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A Brief History of Oil (Profits)

Don't believe the hype. The real reason for high oil prices is (gasp) that they bring in more profits for oil companies and Wall Street

It seems almost quaint now, but just seven years ago, Bill Richardson, then the Clinton Administration's Energy Secretary, was quoted by Reuters World Report as calling oil prices "dangerously high," and saying the White House would use all options to fight soaring energy costs. The same story reported that farmers in Spain were taking their tractors on the roads to protest the cost of fuel. Saddam Hussein was threatening Kuwait again for stealing Iraqi crude. Soon, oil analysts were saying that if Hussein decided to quit shipping Iraq's oil, it could upset the world's petroleum market, possibly causing another severe hike in the price of crude. Yikes!

Of course, when these stories crossed the newswires in September, 2000, things were very different. The soaring energy costs Secretary Richardson was complaining about were $38 per barrel for oil and $1.58 per gallon for gas. Americans' annual spending on gasoline averaged $1,107 less. Today, we're still hearing myriad reasons why oil stays stubbornly above $60 a barrel and why $3 a gallon for gasoline is the greatest bargain in the world.

Considering all of the international problems today, gas at $3 might be a real bargain—and then again, maybe the petroleum crisis is being oversold.

Ramping Up to "Real Trouble"

Even CNN noted recently that when you ask three experts why oil and gasoline prices are so volatile, you get three different reasons. Their report was summed up: "It's not certain anyone really knows what's going on."

That statement may be true. On the other hand, when one examines the hard data on oil and gasoline after the fact—when the rumors of what was driving the market have been forgotten—one often finds a story completely different from anything told at the time.

A strong example is U.S. gasoline reserves on hand during the period known as the "peak summer driving season," or late May through the middle of August. A couple of weeks ago, analyst Phil Flynn of Alaron Trading in Chicago was quoted as saying: "We are in real trouble now."

He was referring to the fact that gasoline reserves on hand were sitting at just 193 million barrels, and that in Denver and Iowa, shortages of gas were being reported. However, we have heard these alarms about the potential for gasoline supply problems steadily since 2001—which is when the industry first started hinting to the media that gasoline could move to $3 a gallon in the near future.

Fuel on Tap

Not a day went by in the summer of 2006 when oil and gasoline prices weren't covered on the nightly news. That's why most people seem surprised when they find out that from the last week of April to the last week of July, 2006, we not only had enough gasoline to meet our demand but we put another 8.1 million barrels of gasoline into reserves.

In fact, America has stockpiled gasoline during the critical summer driving period in four of the last seven years. Even with all of the refinery problems being reported today, we managed to stockpile an additional 400,000 barrels of gasoline this week, and another 5.6 million barrels of oil.

Ironically, in the summer of 2003, gasoline reserves did fall by 14.4 million barrels. What happened to gas prices? They also fell—by 4.2¢—in the so-called peak driving season.

Empty Threats

In case you were wondering, since 1990, gasoline reserves on hand during the summer driving season have risen in 7 years and fallen in 10. The 17-year average drawdown on reserves is only 708,000 barrels. To a country with the "20-year-low" figure of 193 million barrels in reserves, drawing a million for summer driving might cause problems in some regions but it hardly seems the major threat to motoring that it's so often called.

The same can be said for the Chinese oil threat. Again, this has been a major topic among oil traders for years. Yet, after decades of phenomenal growth in their economy, China actually imports only 2.9 million barrels of oil a day.

In much in the same way, the "threat of military action" against Iran is always good for jumping the price of crude whenever the futures market backs off the current prices. One month it's Iran's refusal to quit its nuclear programs, the next it's because they seized 14 British sailors. But Iran was at war with Iraq for many years in the 1980s. We had two major oil-producing neighbors in full-blown combat, at the same time that America's and the world's economies were recovering from a recession caused by the Second Energy Crisis in 1979—and yet the price of oil and gas fell during that period. (It finally collapsed in 1986.)

