Doug Seven's Blog: I'm No Economist....

I'm a software developer turned software marketer. I am not an economist, nor have I ever taken an economics class. I am an average American citizen living in the suburbs. I have a wife, a child, two dogs, an SUV and a sedan. While I try to do my part to "live green," I love internal combustion, so both my vehicles have 6-cylinder engines. My wife and I car pool as well as work from home to reduce our gasoline consumption and carbon footprint.

I have been out of town for 3-weeks, and today, being back in town, I filled up the SUV with gas. Somehow, while I was away, regular gas in my neighborhood jumped to $4.41 USD per gallon. Pardon my French, but Holy Crap!

For a long time I have shared my disdain with the oil/gas industry (along with the hotel and airline industries) with anyone who wanted to listen. I hope you are willing to listen.

The Pick Pocket of Our Collective Wallet

After spending $4.41/gallon, I decided to do a little research ^[1].

Just 5-years ago:
- The average price of gas in the USA was $1.43.
- The average price of a barrel of crude oil was $24.00
Just 1-year ago:
- The average price of gas in the USA was $3.00 (more than double the price in 2003)
- The average price of a barrel of crude oil was $67.00 (nearly triple the price in 2003)
Today:
- The average price of gas in the USA is $4.16 (more than a 30% increase in 1-year)
- The average price of a barrel of crude oil was $138.43 (more than a 100% increase in 1-year)

What Does It Cost to Make Gasoline?

A barrel of crude oil is 42-gallons. When refined, this barrel produces approximately 19.5 gallons of gasoline (depending on source, mix, blend, etc.) as well as other usable byproducts. As near as I can tell, an average of 30% of the barrel is used to make gasoline, leaving the remaining 70% for producing other types of products (heating oil, etc.).

Simple math tells me that a barrel of crude oil that costs $24.00 produces 19.5 gallons of gasoline at a raw product cost of $.037. Selling that gallon of gasoline for $1.43 creates a gross profit of $1.06 - nearly 300% (of course I haven't accounted for refinery costs, transportation and storage costs, and taxes, fees, etc.).

Using the same math, a barrel of crude oil that costs $67.00 produces 19.5 gallons of gasoline at a raw product cost of $1.03. Selling that gallon of gasoline for $3.00 creates a gross profit of $1.97 - a profit of about 200%.

A barrel of crude oil that costs $138.00 produces 19.5 gallons of gasoline at a raw product cost of $2.13. Selling that gallon of gasoline for $4.16 creates a gross profit of $2.03 - a profit of about 100%.

Again, I haven't accounted for refinery costs, transportation and storage costs, and taxes, fees, etc.

Awww, Those Poor Oil Magnates

Given this, should we feel bad for the gasoline companies, after all, layman math tells us that they are cutting into their profits as much as 200% from 5-years ago? Probably not.

According to ExxonMobil, their 2007 year end oil and gas resource base stands at 72 billion oil equivalent barrels - enough to sustain current production rates for 14-years. ^[2]

What does that tell me? I am buying gas at today's prices made from oil secured at previous years' (or perhaps decade's) lower cost; I paid $4.41/gallon for gas that was produced, likely, from crude oil that cost $20-$30 per barrel not the $138.43 per barrel cost of today.

This may explain the continued growth of ExxonMobil's profit. They are the largest company in the world by revenue standards, at around $400,000,000,000 - yes, that's 11 zero's...400 Billion ^[3]. ExxonMobil's profit over the past 5-years has risen slightly (by percentage) from around 9% in 2003 to 10.4% in 2007. The difference of the 1.4% increase in profit equates to around $5 Billion dollars profit.

The Continued Raping of America

It is amazing to me that a company (and an industry) can steadily increase the cost of its goods and even more so its profits while creating a potential recession in the USA economy (not to mention the global economy). I appreciate capitalism as much as anyone, but I also deeply appreciate community. As members of a community we need to ensure that we are not gaining additional profits at the cost of the overall community. I am not saying that ExxonMobil and others should suddenly become non-profits, or loose money for the good of the community, but I am suggesting that perhaps they should not continue to increase their profits at the cost of the community.

The increase in the consumer price of gasoline of nearly 300% in 5-years is driving up the cost of nearly everything. After filling up with gas today, I went to the grocery store and spent nearly $400 on what would have cost me around $200 a few years ago. Every night on the local news there are "human interest" stories about people who are struggling to pay for gas so that they can get to school or work. I know of people who have had to sell their house and move to less desirable neighborhoods simply to reduce their distance to work because they couldn't afford the commute.

Our country is led, for now, by people with (what seems to me to be at least a bit of) a conflict of interest. The Bush family has a long history in the business of energy and oil. Dick Cheney was, of course, CEO of Halliburton, an energy services company operating largely in oil and gas exploration and production, where he amassed most of his net worth(said to be between $30 and $100 million). When these two entered their current positions, gasoline prices were around $1.30/gallon. As they prepare to leave office, gasoline prices are over $4.00/gallon and show no sign of a plateau.

Where Am I Going?

I am fortunate. I can afford to weather the storm through our current gas prices (at least to some degree). I car pool. I can work from home if I'd like. I don't go on a lot of road trips. While I love my car, I don't need to drive it frequently (I bought it in late 2005 and it has only 24,000 miles on it - about 24 miles a day since I bought the car, or about 8,700 miles per year). Many others I know are not as fortunate. So where am I going with all this?

Perhaps I am going no where. Perhaps I just needed to vent. Perhaps, since I am not an economist, my math is all wrong, and the oil and gas companies are completely justified in raising gasoline prices more than 100% in the past year, and almost 300% in the past 5-years. Perhaps I owe them an apology for this post.

Perhaps a $400 Million retirement package for Lee Raymond, the former CEO of ExxonMobil, is totally acceptable, while others forego their little luxuries in order to pay for gas. Perhaps there is nothing wrong with ExxonMobil handing out $214 Million in bonuses ^[4] while the middle and lower classes struggle to pay for gas to get to school and work, and struggle to pay for the increasing cost of other every day goods. Perhaps it is completely normal that, as we potentially head into a recession in the USA, ExxonMobil reports a 17% increase in year-over-year first quarter profits. Perhaps $11 Billion in profit in the first quarter alone isn't enough for ExxonMobil ^[5]. That's about $36 per person for every man woman and child in the USA, or about $157 per running vehicle in the USA. That is the equivalent of over 100 gallons of gas per running vehicle based on 2003 prices. And that's just the first quarter profits.

[1] http://www.gasbuddy.com/gb_retail_price_chart.aspx?time=60

[2] http://findarticles.com/p/articles/mi_m0EIN/is_2008_Feb_15/ai_n24264728

[3] http://www.sec.gov/Archives/edgar/data/34088/000119312508041781/d10k.htm#tx91974_07

[4] http://www.advfn.com/nyse/StockNews.asp?stocknews=XOM&article=23609512&headline=exxon-mobil-gives-ceo-3-36m-cash-bonus

[5] http://triangle.bizjournals.com/triangle/othercities/dallas/stories/2008/04/28/daily44.html