When I first began this investigation, I like many other people believed that we were using oil faster than it could be drilled and that was causing the price to increase with supply and demand. As one reader commented on Chapter 1: "The demand for oil worldwide is only going to increase beyond whatever can be found, drilled and delivered in a timely fashion." However what I am seeing now is that that information might be fabricated to throw us off and keep us from seeing that "they" are actually manipulating the price of oil by getting laws passed that create new loopholes to cover their tracks so they can legally do such things as "legal" insider trading, manipulating supplies and price fixing. One could say they learned from Enron and have figured out what to do and not to do to make it "legal."
What I am also beginning to see is a certain name that seems to keep popping up that's tied to all aspects of this multi faceted stratagem and many other events that are changing the way we live. More on that later. It may not only be Bush and Cheney, as I originally suspected and although they are in up to their necks, they might only be PR manipulators, here to keep it all "legal" by creating the loopholes in laws and keeping people distracted.
Part 1 / Chapter 2.
Continued from Part1 / Chapter 1
"Gasoline Prices, Oil Company Profits, and the American Consumer"
Permission to re-print by :
Tyson Slocum, Director
Public Citizen’s Energy Program
Although federal investigators found ample evidence of oil companies intentionally withholding supplies from the market in the summer of 2000, the government has not taken any action to prevent recurrence. S.2557, introduced by Senator Arlen Specter (R Penn.), and its House companion HR 5279 introduced by Representative John Conyers, would amend the Clayton Act to make it unlawful oil companies to engage in unilateral withholding. But neither of these bills received a hearing in the 109th Congress. A congressional investigation uncovered internal memos written by major oil companies operating in the U.S. discussing their successful strategies to maximize profits by forcing independent refineries out of business, resulting in tighter refinery capacity. From 1995-2005, 97 percent of the nearly 929,000 barrels of oil per day of capacity that has been shut down were owned by smaller, independent refiners. Were this capacity to be in operation today, refiners could use it to better meet today's reformulated gasoline blend needs.
Taxing Oil Company Profits
Apologists for record oil company profits argue that the companies need and deserve record windfalls to provide the necessary market incentive to invest more money into increased energy production.
Public Citizen's analysis of oil company profits and their investments show that they are spending unprecedented sums on benefits for their shareholders in the form of stock buybacks and dividend payments and not adequately investing in sustainable energy that is necessary to end America's addiction to oil. Since January 2005, the top five oil companies have spent $172 billion buying back stock and paying out dividends. In addition, they held $56 billion in cash. This not only represents a huge transfer of wealth from consumers to oil company investors, but shows that oil companies are squandering opportunities to use their record profits to make investments that will end America's addiction to oil.
With nearly $1 trillion of combined assets tied up in extracting, refining and marketing petroleum and natural gas, the big five oil companies' entire business model is designed to squeeze every last cent of profit out of their monopoly control over fossil fuels. They simply will not make significant investments in anything else until their monopoly control over oil is spent.
And this monopoly control translates into unprecedented profits. When communicating to the general public and lawmakers, oil companies downplay these record earnings by calculating profits differently than they do when they speak to Wall Street and shareholders. Conversing with lawmakers and the general public, the oil industry highlights the small profit margins (typically around 8 to 10 percent) that measuring net income as a share of total revenues produces.
But that's not the calculation ExxonMobil and other energy companies use when talking to investors and Wall Street. For example, here's an excerpt from the company's 2005 annual report: "ExxonMobil believes that return on average capital employed (ROCE) is the most relevant metric for measuring financial performance in a capital-intensive business such as" petroleum.
ExxonMobil's 2006 earning report shows that that the company's global operations enjoyed a 32 percent rate of return on average capital employed. And the company's rate of profit in the U.S. was even higher: domestic drilling provided a 37 percent rate of return on average capital employed, while domestic refining returned 66 percent. ChevronTexaco has posted record returns as well, reporting a 23 percent rate of return on average capital employed in 2006 the median return on capital employed for Chevron over the last 18 years was only 8.6 percent.
Billions for Investors But Not for Sustainable Energy
Profit Since 2005, Amount Spent on Stock Buybacks & Dividends Since 2005, Cash on Hand as of April 2007
(Remember, These numbers reflect profits a year ago when oil was $60 a barrel, not $120 as they are today.)
It isn't just oil producing nations like Saudi Arabia that get rich when the price of a barrel of oil exceeds $60, major oil producing corporations get rich, too. On average, it costs an oil company like ExxonMobil about $20 to extract a barrel of oil from the ground, while they sell that barrel to American consumers at the market price of $60/barrel. Indeed, a Merrill Lynch analyst estimated that "ConocoPhillip's overall finding and developing' costs last year were $18 a barrel, including barrels obtained through acquisitions."
