Why oil oversupply does not equal low gas prices on clarkhoward.com

Energy expenses are set to be low at least through the summer, thanks to an oversupply of oil, gas and coal. In fact, the amount of oil sitting in reserve is at the highest level it has been in 18 years.

Recently, Clark told you that many pundits are predicting the price of gas will be somewhere between $2.25 and $2.50 per gallon over the summer. One government prediction puts it at exactly $2.23/gallon.

Say goodbye to the bad memory of last summer's historic high of $4.11/gallon!

At wholesale, a gallon of gas is going for around $1.40 right now. (Editor's note: Price accurate as of April 16, 2009). But with oil, there are so many markups along the way from the ground to the pump.

The "crack spread" refers to a markup that refineries put on their finished product, and right now refiners are really milking the markups. That explains why even the massive oversupply of crude does not equate to automatically low prices at the pump.

In the long run, the low cost of oil will be a temporary thing. Today's lower price of crude and waning demand because of the worldwide recession mean that there's no new exploration, no new wells being drilled and no new refineries opening up.

Eventually, that will all add up to a reduced supply and it will drive prices up again when the economy recovers.

What others are saying

Where is the money?
Bottom line...gov't makes more on every dollar of fuel sold then the companies. You can look at the accounting any way you like boys..but take a look at the numbers. Why do most people constantly put down "big oil" but rarely get upset by the gov't and their excessive taxing???

By the way I would never invest in any of these companies...they are mediocre investments at best long term. They take too much capital and money to run. I will stick with companies that actually make a healthy Return on Equity year over year.

Finally do you really think 2.50 per gallon of gas is that unfair? Really??? If you do the math gas has risen roughly 3.5% annually since 1950. Is that too high? I think not.
By Adam @ 04/28/09 09:58:54 PMreport abuse
yeah
you tell them Mark R. they haven't built a new refinery in decades, they just found the biggest oil field in us territory in the gulf of mexico, but they will wait years to invest in getting it because equipment cost is high...Adam, lets look at it in Billions or Trillions of dollars profit...thats what it is...just because they pay their shareholders (you?) and employees doesnt mean they aren't raping the consumer and driving down the economy--- (hell even opec was confused last year as to why oil was overvalued so much) Greedy big oil is why, with a little help from speculators, and the constant fearmongering of shortages (hurricanes, terrorist, political unrest, china might use more, colder winter than usual, any potential excuse to drive spec prices higher)Meanwhile farmers like toehead might have to scrap the motors in their trucks and hitch a team to pull them around...food costs, and any goods that require trucking go up or shrink the sizes of their product while charging the same, airlines hit us with extra fees that still remain even though gas and oil have returned to reasonable prices...personally i think it was the Bush's last hurrah for their oil buddies, now they can retire in Dubuai.
By Dave @ 04/28/09 05:54:40 PMreport abuse
Profits at the Majors (Awl Co's)
What's missing from this debate is our old friend, Accounting. The industry measures it's profits based on invested capital, not earnings. By that yardstick, Exxon-Mobil (the most integrated of the majors) was making almost 50% profit last year. Remember, some of these companies have under-invested to the point that some of their plant and equipment is 50 years old (!) What's more, refiners and producers have been allowed to close refineries as a result of mergers - which tightens supply even more. Now the refiners (like Valero) were hurt last year because they don't own any reserves. Today, the situation is opposite with the refiners making good markups and the majors making less, but still enormous profit. Bottom line - the industry has us by the short hairs and has too many friends on the hill. Alternative energy can help, but they're into that too...
By Mark R. @ 04/28/09 01:41:36 PMreport abuse
We never learn
We have been riding this roller coaster forever. I don't think we will ever learn. But, here's the "trap" I'm in: I'm a farmer/cattlemen. I've got to have a full sized pickup with power to do my work, carrying heavy loads ect. What alternative do I have? I bought a A.T.V. that gets 30 mpg just to do some light jobs, and running around, but that's only about 10% of my miles. My pickup gets 15 mpg. I'm trapped! Last summer I had to pay $4.00+ for gas! So how will I ever get off the roller coaster?
By Toehead @ 04/28/09 11:39:43 AMreport abuse
Gov't makes the most Profit
Windfall taxes? Most profits ever?? Lets look at the real numbers and take emotion out of the equation.

Look at the net profit for gas companies as a percentage of revenue. They are only operating 10% or so net profits. This is MUCH less than the average S and P 500 corp.

If you want to look at whose making the most money look at the gov't. On average they make 35-55 cents per gallon of gas. At 2 bucks a gallon that's approx 20% profit with no risk!!!!

So to recap...the oil companies take all of the risk, employ millions of people, and make 10% net profit.

Gov't on the other hand sticks there hand out with no risk and no skin in the game and makes double the profit..?

