Thursday, March 1, 2012

Whatever happened to OPEC?

I will quickly show I know just enough (and maybe not even that much!) to be dangerously stupid but what are blogs for?

I was having lunch with a couple of friends and of course briefly we bemoaned the rising prices of gas.

My pet peeve has been what I call “self-fulfilling prophecy”; i.e. some speculator somewhere thinks gas might be higher in a few months or hears that a middle eastern dictator has a cold, then buys some sort of commodity derivative or something at a certain price and off we go. The media reports prices are going up and sure enough, drive by your friendly local station and the guy will be out there with a ladder, suction cups and numbers in hand, changing the price.

Made me wish for OPEC. I remember something about the days when OPEC were the bad guys, a group of Arab Sheiks who met in Switzerland or some such ritzy place to determine who was going to produce how much and for what price. Then I figured – surely they couldn’t have been setting prices for the world market but then …

“One of the most common misconceptions about OPEC is that the Organization is responsible for setting crude oil prices. Although OPEC did in fact set crude oil prices from the early 1970s to the mid-1980s, this is no longer the case. OPEC's Member Countries do voluntary restrain their crude oil production in order to stabilize the oil market and avoid harmful and unnecessary price fluctuations, but this is not the same thing as setting prices.” source OPEC

So who exactly DOES set the prices for Oil and indirectly gas?

Then I read this: “In today's complex global markets, the price of crude oil is set by movements on the three major international petroleum exchanges. They are the New York Mercantile Exchange (NYMEX, http://www.nymex.com), the International Petroleum Exchange in London (IPE, and the Singapore International Monetary Exchange (SIMEX, http://www.simex.com.sg). source OPEC

Please refer back to my earlier statement about a speculator. Wonder where those people go to work everyday?

Again my faulty memory of the bad OPEC days is that the Sheiks would meet, and because at the time the Saudis were the biggest and baddest OPEC dudes, they could call the shots, raise or lower their own production so the smaller guys wouldn’t get hurt too much and in general keep the flow of crude somewhat stable (because it benefited their own economies and countries) which had the effect of keeping gas prices somewhat stable.

Note I didn’t say low but think back to those earlier days when we started feeling the pinch. I do remember when gas went over a $1 a gallon. I remember when it broke $1.50. What I don’t remember are times when it was up a dime today, down a penny or two tomorrow and then back up a nickel again the next day. It seemed like there were longer periods of the same price and not the day-to-day volatility in the market. Buying gas now is like watching an auction on eBay!

Wonder who the OPEC members are? Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (2nd largest known reserves of OPEC countries) United Arab Emirates, Venezuela (largest known reserves of any current OPEC country)

We used to complain that higher gas prices were just making a bunch of spoiled Saudi Princes richer and richer. That may still be true but who is really profiting by the rising prices? I found these folks on a list of the 20 most profitable U.S. companies:

#1 Exxon ($30.5 bil.), #3 Chevron #3 ($19 bil.), #16 Conoco/Phillips ($11.4 bil.) Two int’l cos. are Shell ($28.6 bil.) and BP (a measly $5.3 bil. in the year after the big spill)

Can you see where this is going?

The next little bit of research is to see who of these folks are paying taxes. I found an article where Exxon was whining to CNN about how they paid out more in taxes than they took in, in profit. But it turns out they were counting sales taxes collected at the pump as taxes they paid! So the 25-50 cents per gallon tax that you and I pay at the pump, Exxon was telling reporters THEY paid those taxes. All their stations did was collect them and pass them on. Those taxes were OUR nickels and dimes and DOLLARS, not Exxon’s. But in fairness I did find that Exxon paid about 29% of those profits as actual corporate income taxes – still below the 35% that our tax code requires (can you spell tax subsidy?)

All I set out to do here was find the bogeyman for the daily price rises at the gas pump. We can hate the Arabs all we want (and Chavez too) but it seems there are plenty of our own villains to go ‘round!

I don’t really understand the futures market. I sort of get that if I want to buy a share of Apple stock, I’d pay $532 today (give or take). What I don’t understand is that as a speculator I can presume Apple’s stock price might be $750 (they wish!) and then buy up options or futures based on that assumption. What I further don’t get is how this option purchase today can affect the stock price tomorrow or next month? Shouldn’t that be based more on performance, the long-term market for the products etc.?

Bottom line, low or high, gas is always going to be profitable. Oil companies weren’t going broke when I paid less than 30 cents a gallon back in college. In fact for many, those days were the hay-days of big oil in Texas.

Finally just read this: Obama is considering revoking some tax subsidies for oil companies because of the high prices at the pump. I’m no economist and I really don’t think any of them need subsidies but … taking them away will mean their operating costs go up – right? And if their costs go up, what will happen to the price of gas?

What goes around, comes around I guess.

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