| Robert Wagner 2004-05-17, 10:30 pm |
| "JerryMouse" <nospam@bisusa.com> wrote:
>Oil prices are going up, in large measure, to the tree-huggers. Here's a
>couple of reasons:
>
>1. Although Saudi Arabia has opened the tap, we can't use much more of SA
>crude because of its high sulpher content.
Sulphur can be removed in the refinery, for a cost. It's an economic issue.
When diesel went low-sulphur, eight years ago, it caused widespread O-ring
failure in fuel injectors, causing expensive rebuilds. Fuel injectors in upscale
cars such as BMW cost up to $300 per, and there are six of them. You don't hear
much about low-sulphur gasoline because yuppies have more political klout than
truck drivers. O-rings have since been changed but we must wait for older cars
to leave the system.
>2. No new refinery has been built in the US in 17 years.
It's worse than that. Between 1977 and 2002, the number of refineries operating
in the US fell from 282 to 153. There are 129 refineries sitting idle. They can
be purchased for 20% of the cost of building new, so why would anyone want to
build a new one?
To understand why that's so, you have to understand the Oil Depletion Allowance
and how it influenced oil company accounting. Big oil companies have four major
business units -- Exploration and Production, called Upstream, and Refining,
Transportation and Marketing, called collectively Downstream. (I'm ignoring
Chemicals here.) The Oil Depletion Allowance used to allow them to deduct 15% of
upstream *gross profit* from corporate income tax, which is based on *net
profit*. The four divisions 'sell' product to each other for intracompany prices
that are easily manipulated to move profit from one division to another. The Oil
Depletion Allowance gave them a strong incentive to move as much as possible
upstream. To see this, look at any oil company's P&L. For instance, Exxon Mobil
in the first quarter of 2004 reported (in millions)::
US upstream *net* income $ 1,154 75%
US downsteam *net* income 392 25% (up from 174 same quarter 2003)
Total US income 1,546
Prices are artifically set so that refineries and transportation lose money,
retail operations make a little, most profit is in production and exploration.
On $1,154 *net* profit, the *gross* profit is at least double. Thus corporate
income tax would be (1546 * .35) - (2500 * .15) = 166 or 11%.
If refineries lose money, why build new ones? Better to shut them down (129
above) or sell them to Valero for 20% of new (they're fully depreciated).
In 1975, the Depletion Allowance was limited to small producers who do not
operate a refinery (I used to be one). That was intended to stop the 'tax break
for the rich.' In its place, Big Oil got the 'intangible drilling cost
deduction', which produced an even bigger deduction by letting them deduct 70%
of the cost of drilling a well in the first year, and the rest over five years.
They also got the 'enhanced oil recovery credit', which pays them for operating
stripper wells (marginal, almost played out) and for pumping out-of-spec oil
(high sulphur, high viscosity). Something for everyone -- new wells and old.
Profits were still moved upstream; refineries still lose money.
>3. World-wide demand has increased dramatically, especially in China and
>India, plus increases in Japan and the U.S.
True.
>4. Several years ago, the EPA mandated oxygenates to be added to gasoline.
>MBTE was the preferred oxygen-enriching substance, but that is now outlawed.
>The only remaining oxygen-enricher is ethanol which is WAY more expensive
>than MBTE. The interesting thing is that, as more and more cars use fuel
>injection, the need for oxygen-supplementing compounds is lessened.
Only three States have banned MBTE -- California, New York and Connecticut.
Another reason for high gasoline prices, that you did not mention, is recent
consolidation of Big Oil -- Conoco Phillips, Exxon Mobil, Chevron Texaco, BP
ARCO, etc. -- and increasing monopolization by pushing independent retailers
out. Between 1993 and 2003, retail share of the ten biggest oil companies
increased from 56 to 79 percent. On the East and West Coasts, the four largest
control 76 and 66 percent, respectively. It would be higher on the East coast if
Texaco Chevron or Shell owned stations flying their flag. They are owned by a
Saudi company.
The first quarter Exxon Mobil cited above is their highest quarterly profit in
13 years. Chevron Texaco is up 33 percent over the first quarter last year.
They got independents out by pushing through a law requiring underground steel
tanks be replaced by plastic in 1998. Replacement had to be done by a small
number of 'certified' contractors, who were fully booked by the majors a year
before the deadline. In smaller stations, those pumping less than 10K gal/mo,
the cost could not be economically justified. Steel tanks were in older
stations, which were largely independents.
What all these have in common is MONEY, not tree-huggers.
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