THE BLOG
04/16/2007 08:57 am ET | Updated May 25, 2011

Oil and The Eclipse Of The American Century

Some one hundred years ago Teddy Roosevelt was President of a robust and self-confident nation whose growing stature on the world stage permitted him, with great wisdom, to solemnly intone "Speak softly but carry a big stick". A century on those words have now sadly been reduced to "Fractured Syntax spoken loudly, while wielding a broken stick".

He understood the danger of overweening economic power. Heralded as the "trust buster" he did not hesitate to take on the vested and powerful. He understood that vested constituencies such as the railroads and the burgeoning oil industry needed competition to unleash their full potential to service America's growing economy, or as with the railroads, some government oversight to keep their operations in line with the nation's interests. Thus, he militated for an Interstate Commerce Commission with teeth to bring the excesses of the railroads to heel and enlisted the Sherman Anti-Trust law to break up the Standard Oil Company.

In 1904 an action was brought against Standard Oil, then controlling 91 percent of the nation's oil production and 85% of its sales. Roosevelt understood that Standard Oil as then constituted, would never, of its own accord, let the oil industry grow and nurture the nations fast evolving needs without extracting monopoly profits, in essence a tax on the nation as a whole. Seven years later the Supreme Court upheld earlier court rulings and the great Standard Oil was broken up into 34 separate entities. With the government's victory the oil industry embraced competition and the nation prospered.

In contrast today we have an administration wedded to the oil industry and a Congress ever prepared to do its bidding. We have an Interior Department to all intents and purposes an adjunct to the oil patch and a Department of Energy whose policies are forever supportive of high and ever higher oil prices, to the oil industry's benefit, and the consuming public's detriment. A Department never having the slightest willingness to confront the manipulation of oil prices while helping ever higher prices along by filling to excess what has become that monster oil patch boondoggle, the Strategic Petroleum Reserve.

One of the great anomalies of the oil industry today helping to distort the price of crude oil and that of gasoline, heating oil, fuel oil and diesel is the vertical integration of the oil industry whereby the oil companies are both producers and consumers of the industry's core raw material, crude oil. This very fact has distorted the dynamics of crude oil trading and given carte blanche to ever higher prices of both crude and gasoline and the full gamut of downstream products. As President Bush, the ex oilman, correctly informed us recently " ...but a lot of the price of gasoline depends on crude oil..." We have a series of gargantuan and virtually unfettered integrated oil companies (Shell, BP, Occidental, Chevron and on) that both produce and trade oil , while simultaneously being their own biggest consumers of oil be it in their refineries and in turn in their marketing outlets at the gas pump, the propane tank, or the home oil distributor. The integrated oil companies have no incentive in bringing down the price of crude oil. That's where the money is in the billions upon billions. Simultaneously they have successfully diverted our focus to the nickels, dimes and quarters at the gas pump or the monthly heating oil bill keeping us oblivious to the Beltway robbery going on down the road.

The rigging of the price of crude, helped along by their vertical integration has spun off undreamed of profits making the oil companies as powerful and as ominous as the old Standard Oil. Today's oil industry enhances its clout by spending millions buying influence in Washington through the brawn of its 'K' Street lobbyists, combined with generous contributions to key Political Action Committees. It's influence is so pernicious that it not only gets a free pass in much of what it does domestically irrespective of its impact on the nations citizenry, but also receives extensive and unwarranted government handouts in the form of tax credits, royalty abatements, generous depletion credits. Most ominously its influence has been instrumental in creating a national policy of unfettered energy consumption leading the nation into foreign entanglements that have dramatically eclipsed America's stature and influence around the world, not to speak of the frightful volumes of blood and treasure expended. All this, while the oil industry continues to prosper unashamedly.

