Last night, on The Daily Show, Jon Stewart’s guest was Kimberley Strassel, senior editorial page writer for The Wall Street Journal. Stewart tried to get her to explain why oil company profits should go up just because crude oil and gas prices do. It was a simple question, pretty clearly put: if crude oil prices go up, oil company revenues may go up, but why should profits go up too?
This was a question she totally failed to answer. Since she’s on the editorial staff of The Wall Street Journal – and she giggled a lot – we’ll put it down to nervousness. Stewart gallantly took the blame for being too retarded about economics to understand her, but the truth of the matter is that she totally failed to articulate any kind of answer.
As best as I could make out, the answer she was trying to give was the standard oil company PR response. This was the argument we heard a lot, for example, in October 2005 when Exxon announced those obscene profits for the third quarter of 2005, and again in January 2006 when Exxon announced obscene profits for the last quarter of 2005 and for the full year. In a nutshell, the argument is that the oil companies are really not responsible in any way for the obscene profits they’ve been making recently. The obscene profits just happened to them as they were walking along, innocently going about their business.
Jon Stewart’s question was that oil companies may have higher revenue because gas prices have gone up, but why shouldn’t their profits be the same, since their crude oil cost went up too? That premise would be true if oil companies operated by buying crude at market prices, refining it and then selling the gasoline. But they don’t. Most oil companies start by extracting crude oil. When crude oil prices go up, they make a bigger profit on extracting the crude. Their profits would increase even if they weren’t in the business of refining crude and selling gasoline.
The claim that oil companies are making is that when global supply and demand (and those evil OPEC guys) make crude prices go up, the price you pay at the pump for gas increases only to reflect the increase in the cost of crude. The higher retail price of gas does not reflect any increase in profit once you take the higher crude price into account. Refining and retailing profits don’t increase. In short, oil companies don’t tack on a little extra for themselves when they adjust the price of gas for the cost of crude. That is to say, we are not being gouged.
And so, oil companies maintain that yes, their profits go up when crude oil prices increase, but not because of anything that they have done. The higher profits just happen to them when crude oil prices happen to go up. And they don’t control crude oil prices, OPEC does. So only OPEC is responsible for the recent humungous profits of oil companies.
Unfortunately, as anyone who represents The Wall Street Journal in a national TV discussion of oil company profits should be aware, this is absolutely untrue. It is known to be untrue. Kimberly Strassel is guilty not just of nervously failing to articulate her reply. She is guilty of either being criminally ignorant of the basic facts (which are amply documented) or of deliberately misrepresenting the truth so that oil companies don’t look bad.
Let’s go to the facts. (I did a google search, and picked out two respectable studies at random. If you had the stamina, and I had the sadism, I could quote you fifty.)
A U.S. Department of Energy study titled “2003 California Gasoline Price Study: Preliminary Findings†documented the following (all figures are national averages*):
So the retail price of gas didn’t increase just because crude oil prices went up. The increase in the retail price was more than double what was warranted by crude oil prices. Somehow, by a huge cosmic coincidence – warranted no doubt by the accumulated karma of oil companies – the retail price of gasoline behaved in such a way as to produce a handsome increase in oil company profits over and above what resulted simply from crude prices going up. The study estimates that “Distribution Costs, Marketing Costs, Refining Costs and Profits†went up over this period from 30.1c per gallon to 48.6c per gallon. No one, not even the oil companies, is claiming that “Distribution Costs, Marketing Costs, Refining Costs†went up significantly over this period. So most of it is an increase in refining and retailing profits.
The crude oil component of the cost went up by 17.4c a gallon. Refining and retailing profits went up by roughly the same amount. Under cover of higher crude oil prices, oil companies have managed to tack on a tidy extra profit for themselves. Now you can call this adding insult to injury, or you can call this price-gouging, or you can call it profiteering. Jon Stewart called it “the distinct sensation of being boned up the a**â€. Once the initial spate of “for-window-dressing-only†statements is over, the Bush administration and Congress will, no doubt, call it business as usual.
Those numbers were from 2002-03. It’s the same story if you look at 2006. According to the California Energy Commission, during the 6-week period from March 6, 2006 to April 17, 2006 the crude oil cost of a gallon of gas went up by 20c (from $1.43 to $1.63). The retail price before taxes went up by 39c per gallon. Some things never change, huh? Every time crude oil prices increase, oil companies manage to tag on a stealth component of extra profit for themselves.
The crude oil cost of a gallon of gas has gone up by roughly a dollar since 2002, and oil company profits benefited handsomely in the process. Then, over and above that, refining and retailing profits went up handsomely too—roughly 60c a gallon, by my estimation. It’s easy to understand why oil companies have been making those obscene profits lately.
That pool of cosmic karma must be almost as vast as Saudi Arabia’s oil reserves.
* The numbers look even worse if you take California averages. The crude oil cost of a gallon of gas went up by 18.5c (from 59.c to 77.7c). The retail price before taxes went up by 53.9c per gallon (from $1.038 to $1.577).