The Enigma of the Oil Price

Back in June and July when the price of oil was rising, I was rather perplexed and puzzled about what was driving this increase. The actual increase in global demand was only rising by one percent per year. Also there is an slight over supply of about three to five percent. That means that there is slightly more production than demand. Therefore, that was not the cause of the increase.

Also it was stated that there was an increased demand for diesel. Now while this could be a factor, this also made me puzzled as from each barrel of oil you will get a fraction used for Jet Fuel, a fraction that is used for heating oil, your petrol and your diesel and some for plastics. Therefore, if there is an increase in the demand for diesel, about 27 percent of a barrel, then the petrol fraction, about forty seven percent of the barrel should fall in price. But the price of petrol went up and up.

Then there was the speculators. Here there was an aspect that was driving the price up and one hedge fund alone lost one and half billion dollars when the price fell. And as Lehman brothers lost twenty billion dollars on oil futures trading, then this obviously was part of what pushed the cost of oil to such levels.

However, the story doesn't end there as while the price of oil has fallen because of the collapse of the global economy, speculation alone is a to simplistic and convenient explanation. To really understand what was happening we have to look at the way the oil companies are structured.

The oil companies have long argued that they need large profits to finance the capital expenditure required for the exploration of new oil. And this is true as it is expensive to drill for oil. Further as all the easy to reach oil has already been tapped then it is in places like off shore fields where any new sources need to be accessed.

Once oil has been found though the cost of extraction is only about fifteen dollars per barrel. While there are taxes and duties to be paid even at fifty or sixty dollars per barrel that's quite a good gross profit margin. Thirty five to forty five Dollars on each barrel. When you consider that in the US alone two hundred and twenty four thousand barrels are used each day it is no wonder that the oil companies make multi billion dollar profits each year.

That's just the production side of their businesses, they also own the refineries and the petrol stations. This really is the business to be in. However, this is where the poor oil companies suffer, as at seventy dollars a barrel, refining actually costs them money. It costs the poor oil companies a twenty dollar loss to produce the fraction that is heating oil and a two dollar loss producing the fraction that is petrol. The only profitable fractions are Diesel and Jet Fuel. The fraction that goes into plastics is just a waste product and that is why plastic bags are so expensive at the supermarket, yes those ones that are free.

The retail side is even worse, as the retail margin is only two percent, and most filling stations loose money selling petrol. In fact there is more profit selling sandwiches than there is in selling fuel. Now if only we could power cars on sandwiches we could solve global warming and save the oil companies from poverty.

Now you may have noticed a mildly cynical tone there as it is the way the oil companies have structured their businesses that means they make these losses. Losses that reduce their tax liability. Well its only fair as they do provide such a great service to the public selling us cheap fuel, fuel that because of the way they do their accounting, they are selling at a loss.

Well all this is true and it has taken months to calculate all this from the financial reports of the oil companies. All the figures I was able to verify from other sources too. However, it was via the dense details in the annual reports of the oil companies that the real reason for the hike in the oil price occurred. It is because the oil companies have been deliberately manipulating the market. That way they could change US public opposition to drilling for oil in the Alaska Arctic Refuge, and reverse state bans on offshore drilling. All by manipulating the price of oil. By stating their intention in their annual reports they avoided breaking the laws regarding price fixing.

So while the speculators jumped on that band wagon it was the oil companies that were the real culprits. What's more they nearly got what they wanted too. Had there not been the banking collapse where McCain looked panicked and lost, it was likely that he could have won the US presidential election.

However hindsight is such a wonderful thing as while the global economy was already weak and would have collapsed anyway, it looks as though it was the price of oil that cost us all. Had it not been the oil price that broke the economy then it would have been something else, but it shows the arrogance of these multi national companies that they would even do this. The price we all now pay is the economic one.

On the bright side, the increase in oil was the equivalent to a six hundred dollar carbon tax. The one thing that the oil companies have done that is a real benefit is that a carbon tax under the cap and trade system that is proposed in the US and we already have in Europe will not harm most people. As the price hikes were twelve times higher than anything the cap and trade system will bring.