Teddy Roosevelt fought for competitive markets. Now our government covers for manipulated markets because that's where the money is and influence lies.Take Exxon Mobil (being the largest it is the one that most readily comes into focus, but certainly not the only one). Their annual sales are $337 billions from which they reported the largest after tax profits ever for an American company, of $39.5 billion (and an EBITDA well in excess of $70 billion). Exxon Mobil highlights that their profit margin therefore is a normal 10.4% of sales, and they walk away smiling, firm in the belief that we have been duped once more. Now this number does not deal with cash flow. It gives us no immediate sense of possible accelerated expenses orthe method of inventory write downs, or offsetting depletion allowances. Nor do we have an immediate sense of the humungous salaries being paid (not Exxon, but to give better sense of oil industry excess, Occidental Petroleum just announced they paid their CEO Ray Irani $400 million last year); nor the additional golden parachutes comparable to the $400 million doled out to ExxonMobil's retiring CEO Lee Raymond; nor the millions going to Washington's 'K' Street operatives; nor the monies being poured into organizations questioning the science of global warming such as the Competitive Enterprise Institute, The Heartland Institute, The International Policy Network among others; nor the set aside for the Valdez oil spill. All of which would give us a truer picture of what Exxon's cash bonanza is being used for and what they are doing to reduce, yes reduce not increase, their bottom line.

Crude is unquestionably the mainstay of their balance sheet. Consider that Exxon produces over 6 million barrels of crude oil equivalent per day. At today's price for crude that translates more than $130 billion a year on crude oil alone. The cost to produce this crude is certainly no more than $20 per barrel( see post "Deception From America's Oil & Natural Gas Industry" 8.27.06). By far most of Exxon's production were brought on stream more than a decade ago when crude was selling in the low $20 or less and production and wells would in large measure have been capped were their production costs higher than the then going market. The investment in many of these wells has long since been amortized. Using $20 as an average cost basis (it is probably significantly less) and sales at $60 would mean a gross profit on each barrel of $40 or a gross profit on annual crude sales $87 billion a year. By comparison Exxon's fuel refining, lubricants and petrochemical operation become bells and whistles when compared to crude oils profit quotient. They do, however, serve as an effective cover diverting our attention from the astronomical earnings generated by their in house crude oil production.

And here's the rub, which Teddy Roosevelt would have understood. Crude oil and their derived products are a patently manipulated market. Most of the end users, the integrated oil companies have absolutely no incentive to push down the price of crude oil. Their brethren in OPEC blithely cut production whenever it suits them to ratchet up prices and the integrated oil companies are their biggest cheerleaders. Together they have successfully duped us into believing their spin that high crude oil prices are all about the invisible hand of market forces. It may indeed be the invisible hand, but it is the invisible hand of market manipulation (see "Oil Prices Being Pushed Ever Higher By Manipulating Oil Futures Trading" 04.05.06) There are, as example the massive trading desks of the integrated oil companies doing what they can to support the pricing interests of their production divisions. BP for one, made a substantial settlement with the New York Mercantile Exchange to resolve allegations of improper oil trading activities. Then last year the Commodity Futures Trading Commission (the CFTC) outlined what it said was a scheme by BP to manipulate the price of propane causing higher prices for residential and commercial propane consumers. And then, of course, is the well documented instance of Enron's manipulation of the California gas market.

There seems to be nascent willingness in Washington to begin examining this issue. Senator Norm Coleman (R..Minn.) has said "We need to explore legislative ideas to ensure that energy prices reflect the true market forces of supply and demand...", and to quote Senator Carl Levin (D., Mich.), "Right now there is no cop on the beat overseeing energy trades on over the counter, electronic exchanges or foreign exchanges...Enron has already taught us how energy traders can manipulate prices and walk over consumers if they think no one is looking". And sad to say no one is looking as yet in a systematic way. Teddy Roosevelt we need you back.

What this industry also needs is a good dose of competition where refiners are no longer tied to oil producers. Where oil producers have to compete with one another to become suppliers to independent refineries. As currently constituted the oil market presents a clear and present danger to the nation's welfare. The orchestrated high price of oil facilitates the transfer of billions to rogue or unstable regimes who would themselves or would support those who wish us harm. While the billions pouring into the oil companies enhances the ongoing influence they continue to have in the halls of government. As Teddy Roosevelt dealt with Standard Oil and the railroads we need our Government to take action now to create real competition in the oil patch by breaking up the integrated oil companies. And we need a government that borrows Teddy Roosevelt's bully pulpit to impart individual responsibility on the issue of global warming, while we in turn have to keep pressure on Congress to reign in the nations consumption of fossil fuels irrespective of its price, and especially if its price should plunge.

Don't expect much from this administration. And the newly elected Congress needs do much more. To date we have heard little more than lip service.

And remember, Teddy Roosevelt was a Republican!