Stubborn, persistent, historically high inflation continues to make a splash as we approach another, otherwise relaxing weekend.
Earlier this week, Pam and Russ Martens at Wall Street on Parade featured Schlafer’s Auto Body & Repair in Mendocino, California, which was making headlines in quite the inauspicious way.
Schlafer’s, you see, is home to an independent Chevron gas station and as of last weekend, it was charging what the Martens say is the highest regular gas price in the country – at $9.60 a gallon.
That’s 50% higher than the average price for regular in all of California ($6.37), according to the American Automobile Association’s gas tracker, and essentially twice the national average ($4.91).
Now, the Martens point out that California is far from the only state where complaints of outrageous price gouging are being heard.
The Daily Record of Maryland reports that a Shell station in Bowie, MD, was charging $6.13 for a gallon of regular gas, at the same time an Exxon station “less than a block away,” was charging over a dollar less.
The lion’s share of gas stations in the U.S. are independently owned and operated – not by a major oil company.
By Dave Allen for Discount Gold & Silver
Stubborn, persistent, historically high inflation continues to make a splash as we approach another, otherwise relaxing weekend.
Earlier this week, Pam and Russ Martens at Wall Street on Parade featured Schlafer’s Auto Body & Repair in Mendocino, California, which was making headlines in quite the inauspicious way.
Schlafer’s, you see, is home to an independent Chevron gas station and as of last weekend, it was charging what the Martens say is the highest regular gas price in the country – at $9.60 a gallon.
That’s 50% higher than the average price for regular in all of California ($6.37), according to the American Automobile Association’s gas tracker, and essentially twice the national average ($4.91).
Now, the Martens point out that California is far from the only state where complaints of outrageous price gouging are being heard.
The Daily Record of Maryland reports that a Shell station in Bowie, MD, was charging $6.13 for a gallon of regular gas, at the same time an Exxon station “less than a block away,” was charging over a dollar less.
The lion’s share of gas stations in the U.S. are independently owned and operated – not by a major oil company.
Oil and Gas Prices Out of Control
The Martens say that current prices at the pump, which are approaching historic price levels, is unusual because the cost of crude makes up less than two-thirds of the cost of a gallon of gas.
That’s according to figures from the usually reliable Energy Information Administration (EIA).
And U.S. domestic crude oil, known as West Texas Intermediate (WTI), is not at historic levels (at least not yet).
WTI soared to over $145 a barrel at its peak in July 2008 – in the midst of the Great Recession – and hasn’t traded near that level since then.
Thus far this year, WTI hit its highest intraday price of $130.50 on March 7th – about 12% below the 2008 mark (but it’s still trending upward since its 2022 low of $92.93 on April 11th).
So, the Martens ask why are gasoline prices at the pump at historic levels?
Part of that is good ole price gouging. As the chart above shows, the trend line of gas pump prices has been consistently below WTI prices, including during the Great Recession.
Until, that is, late February of this year.
From January 2008 through June 6, 2022, the price of regular gas has averaged 4.3% of the corresponding price of WTI.
(The weekly gas figures shown above and referred to throughout this article reflect a 3-day lag from the weekly crude oil prices.)
More notably, during WTI’s Great Recession peak prices (i.e., from the end of May through the end of July 2008) – when domestic crude oil averaged $134/barrel, gas pump prices averaged $4.06/gallon.
Put another way, the price of gas at the pump averaged 3.03% of the price of crude during that two-month period.
However, starting in late February 2022, the trend line of gas pump prices started to exceed the comparable line for WTI, to boot:
From February 25, 2022, through June 6, 2022, WTI has averaged $106/barrel, while the price at the pump has averaged $4.27/gallon.
In other words, gas at the pump has been 4.02% of WTI during this period – 33% higher than during the 2008 peak period.
Big Oil Riding the Wave
Brittany Cronin writes that it's a good time to be an oil company – and even better to be an oil investor.
Over the past couple of weeks, Big Oil companies have reported a skyrocketing profits for the first quarter of 2022.
In fact, their earnings would have been even more massive had they not booked charges from exiting Russia after Putin February invasion.
