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Oil, Who Profits?

By       Message Douglas C. Smyth     Permalink
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Oil's apologists point out that the oil companies make, on average, about 8% profits, about average for businesses generally, but then their gross has become so much larger, so their total profits have soared as well. Eight percent of  $100 billion is $8 billion, for example, while 8% of $400 billion is $32 billion, so higher prices do lead to higher profits. Why is oil trading so high? Oil traders may be making most of the money in the oil business, and the oil countries. Headlines today that oil "fell sharply," may reassure, but oil only fell about $4, to just under $132 a barrel, a price that would have been unthinkable only six months ago.

 

Chavez, Ahmadinejad and the Saudi King are laughing all the way to the bank, although the Saudis apparently appreciate that high oil prices will likely lower consumption in developed countries; that's why they've called an OPEC meeting to increase output, but there may just not be the capacity to increase it enough.

 

Supply and demand really is part of the problem: the two largest countries in the world are engaged in the greatest boom, the fastest development in human history. The oil traders are simply trading on that, perhaps exaggerating the effect—for their own profits. So, China announces a price increase in fuels, but that will probably have even less effect than the price increases we've sustained. It's true our consumption has fallen somewhat, but not enough to drive oil down below $130, let alone down below $100.

 

Our falling dollar is another of the reasons why oil prices remain high, but there is a short-term reason as well—the summer Olympics in China. At least that was what one gas station owner told me. The Chinese know that their energy grid is unstable; they've been growing so rapidly that should be no surprise. So, they are apparently buying up a huge reserve of oil to insure that they don't run short when the influx for the summer games begins. And there's also need for fuel to carry out the reconstruction and aid after the earthquake. So, there are short-term reasons for the spike in prices, but it's the long-term ones that are most important.

 

The gas station owner insisted that he was actually making less with the high prices of gas, that his margin was actually lower with the higher gas prices. Why?

 

Have you noticed that you don't buy gas with cash as much as you used to? When it took only a $20 to fill your tank, you'd pay with cash, but now with gas around here at between $4.23 and $4.45, more people pay with credit cards. I know I do. The gas station owner confirmed that a larger percentage of his sales are now on cards.

 

So? Retailers pay over 10% of the purchase price when it's bought with a credit card, so that eats into the gas-station's margin, never very high to begin with (around 4-5%). Most gas stations are independent small businesses, so they're relatively powerless against the big oil companies, their suppliers.

 

It's likely, however, that as I noted in the beginning, it's the speculators who are making the greatest windfalls. They are not solely responsible for the run-up in prices, but they are the ones taking greatest advantage of it, and they are probably inducing prices to rise more dramatically.

 

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http://www.douglascsmyth-author.com

I am a writer and retired college teacher. I taught college courses in Economics and Political Science (I've a Ph.D) and I've written as a free-lancer for various publications.


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