Investment Contrarians

Why Big Oil Is a Big Scam

By for Investment Contrarians |

Big Oil Is a Big ScamGas prices are finally moving lower, but don’t get too comfortable, as the big oil companies are always looking for reasons to drive gas prices back upward. Yet with oil prices in the mid-$80.00 level and holding there for weeks, the oil companies had little choice but to lower the price at the pump. On November 26, the price of regular gasoline averaged $3.43 per gallon across the United States, down 9.7% from the $3.80 average on October 1, according to the U.S. Energy Information Administration (EIA).

The lower gas prices come at a convenient time for consumers, with the expected rise in driving during the holiday shopping season. Money saved on gas means more to spend at the malls.

Yet while I’m encouraged by the decline in the price of gasoline, I still feel prices are above what they should be. Again, blame the oil companies and speculators.

In July 2008, gasoline was priced at $4.11 per gallon. At that time, West Texas Intermediate (WTI) oil prices peaked at $145.00 a barrel, so the high gasoline prices at that time made sense. During the recession, WTI oil prices fell to $30.28 a barrel and rallied from there with the economic recovery. WTI oil was priced at $88.07 a barrel on Friday. (Source: U.S. Energy Information Administration, last accessed November 30, 2012.)

Looking at these numbers, something is wrong here. Let’s just make a simple comparison. In July 2008, oil traded at 35.28 times the price of gasoline. That number stood at 25.68 on Friday. Now, if you use the 35.28 figure with the current oil prices, the price of gas should be around $2.50 a gallon. The analysis is too simplistic, but there is clearly a mispricing happening here.

In my view, there is absolutely little connection between oil prices and gasoline. Perhaps the oil companies aren’t greedy, and it’s just a bad reputation?

The reality is that government taxes account for 11% of the cost, with another13% for distribution and marketing, 12% for refining, and 64% for the cost of the crude oil. (Source: U.S. Energy Information Administration, last accessed November 30, 2012.) In other words, the oil companies are lining their coffers at the expense of the consumer.

As an alternative to the rising gasoline prices, you can push your government representative to increase the focus on alternative fuels, including hybrid and electric cars.

The problem is that America is dependent on foreign oil to satisfy the country’s immense thirst for gasoline. The greedy oil-cartel Organization of Petroleum Producing Countries (OPEC) controls much of the world’s oil; it dictates global oil prices by adjusting its production quota when these ultra-rich oil tycoons wine and dine at their regular meetings. Gas prices in these OPEC countries are some of the lowest in the world, which shouldn’t be a surprise.

Oil prices must be controlled and gasoline prices should be regulated. Don’t open up the country’s oil reserves. The Keystone oil pipeline from the Canadian tar sands will help, but the environmental impact from oil sands oil is a major issue.

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