THE BLOG
08/27/2006 07:51 pm ET Updated May 25, 2011

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.