prices
A penalty for price discounts
Advance notice of price changes
Information exchanges
Swaps and exchanges
Price fixing


Seems pretty clear to me.

So the oil companies make record profits, Americans do without or lose everything they have, and eventually the economy goes bust.

I hope the oil companies enjoy the money while they got it because there’s one more “unintended circumstance” they apparently are not thinking about.

When American get mad, they unite … and we’re not stupid.

And most importantly … when people cannot afford anything, much less gas … they sure aren’t buying gas, especially if they lost their job due to cutbacks or not being able to get there anymore …

No income … no buying gas … no more record profits … if any

They may price themselves out of business …

Anyone know where I can buy a horse and buggy cheap ?



(Why is gas the only petroleum product doubling in cost anyways? In fact ... the only one rising at all.)

UPDATE: President Bush has ordered a probe into the gas prices.

President Bush is ordering an investigation into whether the price of gasoline has been illegally manipulated, his spokesman said Monday.

During the last few days, Bush asked his Energy and Justice departments to open inquiries into possible cheating in the gasoline markets.

McClellan said Bush also will announce that his attorney general and Federal Trade Commission will send a letter to all 50 state attorneys general, who have primary authority over price gouging, to remind them to stay on top of the issue and offer federal help to do so. And he will call on energy companies to reinvest their profits into expanding refining capacity, developing new technologies and researching alternative energy sources.


"I think you'll hear the president say very clearly that he will not tolerate price gouging," McClellan said.

Repeating the above added thought, ...

No new refineries have been built in over 30+ years. Can you honestly tell me that over all that time the profits haven't been there to have paid for them already? What percentage of the past 30+ years profits would that have been?

Why do oil companies apparently think they do NOT have to reinvest their profits, like every other business, but wait and one day the government will do it with our tax dollars?

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