With oil companies failing to take action to protect America's middle- and low-income families from the high energy prices that fuel their profits, oil industry subsidies should be repealed with the proceeds invested in renewables, alternative fuels, energy efficiency and mass transit. Indeed, HR 6, which passed the House on January 18, 2007 repeals $14 billion in oil company subsidies over the next decade and dedicates the money to a new "Strategic Energy Efficiency and Renewables Reserve." A windfall profits tax could be modeled on HR 2070, introduced in the 109th Congress.
Naysayers argue that increasing taxes on oil companies or enacting a Windfall Profits Tax didn't work the last time it was tried. The Windfall Profits Tax of 1980-88 was ineffective not because of the tax itself, but because oil prices fell shortly after enactment of the tax due to global events unrelated to U.S. tax policy. Congress enacted the Windfall Profits Tax in 1980 after U.S. oil company profits surged following the Iranian Revolution and the resulting Iran-Iraq war, which caused oil prices to increase from $14/barrel in 1979 to $35/barrel by January 1981. But after 1981, crude oil prices steadily decreased until completely bottoming out in 1986-87 as demand slackened and as other oil producing countries increased their output. As the value of the commodity subject to tax fell, the effectiveness of the tax was diminished.
But that was then. The Wall Street Journal recently concluded that "a crash looks unlikely now, both because supplies remain tight and because of the large volumes of money that investors are pouring into oil markets."
In addition to a Windfall Profits Tax, Congress needs to reform the royalty system imposed on companies drilling for oil and natural gas on public land. One-third of the oil and natural gas produced in the United States comes from land owned by the taxpayers, but royalty payments by oil companies have not been keeping up with the explosion in energy prices and profits enjoyed by the industry. A recent Inspector General audit of the U.S. Department of the Interior's Minerals Management Service concludes that oil companies are pumping oil from federal land without paying adequate royalties to taxpayers for the privilege. The report cites widespread cronyism, ethical breaches, decimated auditing staff and over reliance on information provided by Big Oil as culprit in the oil industry giveaway. Meanwhile the Justice Department unexpected announced the welcome news that it has initiated criminal investigations into the Interior Department's oversight of oil companies. Taxpayers must be fairly compensated for allowing oil companies the privilege of extracting resources from federally-owned land. Public Citizen also recommends repealing all federal subsidies currently enjoyed by the oil industry and transferring those expenditures to renewable energy, energy efficiency and mass transit. Public Citizen estimates that the oil industry receives 65 percent of all federal government energy tax breaks and government spending programs, estimated at as much as $8 billion annually, including:
FTC Not Adequately Protecting Consumers
The Federal Trade Commission has contributed to the problem by allowing too many mergers and taking a stance too permissive to anti-competitive practices, as evidenced by the conclusions in its most recent investigation, for example, finding evidence of price gouging by oil companies but explaining it away as profit maximization strategies and opposing federal price-gouging statutes. This stands in stark contrast to the May 2004 conclusions reached by a U.S. Government Accountability Office report which found that recent mergers in the oil industry have directly led to higher prices. It is important to note that this GAO report severely underestimates the impact mergers have on prices because their price analysis stops in 2000 before the mergers that created ChevronTexaco-Unocal, ConocoPhillips-Burlington Resources, and Valero- Ultramar/Diamond Shamrock-Premcor.
The FTC consistently allows refining capacity to be controlled by fewer hands, allowing companies to keep most of their refining assets when they merge, as a recent overview of FTC-approved mergers demonstrates. The major condition demanded by the FTC for approval of the August 2002 ConocoPhillips merger was that the company had to sell two of its refineries representing less than four percent of its capacity. Phillips was required only to sell a Utah refinery, and Conoco had to sell a Colorado refinery. But even with this forced sale, ConocoPhillips remains the largest domestic refiner, controlling refineries with capacity of more than 2.2 million barrels of oil per day, or 13 percent of America's entire capacity. And the FTC allowed ConocoPhillips to purchase Premcor's 300,000 barrels/day Illinois refinery in 2004.
As a condition of the 1999 merger creating ExxonMobil, Exxon had to sell some of its gas retail stations in the Northeast U.S. and a single oil refinery in California. Valero Energy, the nation's fifth largest owner of oil refineries, purchased these assets. The inadequacy of the forced divestiture mandated by the FTC was compounded by the fact that the assets were simply transferred to another large oil company, ensuring that the consolidation of the largest companies remained high.
The sale of the Golden Eagle refinery was ordered by the FTC as a condition of Valero's purchase of Ultramar Diamond Shamrock in 2001. Just as with ExxonMobil and ChevronTexaco, Valero sold the refinery, along with 70 retail gas stations, to another large company, Tesoro. But while the FTC forced Valero to sell one of its four California refineries, the agency allowed the company to purchase Orion Refining's only refinery in July 2003, and then approved Valero's purchase of the U.S. oil refinery company Premcor. This acquisition of Orion's Louisiana refinery and Premcor defeats the original intent of the FTC's order for Valero to divest one of its California refineries. In response to the Carlyle/Riverstone 2006 acquisition of Kinder Morgan, the FTC only required that Carlyle/Riverstone's investment in Magellan be changed to passive. The FTC required no firewalls or other restrictions between Goldman Sachs' energy trading affiliate (J. Aron) and the Kinder Morgan affiliate.
