Oil Companies Do NOT Want Permanently High Prices 

– National & Economic Affairs

Sounds like a non sequitur, doesn’t it? What business doesn’t like higher prices? Don’t get me wrong -- higher prices usually mean higher margins and that means bonuses and raises for executives and employees and it means happy shareholders. But oil companies don't want permanently high prices or prices that are too high. There are three reasons for this:

(1) Those who produce oil, those who refine it, and those who sell it realize that, above x price (with x fluctuating depending upon incomes and inflation expectations,) oil will be uncompetitive.

(2) Oil companies don’t own their raw material. Venezuela owns Venezuelan oil. Saudis own Saudi oil. Nigerians own Nigerian oil. Et cetera. Oil companies are no different than the proprietor of a country store. If Frito-Lay ups the price of a bag of potato chips by $1, does the country store proprietor benefit? Yes -- to the extent that he earns the same profit margin. Did the storekeeper make a windfall profit? No -- he made a little more but he’s operating on the same margins. It’s Frito-Lay that made the big bucks with the price rise. Think of OPEC as Frito-Lay, only bigger.

(3) The higher the price of oil, the greater the share of proven reserves the oil companies booked at way lower prices. They lose money because, once those old wells negotiated with an assumption of $20 a barrel, or $30 or $40 or $50, hit their payout targets, the nation in which they are drilling gets to raise their share of the revenue.

For all these reasons, big oil companies, oil refiners and oil and gas retailers don’t want to kill their primary, and in some cases their only, source of income. Oil prices that are too high = world recession = a collapse of oil prices. Thus has it always been, thus shall it always be. Whenever we get to this side of the gas price bell curve, we hear the choruses of the ignorant saying, “This time it’s different,” or “The world is ending.” They’re wrong.

At least higher prices at the pump don't give the Feds and states more money to fund their favorite pork projects. Thankfully, taxes on gas purchases are based upon the volume of sales, not a percent of the price.  If gasoline is $2.70 a gallon, the country owning the crude typically gets about $1.55 and those who paid for the drilling equipment, labor to find the stuff, suffer the dry holes, ship it across oceans and land masses, refine it, distribute it via pipelines and such, and sell it at retail get to split 70 cents or so among them. The remaining 45 cents goes to the state and federal governments.

At $100 a barrel, who wouldn’t want to produce all-out?  But as we’ve seen for the last two years, the antidote to expensive oil and gas is… expensive oil and gas. It’s called The Law of Supply and Demand and all the ink from all the Chicken Littles in the blogosphere won’t change that law one bit. If you want to do something to deal with higher gasoline prices, do this:

(1) Buy shares of oil companies and vote out the SOBs who pay $400 million pension packages to a single executive. Stop the madness. Cap the pay of these dweebs who are stealing from the shareholders. You own the damn company -- band together and fire ‘em all.

(2) Lobby your representatives to raise fuel economy standards and take other intelligent conservation actions. In other words, use less. Remember Supply and Demand.

(3) The first two are for serious activists. Just want to complain, but you’d like to do it while making money? Buy shares of energy companies. You’ll still pay a couple thousand extra bucks in gasoline costs every year -- but you’ll pay it out of the tens of thousands you’ll have made owning well-selected companies.