ExxonMobil, the largest oil company in the U.S., reported that its net profit more than doubled to $5.5 billion from the previous year – even after booking a $3.4 billion charge from Russia behind.
Meanwhile, Chevron reported its highest quarterly profit in almost a decade, while Shell posted its highest earnings ever.
The surge in profits comes despite the writedowns tied to Russia, and they speak to how good the quarter was for Big Oil.
Doug Leggate at too big to fail Bank of America observed, "The bottom line is that the industry is generating the highest free cash flow certainly in the 25 years that I've looked at this business."
The oil and gas industry, however, responds that it wasn't always this good.
It’s true that oil companies suffered in the early months of the pandemic, when crude prices turned negative – meaning that traders were actually paying buyers to get oil off their hands.
So, it’s not exactly an apples-to-apples comparison to look at Big Oil profits then and now.
The 2008 financial crisis and Great Recession induced a bear market in oil and gas, sending the price of a barrel of crude oil from about $134 to $39 in less than a year.
The recession led to a general drop in asset prices around the world as credit contracted and earnings projections fell.
At the same time, rising unemployment and lower spending led to less demand for oil by both consumers and businesses.
Kind of the opposite from what we’re seeing today. But clearly, something appears to be amiss – at American households’ collective expense.
A 2008 vs. 2022 profit analysis would certainly be instructive to policymakers and the general public to see just how much we’re getting the screws from Big Oil and their minions in Washington.
Alas, the Martens argue, “the big picture is more complicated than that.”
Other Factors at Play, Too
According to the EIA, in addition to the 61% of the price of a gallon of gas that comes from the cost of crude oil, the other 39% comprises the following:
The costs of refinement (14%)
Taxes (14%)
Distribution and marketing (11%)
And refining looks to be a particularly troublesome issue at the moment, amid some voices in Congress and in towns across the country saying we should look into fixes like a windfall profits tax on the gougers.
But consider this: EIA numbers show that in January 2008, the U.S. had 146 refineries in operation compared to just 124 as of January 2021 (we had over 250 in 1982).
That 15% decrease since the days of the Great Recession is the result of several factors, such as company consolidations, bankruptcies, the impact of hurricanes and other major storms and the like.
The point is that as domestic oil production has ramped up over the past few decades, the number of operating refineries used to convert crude to gas and other products has fallen – adding to today’s supply/demand dilemma.
At an April hearing before the House Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations, the President of Shell USA, Gretchen Watkins, testified about pressures on refiners:
(I’m no fan of Shell – or other Big Oil companies for that matter – but Watkins’ comments are instructive.)
“To be clear, the mismatch of oil supply and demand predates the crisis in Ukraine.
“The onset of the Covid-19 pandemic initially caused unprecedented global economic contraction, including a historic drop in demand for transportation fuels.
“The most dramatic example of that came in spring 2020 when the crude oil market collapsed and the benchmark price for U.S. [WTI] went into negative pricing for the first time in history.
“Th[at] drop in demand resulted in a surplus of supplies of transportation fuels such as gasoline, diesel, and jet fuel, requiring refineries to reduce production rates or shut down.
“In some instances, those shutdowns became permanent (emphasis added).
“Today, demand has recovered and is now surpassing pre-pandemic levels for many transportation fuels.
“But refinery throughput has not yet caught up with the post-pandemic surge in demand (emphasis added).
“The loss of Russian supply from the global market has only added pressure on an already strained refining industry that has yet to fully catch up with increasing demand…
“Although the overall consumption of Russian crude oil in the United States is relatively small, the loss of Russian feedstocks and gasoline blending components will have effects in the United States.
“The challenge is that feedstocks are needed to supplement some grades of crude oil and are part of refinery secondary units along the U.S. Gulf Coast, where they are upgraded to gasoline and diesel…
“Refinery production of gasoline and diesel will reduce with the loss of Russian feedstocks and become more economically challenging as refiners compete for a limited pool of alternatives.”
We know that the federal government has taken steps to ease the effects of low oil supply and high prices, including:
All Americans have their work cut out for us in the months and years ahead as we deal with high inflation – and the extent that Big Oil and other companies take further advantage of us.