Rule of Reason versus Per Se Antitrust Analysis
A recent Supreme Court decision continued an unfortunate trend of relying on the rule of reason rather than a per se analysis of alleged anticompetitive conduct. Per se offenses are those that are, on their face, illegal, with no economic justification. All per se "FTC Challenges Acquisition of Interests in Kinder Morgan, Inc. by The Carlyle Group and Riverstone Holdings," offenses are violations of section 1 of the Sherman Act. As the Supreme Court has argued:
...there are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.
Examples of per se antitrust violations include: horizontal and vertical price fixing, bid rigging, territorial allocation and tying arrangements.
A rule of reason standard, on the other hand, is one where the activity is judged in context and the reasonableness is considered. Therefore, an action that otherwise would be unlawful could be judged to be in compliance with the Sherman Act if the conduct surrounding the unlawful activity is deemed to justify it. (Loopholes)
Clearly then, courts that favor a rule of reason standard over per se condone otherwise uncompetitive actions. Such is the case in Texaco v. Dagher, where the Supreme Court ruled in February 2006 that a joint venture Equilon between two competitors, Shell and Texaco, that resulted in the companies unilaterally setting prices that the venture charged customers. As an amicus brief filed by the American Antitrust Institute explained:
Evidence suggests that Shell and Texaco officials had deliberately refrained from discussing brand pricing prior to the formation of the venture "because of antitrust concerns." Of greatest significance, Respondents offered evidence that Equilon sharply raised the price of its gasoline, at a time when crude oil prices were stable or decliningShell and Texaco were not seeking to create a more efficient competitor in a competitive marketplace, but to profit by lessening competition between the two former rivals."
But because the Court relied on a rule of reason analysis, this anti-competitive practice was deemed to be in compliance with the Sherman Act.
Energy Trading Abuses Require Stronger Oversight
Two regulatory lapses are enabling anti-competitive practices in energy trading markets where prices of energy are set. First, oil companies, investment banks and hedge funds are exploiting recently deregulated energy trading markets to manipulate energy prices. Second, energy traders are speculating on information gleaned from their own company's energy infrastructure affiliates, a type of legal"insider trading." These regulatory loopholes were born of inappropriate contacts between public officials and powerful energy companies and have resulted in more volatile and higher prices for consumers. Contrary to some public opinion, oil prices are not set by the Organization of Petroleum Exporting Countries (OPEC); rather, they are determined by the actions of energy traders in markets. Historically, most crude oil has been purchased through either fixed-term contracts or on the "spot" market. There have been long-standing futures markets for crude oil, led by the New York Mercantile Exchange (NYMEX) and London's International Petroleum Exchange (which was acquired in 2001 by an Atlanta-base unregulated electronic exchange, ICE). NYMEX is a floor exchange regulated by the U.S Commodity Futures Trading Commission (CFTC). The futures market has historically served to hedge risks against price volatility and for price discovery. Only a tiny fraction of futures trades result in the physical delivery of crude oil.
*From the PIA. Testimony of Tyson Slocum, Director Public Citizen's Energy Program before The U.S. House Committee on Energy and Commerce, Subcommittee on oversight and Investigations.
TO BE CONTINUED.
Read Part 1, Chapters 1 through 4 and More Articles by Kipper Mathews below.
The Bush / Cheney Stratagem Part 2 / Chapter 1
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Published: Sunday, May 11, 2008
Last modified: Tuesday, June 10, 2008
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Reader Comments:
Posted By: Lloyd Kempson
Date: 2008-05-11 16:08:32
You do realize that Exxon-Mobil's $10,000,000,000 were from world-wide sells and not from US sales alone right?
Also Taxing oil companies further will only result in a higher gasoline price. No matter what the price of gasoline has been the oil industry's average profit margin has been 8%. That means that for every $1 that they sell in Gas, they make only $0.08. If forced to pay even more royalties to the public, you will be increasing the price of production, which would require an increase in the price to maintain the profit margin.
Alternative energy is availiable, but it is not affordable. Biofuels with the exception of fast food grease take away from food production and cause the price of food to increase. The best source of alternative energy is nuclear power, but it is so regulated and publicly scorned that most power companies don't invest in it.
Subsidizing alternative energy does make it cheaper, but it does not make it affordable. The American public is paying for energy that it may or may not be using.
Involving more government is not going to make anything better. Let us remember that all of the legislation that would have made oil cheaper via US based oil has failed in the House before Bush could sign it. Let us also not forget that India and China are developing and are now demanding more oil. Also, Bush is a believer in sane environmentalism which has lead him to support alternative fuels and energy. The price of petroleum has many factors and the blame can not be set at the feet of a sole scapegoat. Your propaganda has failed to mention this and placed a lot of blame on Corporate Oil and the Bush Administration.