BY KATHERINE LING, Medill News Service
Times of Northwest Indiana
CHICAGO | Consumers fuming about the high cost to fill up their gas tanks or to heat their homes should not blame U.S. oil companies, said John C. Felmy, chief economist at the American Petroleum Institute, the main trade association for the oil and natural gas industries.
Brent spot crude oil was trading at $57.89 per barrel Wednesday, while prices at Midwest gas pumps were averaging $2.21 per gallon.
In a speech at the Union League Club in Chicago, Felmy said most consumers don't understand how those prices are determined. As a result, he said consumers, politicians and the media make erroneous assumptions about skyrocketing prices and end up vilifying oil companies that are racking up huge profits. Felmy said he and the API are on a mission to try and correct such misunderstandings.
Exxon Mobil Corp. posted record 2005 earnings of $36.1 billion, a jump from $22.3 billion in 2004. BP PLC earnings totaled $22.6 billion in 2005, up from $17.3 billion in 2004.
Felmy argued the record oil company earnings did not come from a rising share of profits from sales, but from selling more product.
"The companies were selling record or near record amounts of product," he said, adding rising profits are a result, not a cause of the higher gasoline prices.
Only about 20 percent of adults in the U.S. feel they are "informed" on energy policy, according to a Harris Interactive Poll released in May.
Respondents also said they believed gasoline prices would fall by a median 31 percent if oil company profits were extracted from the price. In actuality, gas prices would only decrease by 8 percent, according to Felmy.
Felmy explained that for every dollar change in the price of crude oil, the price of gas fluctuates by about 2.4 cents. So a $20 drop in the price of a barrel of oil would translate into a drop of 40 cents a gallon in the price of gasoline.
Four major factors determine the cost of gasoline, according to the U.S. Energy Information Administration: the price of crude oil on the global market, federal and state taxes, refining costs and profits, and distribution and retailing.
Of those four factors, only the cost of crude oil jumped in 2005.
Crude oil prices rose 47 to 53 percent on an average U.S. retail gasoline price of $2.27 a gallon. Refining costs and profits held steady at 18 percent.
"What we've seen when looking at actual dollar amounts is, yes, they made more money, but that's the gross amount and not necessarily the rate. The actual rates are about the same," said Laurie Falter, an industry economist at the EIA.
Justin Perucki, an equity analyst for Morningstar Inc., agreed.
"It's actually more profitable for retailers (many of which are owned by the oil companies) if the gas price is low," he said. In that instance, Perucki said retailers do not have to try and undercut competition by cutting into their wholesale-to-retail price mark-up.
Earnings also come from the sheer size of oil companies these days.
"Companies are much larger," Felmy said, pointing to the merger of Exxon with Mobil Corp. and BP with Amoco Corp., leading to dramatic cost cutting due to redundancy, and shaving a bit off the margins with greater efficiency.
Others say there is a direct link between higher prices and bigger profits.
"There's no doubt in my mind that oil companies have benefited from higher prices," said Thomas Mondschean, professor of economics at DePaul University. Oil companies often own oil reserves themselves or contract special lease deals with foreign countries and are able to get crude oil at a different price than if they were just buying oil on the market. Thus they're able to profit from the price differential.
As for whether consumers can expect recent price drops in oil and natural gas to continue, Felmy said a tight supply situation combined with strong demand would suggest no.
"There is not a lot of excess capacity" in the industry, he cautioned. At the same time, demand for energy remains strong from the U.S., China and other developing countries.