The Big Q: Red, what is behind the price rise in gasoline
The Big A: Lots of folks in the US grit their teeth when filling their gas tanks these days. The AAA survey says in most of the USA the price per gallon is at least US$4.00 and some places it is almost at US$5.00 gal.
And with that the most often asked question last week is Why.
Part the answer is the increase in demand and geo-political concerns in some Crude Oil producing nations.
Another reason is the taxes levied by the state and federal governments, and another reason is speculation in the free market.
Early in April Goldman Sachs (NYSE:GS) reported that speculation is partially responsible for driving up the price in Crude Oil faster, higher than supply and demand. That means that market players are placing bets on Crude Oil making the price rise. And they can win, lose or break even on their speculations, they are not consumers so when they benefit they do not share their profits with the consumers at the pump. On the other side of that equation the consumer does share in the losses.
Remember the World runs for the most part on energy derived from petroleum (Crude Oil, Nat Gas and Coal)
The oil and gas industry in the USA has a powerful voice in Washington, DC called the American Petroleum Institute, and the industry POV is that, although Big Oil’s earnings are huge now, they only reflect the Oil and Gas Companies’ contribution to the US economy, and that the price of their stocks are major contributors to the Nation’s laborer pension funds and the portfolios of their investors, both institutional and individual.
I personally believe that the numbers get too much attention in the media and from pols as “Hot Button” issues.
Sure, the overall profit numbers look big because the companies are big companies that move a lot of product around. To say that Big Oil’s profits are too big only works if talk about the number. They are not overly big profits when compared to other companies and other industries.
Yes, when the price of gasoline rises, lots of folks complain, perhaps because it is not comfortable when the status quo of low priced energy rises. From my POV high Crude Oil prices mean, among other things, that it becomes more attractive to develope alternative energy something that I believe in. The worst thing that ever happened to wind and solar power companies was when oil prices collapsed from US$147 bbl to US$30 odd a bbl Y’s 2008 and 2009. On the other hand, when gasoline gets pricey people who bought a Prius get a payback, and that is good.
The fact of the matter is that every time a driving consumer visits the Gas Pump that signify’s a transfer of money from many to a few, and in most cases, from the regular guy and gal to Big Oil companies who are mega rich in terms of their bottom line numbers.
Overall Big Oil’s company profits do not finding their way back into the communities from which they are derived, and they are not used to create more jobs in the USA, or being invested in new equipment and exploration.
Of course, some of the profits go to shareholder as dividends and higher stock prices. It is interesting to note that in the case of 2 of the Big 5 Exxon (NYSE:EOM) and ConocoPhillips (NYSE:COP), 50% + of their bottom line profits are used to buy back their own stock.
US$5.7B of Exxon’s profits went to buy back its own stock, and the Company announced that it expects to buy back yet another US$5B worth in Q-2 of Y 2011.
In Conoco’s case, it earned US$3B in Q-1 of 2011, and used US$1.6B of that to buy back 21M of it shares.
You should know that buying back stock out of the market is not uncommon among public companies when they experience a sudden and often temporary rise in revenue.
Stock buyback plans are usually a guarantee that the company’s stock price will rise, by boosting earnings per outstanding share, increasing the demand for the stock, and sending a signal to the market that the company believes its stock is undervalued.
But from the POV of a company’s CEO, and its Board of Directors, stock buybacks have lots of advantages.
Top company executives often get significant stock options. If stock prices do not go up, said options are worthless. On the other hand, the higher the stock price goes, the more valuable the option. For example Exxon’s stock is up 32% in 6 months.
Companies that buy back their stock can either retire it or simply keep it themselves, under the control of the Board of Directors, to reissue later or award as bonuses or to make acquisitions, it is “Money”.
Dividends, however, are not a great deal for company executives, as in the USA they are taxed as income.
An increase in the stock price is not taxed as income, and it is not taxed at all until the stock is sold, and only then at the capital gains tax rate, which is limited to 15%.
A 15% tax rate is a lot for the regular American family, which pays less than 5% of its income in federal taxes. But it is a significant break to those paying income tax at the highest marginal rate of 35%
The buying back shares benefits existing shareholders, and existing management.
In Y 2007, when Exxon was using US$30B a year from the previous Crude Oil-price rise to buy back its shares, a columnist said that: “In most cases, stock buybacks are suspect…. Managements should ignore investors’ call to repurchase their shares and invest money in ways that will increase profit, not just earnings per share.” Certainly that gentleman is entitled to his opinion, but he is writing for readers not for the managers and investors in the companies.
An economics professor at NYU, studies wealth distribution recently opined, that when it comes to total equity in stocks it is very concentrated in the hands of the rich. The fact is that fewer than 50% of all American households owned any stocks as of Y 2007, and that is likely less now” because of the financial crisis that frightened most into selling at the low, and that includes 401k’s, mutual funds and other issues.
Who are the shareholders then you ask, well, they are wealthiest 1% of households at 38%, the wealthiest 5% have 69% the wealthiest 10% have 81%.
The lowest 60% of US households owns 2.5% of the total stock in listed public companies..
Big Oil is also conserving profits, because it is a precedented fact that just as soon as Crude Oil prices started to rise again a lot of that money started going to the bank, and that added more to the US$1T+ in corporate cash in reserve for a rainy day, that like personal and private bank saving is slows a recovery not fuel it.
Also, a large portion of Q-1’s profits derived from federal subsidies, say Plus or Minus US$6B.
Recently US President Barack Obama proposed repealing US$4B a year in federal subsidies the American Petroleum Institute says the proposal would actually cost the industry about US$90B over the next 10 yrs.
The Congressional response to Mr. Obama’s proposal was weak from both sides of the aisle.
The Dems, afraid of being thrown clearly out of the Congress and the White House by an angry, gas-impoverished voting public, are seeing such a fight as a winning (vote getting) political issue.
The fact is that a repeal would neither increase nor decrease the price of gasoline at the pump, it would take a chunk out of Big Oil’s bottom line. But, pushing for the repeal will highlight the modern Republican Party’s allegiance to now thriving Oil and Gas interests, something that, in a period of high gasoline prices and even higher profits, may not augur well for them.
But, as you ponder this information you must be keenly aware that the Oil and Gas industry does with its cash is they lobby influence in Washington DC. Example: Exxon, during the same Quarter it made about US$11B it spent US$3M on lobbyists, small but significant. Not to mention the contributions made to the pols across the spectrum.
By last Friday all the Big Five Oil companies had reported Q-1 earnings. Between the 5 of them, ExxonMobil, BP, Shell, Chevron, and ConocoPhillips they made US$34B in profits in Q- of Y 2011 + 42% Y-Y.
Exxon, the largest cleared US$10.7B profit from January through March, up 69% from Y 2010, and that is because the price at the gas pump is up from, (on the US national average) US$2.88 to $4.00+ per gallon of gasoline.
Gasoling prices rise as Crude Oil prices rise, and when Crude Oil prices rise for reasons that have nothing to do with how much it costs to bring it out of the ground, there comes a “windfall” for the folks who produce it.
The average cost to produce 1 bbl of Crude Oil in the US, including exploration, development, extraction and taxes, is about US$30, according to a US. Energy Information Administration survey. The current cost to buy 1 is about $113 as of the close of pit trade in the US last Friday.
Still, as I see it gasoline is cheap when you compare it to what a Coffee at Starbucks or a bottle of Fiji water, and it does get one to work and back…
Stay tuned…
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