Hmmm...
By Adam @ 04/28/09 11:28:41 AMreport abuse
gas prices
Its because big oil companies want to continue to make the MOST PROFITS BY ANY COMPANIES EVER. When oil prices were sky high they made it there while claiming a loss or slim profit from the refinery and gas side. Now that oil prices are down, americans are still using less gas, they reduce refinery production to keep gas supply in line with demand and generate big profits from the refinery and gas side of their business.
I can't wait for a decent electric car so I can tell the Arabs and the big American oil companies I am through getting raped at the pumps.
By Dave @ 04/28/09 10:43:59 AMreport abuse
Gas Prices
A windfall profits tax would take the wind out of their sales fast.
By OJ @ 04/28/09 06:12:08 AMreport abuse

Where is the money?

Bottom line...gov't makes more on every dollar of fuel sold then the companies. You can look at the accounting any way you like boys..but take a look at the numbers. Why do most people constantly put down "big oil" but rarely get upset by the gov't and their excessive taxing???

By the way I would never invest in any of these companies...they are mediocre investments at best long term. They take too much capital and money to run. I will stick with companies that actually make a healthy Return on Equity year over year.

Finally do you really think 2.50 per gallon of gas is that unfair? Really??? If you do the math gas has risen roughly 3.5% annually since 1950. Is that too high? I think not.

By Adam @ 04/28/09 09:58:54 PMreport abuse

yeah

you tell them Mark R. they haven't built a new refinery in decades, they just found the biggest oil field in us territory in the gulf of mexico, but they will wait years to invest in getting it because equipment cost is high...Adam, lets look at it in Billions or Trillions of dollars profit...thats what it is...just because they pay their shareholders (you?) and employees doesnt mean they aren't raping the consumer and driving down the economy--- (hell even opec was confused last year as to why oil was overvalued so much) Greedy big oil is why, with a little help from speculators, and the constant fearmongering of shortages (hurricanes, terrorist, political unrest, china might use more, colder winter than usual, any potential excuse to drive spec prices higher)Meanwhile farmers like toehead might have to scrap the motors in their trucks and hitch a team to pull them around...food costs, and any goods that require trucking go up or shrink the sizes of their product while charging the same, airlines hit us with extra fees that still remain even though gas and oil have returned to reasonable prices...personally i think it was the Bush's last hurrah for their oil buddies, now they can retire in Dubuai.

By Dave @ 04/28/09 05:54:40 PMreport abuse

Profits at the Majors (Awl Co's)

What's missing from this debate is our old friend, Accounting. The industry measures it's profits based on invested capital, not earnings. By that yardstick, Exxon-Mobil (the most integrated of the majors) was making almost 50% profit last year. Remember, some of these companies have under-invested to the point that some of their plant and equipment is 50 years old (!) What's more, refiners and producers have been allowed to close refineries as a result of mergers - which tightens supply even more. Now the refiners (like Valero) were hurt last year because they don't own any reserves. Today, the situation is opposite with the refiners making good markups and the majors making less, but still enormous profit. Bottom line - the industry has us by the short hairs and has too many friends on the hill. Alternative energy can help, but they're into that too...

By Mark R. @ 04/28/09 01:41:36 PMreport abuse

We never learn

We have been riding this roller coaster forever. I don't think we will ever learn. But, here's the "trap" I'm in: I'm a farmer/cattlemen. I've got to have a full sized pickup with power to do my work, carrying heavy loads ect. What alternative do I have? I bought a A.T.V. that gets 30 mpg just to do some light jobs, and running around, but that's only about 10% of my miles. My pickup gets 15 mpg. I'm trapped! Last summer I had to pay $4.00+ for gas! So how will I ever get off the roller coaster?

By Toehead @ 04/28/09 11:39:43 AMreport abuse

Gov't makes the most Profit

Windfall taxes? Most profits ever?? Lets look at the real numbers and take emotion out of the equation.

Look at the net profit for gas companies as a percentage of revenue. They are only operating 10% or so net profits. This is MUCH less than the average S and P 500 corp.

If you want to look at whose making the most money look at the gov't. On average they make 35-55 cents per gallon of gas. At 2 bucks a gallon that's approx 20% profit with no risk!!!!

So to recap...the oil companies take all of the risk, employ millions of people, and make 10% net profit.

Gov't on the other hand sticks there hand out with no risk and no skin in the game and makes double the profit..?

Hmmm...

By Adam @ 04/28/09 11:28:41 AMreport abuse

gas prices

Its because big oil companies want to continue to make the MOST PROFITS BY ANY COMPANIES EVER. When oil prices were sky high they made it there while claiming a loss or slim profit from the refinery and gas side. Now that oil prices are down, americans are still using less gas, they reduce refinery production to keep gas supply in line with demand and generate big profits from the refinery and gas side of their business.
I can't wait for a decent electric car so I can tell the Arabs and the big American oil companies I am through getting raped at the pumps.

By Dave @ 04/28/09 10:43:59 AMreport abuse

Gas Prices

A windfall profits tax would take the wind out of their sales fast.

By OJ @ 04/28/09 06:12:08 AMreport abuse

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Apr 27, 2009 -- Why oil oversupply does not equal low gas prices

What others are saying