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Oil prices spike with gas prices Original Source Link: (May no longer be active)
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Posted on Wed, Apr. 21, 2004
Oil profits spike with gas prices
By Matt Marshall
SAN JOSE MERCURY NEWS
A study released Tuesday backs a common complaint from drivers: Profits for oil companies have been rising sharply along with prices at the gas pump.
The average profits for California's top five oil companies spiked 298 percent in 2002, while gas prices increased 21 percent, according to the Foundation for Taxpayer and Consumer Rights in Santa Monica, a liberal public policy group. In 2003, their profits grew a remarkable 926 percent, while gas prices rose 35 percent. The companies included in the study were Shell, ConocoPhillips, ExxonMobil, Chevron Texaco and BP Arco, and the study was based on an analysis of government records.
A look at company books confirms that profits are indeed rising along with gas prices -- something even oil companies won't deny. The disagreement is around the question of why.
The foundation suggests the answer is clear: Oil companies are ripping consumers off.
"When profits skyrocket in sync with pump prices, price gouging is the only possible explanation," said Jamie Court, of FTCR. "This is what happens when industries are left to their own devices."
He called for legislators and regulators to create more controls over the price and supply of gasoline.
However, the oil industry shot back, saying prices have risen largely because of a limited supply -- a situation largely out of its control.
Moreover, most industries profit at a time of rising prices, industry representatives said. They pointed to statistics they said show the oil industry's average profits haven't risen any higher than other industries.
They also said the FTCR study has shortcomings because it looks at profits made by companies that operate worldwide and in a number of sectors -- not just the profits made from selling gasoline at the pump.
"They're comparing apples and oranges," said Joe Sparano, president of the Western States Petroleum Association. "An economist would say, that's not right."
What would an economist say? Which side is right, in this war of words?
Well, the truth is somewhere in the middle, according to Jeremy Bulow, a professor at the Stanford Graduate School of Business, a former chief economist at the Federal Trade Commission -- and expert on antitrust issues.
It may be true that the oil industry has profited from a rise of prices at the gas pump, but that in itself isn't a sign of wrongdoing, or of gouging, he said.
He uses an analogy of someone who buys a house in San Jose for $200,000, only to see the value of that house increase to $240,000 over the next year. Assuming the person put a 20 percent down-payment toward the house, he'd have doubled his money in a year.
"That doesn't mean he price-gouged," Bulow said.
What it means, he explained, is that the person invested in a market where prices were rising, and that most people would agree the person has the right to benefit from the investment. "It's your good fortune," he said.
Large oil companies like ExxonMobil, he noted, have only a small percentage of the world's output, and so don't really have leverage to manipulate prices. Indeed, the Organization of Petroleum Exporting Countries, or OPEC, has more control over world supply. That group hasn't boosted output enough to offset the growing world demand for oil, led in part by China's robust economy.
While there are special factors that have contributed to limited supply and higher prices in California -- compared to other U.S. states -- the companies operating here have generally produced as much as they can, Bulow said. Multiple studies by government regulators have turned up no evidence of price-fixing, he said.
For the time being, though, oil companies look set to continue profiting from the rising prices, according to FTCR. If pump prices stay up, 2004 will be the most profitable year yet for the oil companies, according to FTCR petroleum industry consultant, Tim Hamilton. The analysis found that, quarter by quarter, each run-up in gas prices resulted in a run-up in company profits. Gasoline companies are expected to release their earnings reports for the first quarter later this month.
Profit margins in 2003 for the oil and natural gas industries were 6.4 percent -- pretty close to an average of 6.5 percent for other U.S. industries, contended Sparano of the petroleum industry. But FTCR countered that those statistics might be suspect, covering up various write-offs oil companies have made through using industry tax breaks and other maneuvers.
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