How Big Oil Keep Breaking Profit Records

I’m going to keep this very simple.

There recently was a hearing in Washington with Big Oil regarding the high consumer price of gasoline and the increasingly huge profits these companies are making.  You can read about that here, and the absurd argument made by the CEOs  about their continuing need for tax breaks.

That is understandable, the CEOs are under a legal obligation to maximize profits, and free government money is free money, and there’s no way they are going to say they don’t want it or “need” it.

All of that is neither here nor there in this discussion.   I’m going to talk about market psychology and ripping people off.

What I had noticed in my personal life recently is that the trend in consumer gas prices is linked to price of crude oil…but only in one direction.    When you hear about the price of oil going up in the news, gasoline retailers immediately raise prices, justifying this by the increased commodity prices.

Why the commodity price plunges dramatically, as it has the last few weeks, the price at the pump….holds steady.

Not being one to just assume my general observations are correct, I did some light digging and found these two charts…very simple.   Here’s the first one, from AAA’s site that tracks this.

Note where the graphs divergeThat charts seems to indicate exactly what I was thinking.  You can see right around last August, there was a large drop in crude oil prices…and a slight rise in gas prices.   Currently there has been a HUGE drop in oil prices…and the price at the pump holds steady. 

Now, that graph above is lacking in correct units for oil prices, so I looked up a similar chart to make sure of the correlation.

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Now one can see how the AAA graph for oil prices is essentially the same curve as the market chart.   One can also see that large dip in Aug-Sep ’10, and the non-existent corresponding dip in gas prices.   To bring one up to the present, one can easily see the recent plunge in oil prices…and the non-existent corresponding dip in gas prices.

So what does the difference between the two graphs represent?   Record profits.  BTW, that linked article tries to use energy analysts to explain this isn’t really Big Oil’s “fault”…but as you can see from the graphs…that’s total bullshit, they are milking this situation for as much as possible.  

It’s not even nefarious ultimately, this is just how markets function when you have big players setting the price of an inelastic product: they reap huge profits that everyone else pays for.

In 21st Century America, however, this does get more nefarious, a portion of those record profits are funneled back, untracked, to the politicos to make sure they keep on flowing.  And they do.

Even with the Senate’s two independents and both Republican Senators from Maine on board, there was no way it could pass. So, S. 940, the Close Big Oil Tax Loopholes Act, bit the dust late Tuesday, with only 52 votes in favor of a motion that would have allowed the bill to be debated. Three Democrats joined the GOP side.

Yep, only 52 out of 100 votes…which means it fails.    BTW, the three Republicans (now two) on the Debt Commission, all votes against removing these tax breaks, making their other job (who to screw over to pay for them), that much harder.

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