Don't Peak Panic Just Yet

If you want to talk about the potential for problems in Nigeria's oil region, fine. Use LexisNexis and you will find thousands of stories on that particular problem dating back forever. Yes, the militants blew up three oil pipelines this week, but it's not the first time.

T. Boone Pickens has been the most visible expert to prophesy that Peak Oil has already arrived. But according to Cambridge Energy Research Associates' Daniel Yergin—author of the Pulitzer-winning history of oil, The Prize—we have been told we were at the end of the oil age five times in the last 100 years, but the end has never materialized.

Most don't know that in 1916, Charles Kettering, inventor and co-founder of General Motors' (GM) Delco Products Div., warned GM's Billy Durant that, according to numerous studies, the world would run out of oil by 1940 if something wasn't done to improve the fuel efficiency of all automobiles, and GM was a doomed corporation. Durant wisely said, "The experts are always wrong. They'll find more oil before you'll find another fuel source."

Kettering and his boys created leaded gas to extend our fuel supplies, and in the 1920s, ethanol became its competitor. The drought and Dust Bowl of the '30s ended the first ethanol experiment, while leaded gas disappeared in the late '70s owing to environmental consequences. Farming tried to resuscitate ethanol after the long drought, but the World War II demands on crops for food ended that pipe dream for three decades. Today's "eat or drive" debate isn't new either.

Don't Refine It and They Will Come (Begging)

Clearly, one day Peak Oil will be upon us, and the price of oil will rise so high that economies worldwide will either shift to some other energy to power their societies or drift back into Third World country status. Other than oil traders with access to the media and a few geologists, however, calmer experts like those at Cambridge Energy believe that Peak Oil is still at least two decades away.

The most troubling issue isn't the price of oil or its supply, it's how much coverage the doomsayers are being given. They often have fortunes resting on the hope that prices will continue to rise for those products, and therefore they stand to gain the most if the rumors of problems become the public's perception of reality. However, in November, 2005, when the oil market went "in contango" (meaning spot oil prices were less than the contracted price on the date of delivery), the media went right on reporting the high price—of futures contracts. Were lower spot prices for oil less newsworthy?

Last year, oil on the futures market hit $78 per barrel, but when it became known that we were running out of places to store crude prices promptly, it collapsed back to $50 a barrel. Last year, everyone bet on oil. This year, everyone is betting on gasoline. The result? $3.07 at the pump for us, often triple the profits for refiners. Yes, refinery runs are down, but only by a couple of percentage points.

This week, Senate Majority Leader Harry Reid (D-Nev.) finally said what others must have been quietly thinking—that the slowdown in gasoline production is intentional, done simply to support profits.

Who Ya Gonna Believe?

To prove the industry's insanity, just look at the recent forced resignation of British Petroleum (BP) CEO Lord John Browne. It wasn't over the 2005 explosion and fire at BP's Texas City refinery, even though a recent report pinned the blame solely on the management of the company. It wasn't over the shutdown of the Alaskan Oil Pipeline from failure to perform properly scheduled maintenance. Nor was it over the closing of a minor BP pipeline based in Baku a few months ago or problems in their North Sea operations. And certainly it wasn't over the issues with BP's Whiting, Ind., refinery—that plant, which can refine more than 400,000 barrels of oil a day, is now down to less than half its normal output and looks like it will stay that way for another couple of months.

No, what brought his lordship down was telling a little white lie to a British court about how he met his vindictive former boyfriend. Problems caused by business incompetence in the oil and refinery business can create shortages of either oil or gasoline, in turn raising prices and profits. The press from nasty breakups simply raises a public stink.

In four of the last seven years, we've added gasoline to our reserves during summer, and we acquired so much oil last year we were starting to top off our oil tanks. While the networks reported the high prices paid on the futures market for oil each night, and while some traders suggested Peak Oil was here, the world's oil industry delivered the goods.

Come to think of it, the industry also claims that the reason for today's high prices is the lack of any buffer in oil production today. Nevertheless, even though OPEC has shut off more than a few of their taps, we keep right on stockpiling crude, including another 5.6 million barrels this week.

Note: Oil and gasoline data from the Energy Dept.'s Energy Information Administration historical data.

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