Pity the poor oil industry

May 7, 2006

VALLEY VOICES/Chuck Legge

There's an old saying where I come from in Arizona. After a little editing, it goes something like this: &#8220Don't relieve yourself in my boot and tell me it's raining.”

If you apply this little aphorism to gas prices, my meaning should be obvious.

When this year started, gas was about $2.25 a gallon. Ahh, for the good old days. In just five short months, gas has gone up about 65 cents a gallon.

The oil companies tell us that it has to do with world markets, supply and demand, instability in the Middle East, finite resources, phases of the moon, etc., etc. To hear their explanations, I guess we're lucky gas isn't $10 a gallon. Gee thanks, Exxon.

I guess this all boils down to supply and demand, that most basic of economic drivers. Well, let's take a look at good old supply and demand.

Say you have a lemonade stand. You may get 25 or even 50 cents a glass. I'm sure we've all done something similar to this when we were kids and walked away with a couple of bucks in our pockets at the end of the day. You had access to a lot of lemonade, but the demand wasn't much, so you made a few bucks. Big deal.

Now, let's pretend that a lemon blight has swept the world, and you have the last can of Happy Time frozen concentrate. This isn't even the pink stuff. Well buddy, this is now a BIG DEAL, and your little lemonade stand is going to let you retire in the Bahamas.

This is how oil companies are making their case. No, there hasn't been an oil blight, but there is a limited supply, and a limited amount of refineries to process that oil, and demand is way up. Countries like China and India are sucking up as much of the stuff as they can. And calling producers like Iraq and Iran unstable is like saying Hannibal Lechter had an eating disorder.

Well, this seems pretty cut and dried. Limited supply plus increasing demand equals profits obscene enough to make Anna Nicole blush.

There is, however, another element involved here that isn't really looked at or talked about much. You know how at the end of the day you hear a newscaster say something like: &#8220Alaska North Slope crude finished up 5 cents at $70.12 a barrel today?” Did you ever wonder what the dynamics of that are?

Does it mean that it costs that much more to get it out of the ground? Well, no. Does it mean that it cost more to turn that oil into gasoline and diesel? Uh, not exactly. Does it mean that demand has reached a new high? No, not really.

Here's what that means. Some joker in the commodities market is willing to buy that barrel of oil for $70.12 because he knows he can sell it to some other joker for $71 in a few days.

Any little hitch in the process, real or perceived, makes these traders nervous. So when rumors of turning Iran into a sheet of radioactive glass start circulating, so does the adrenaline level in the market, and oil prices go up. That's right. Demand hasn't changed. Supply hasn't changed, but the idea that it might in the near or not-so-near future brings out the Chicken Little in every red-blooded oil trader.

This translates into higher prices at the pump, which translates into Exxon's former CEO Lee Raymond getting a $400 million retirement package. He's not going to retire to the Bahamas; he's going to buy the joint, lock, stock and beaches.

So the price of oil is driven as much by perception and emotion as it is by reality. Some Bedouin in Al Anbar sneezes, and we all catch cold.

Is there anything we can do about this? Well, Rep. Dan Guttenberg and Sen. Johnny Ellis of the Alaska Legislature would like to repeal the 8 cent state tax on fuel. It's not much, but it is something.

Unfortunately, the governor thinks it's too much something. I guess that with all the extra millions pouring into state coffers from higher oil prices, 8 cents is too big a hit. Yah, that makes sense.

Of course, the big three oil companies in the state don't care if we exclude an 8 cent tax. But just mention an increase in their tax burden, and their heads begin to spin as if they were possessed.

In all fairness, big oil companies are probably too busy with profits climbing to nose-bleed altitudes. After all, why would they want to share more of Alaska's wealth with Alaska? Yah, that makes sense, too.

We should pity the poor, benighted oil executive. He's at the mercy of these commodities traders who force staggering profits upon him.

The next time you fill your tank, I want you to consider his plight. It falls on his shoulders to sit through endless strategy sessions, devising ways to have us believe our boots are dry. In the face of record profits, this is no easy task.

And while I'm sure you don't need me to tell you this, just let me point out that that's not spring rain in your Sorels.

Sutton resident Chuck Legge is a free-lance cartoonist whose work appears in every edition of the Frontiersman.

His Valley Voices guest opinion column appears here every four weeks.