Our Government, Not Big Oil, is Price Gouging Gasoline

Gasoline is a political hot button that politicians love to publicize, as they know consumers are more aware of price changes of gasoline at the pump more than any other household budget item. Politicians are not the best and brightest that society has to offer, but they are wise enough to know that their existence depends upon their ability to sell their public image to voters. Taking credit for everything good and blaming others for everything bad is their political modus operandi. In the case of Oil, we heard it was the Putin Price Hike. It had a nice ring to it, but as we and others have highlighted, most of the energy price hikes occurred prior to Russia’s invasion of Ukraine. Oil was over $90 when Putin sent 150,000 troops across Ukraine’s border and many forecasters were already projecting more than $100/barrel without war. While the Putin Price Hike mantra remains a part of the Government sales campaign, blaming Big Oil companies for price gouging has been added to the list of disinformation efforts. Ironically, the Governments Public Relations attempt to lower energy prices has run up against the law of unintended consequences. Energy experts know that releasing Government stockpiles from the US strategic petroleum reserves is more a gimmick than a solution to the long-term supply shortage. In this case the massive release of emergency reserves caused a shortage of gasoline and diesel at refineries that triggered a record gasoline crack spread of $55. This means gasoline costs the equivalent of about $160/barrel today. “Crack” is the process of breaking crude oil down into components such as diesel and gasoline. The crack “spread” is the price difference between oil bought by refiners and the end products they sell. So the massive release of Oil from our emergency stockpile has actually caused gasoline, jet fuel and diesel prices to rise more than normal over the short to medium term. While unitended, it truns out that Big Oil isn’t price gouging, our Government is. 

Since the oil released from emergency reserves around the world was unrefined, it clogged up the supply chains and reduced gasoline and diesel inventories that were already in steep decline. Oil refiners are now one of the bottlenecks in the energy market, and despite a return to record profits, refiners are running at full tilt. With the Covid shutdown of key refineries in 2020, total US refinery capacity is currently the second-lowest it’s been since late 2014, with diesel inventories down 43% and the Central Atlantic region’s inventories off 78% since early 2020. California has been converting traditional refineries to biodiesel which is also adding to the production shortfall. The only reasons Oil has not risen even further toward its 2008 peak near $150/barrel is that (1) China’s forced lockdown of over 50 million people, (2) inflation impaired consumer spending and (3) the Fed’s rapid rate hikes are all converging rapidly to slow the economy towards a potential Recession. What we need are more refineries, more pipelines, more labor and liquified natural gas (LNG) ports. Instead, the Government has added unrefined product we don’t currently need, blocked pipeline building, reduced oil drilling leases, pledged higher Oil company taxes/penalties and refused to cooperate with our Middle Eastern allies that want protection from Iran and their terrorist satellites. Our Government can actually make a diference on inflation and in protecting our allies, but instead we will sit back and wait for the free market to bring supply and demand into balance with higher prices and rationing this year until the Global economy slows down sufficiently.

Diesel is about $6 a gallon with extremely low inventories and it appears gasoline stockpiles are also falling well ahead of the lean summer travel season. Perhaps record high prices at the pump and in the air will accelerate the vacation cancellation wave and reduce demand more than expected. Yet, shortages are likely to persist.

Like all companies that sell commodities, Big Oil tries to maintain a targeted profit margin that causes nominal profits to rise and fall with the underlying commodity.  Oil and gas prices are set by the global marketplace, as are most commodities,. When Oil prices were historically weak in 2016 and 2020, Oil companies lost Billions. As the Government induced overstimulated global market recovered in 2021, pushing Oil prices back to 10-year highs, Big Oil also returned to the high end of their profit range as energy shortages developed.

As Exxon exemplifies, Net Profit Margins for Oil companies are usually in the single digits. After a year of hemorrhaging losses, Exxon is back to their normal 8% profit margin. This is hardly a case of “price gouging”, but if repeated enough in the media, it may sway a few voters.

Profits margins have normalized, revenues are great, but without more pipelines, ports and oil rig workers, it will be a slow build in supply that our government is promising. If our Government wanted to replace the Russian energy stranglehold in Europe and India and defund Putin’s Ukraine war, they would create and emergency plan to incentivise Oil reinfieries to expand rush materials to the front lines and fast track pipelines and shipping ports to elevate production. The vaunted Defense Production Act is being used for Baby Formula. Why not use it for energy production and even employ military personnel to speed up the supply chain?

The Oil industry is still 100,000 workers below pre-pandemic levels. Production per worker is rising with energy Rig efficiencies, but it may take a year or two to reach previous output records, assuming inventories remain tight.

It’s been a great year for energy market investors, especially during the 20 to 30% rout in major indices this year and prices should stay within $30 of current levels. The only good news for the broader stock market is that small and mid-cap companies have already compressed their forward price to earnings ratios to the 11 to 12 range, which is very close to past Recession lows. However, until the new trend of lower earnings revisions stop, stocks can fall still further before the Fed liquidity drain and the growth Recession are fully discounted in the stock market. 


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