Oil Companies Suffer Drop in Oil Margins
October 12, 2004

See the July 2006 update...

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In the past seven weeks, the gross margin (oil cost per unit / gas price per unit) earned by oil producers has dropped to a seven year low. This has been caused by unusually stable gas pump pricing combined with a dramatic spike in world oil prices. Chart 1 illustrates the sudden drop from a normal level of around 50%, to this week's record low 34.9%.

While this is a good thing for American consumers, it is a very good thing for a sitting President. If oil producers were to maintain the average 51.8% margin experienced since January 2001 (Bush Administration), the price of gas today would be $2.63 per gallon, rather than the $1.94 per gallon "U.S. Regular Conventional Retail Gasoline Price" reported for October 11 by the US Energy Information Administration (www.eia.doe.gov). (If Clinton were in office, we'd be paying $3.30 per gallon if oil producers maintained the margins experienced 1997 - 1999, but that's a mote point.)

As always, figures like this must be seen in context, so let us look at the last seven years. Chart 2 displays the same calculation, and four interesting periods can be observed:

• Campaign 2004 - average margin 47.3%
• Bush Presidency - average margin 51.8%
• Campaign 2000 - average margin 51.1%
• Clinton 1997-1999 - average margin 61.6%

On Chart 2, I find it interesting that the last time margins dropped into the sub-45% range was late September - November 2000 (remember Florida?)

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Finally, margins can be tricky if the real dollars are what counts. So, let's look at what the oil producers actually paid for crude, charged for gas and grossed per gallon. Chart 3 displays this raw data (the basis for the two previous charts), and several interesting observations can be made:

• The price of oil (orange)is going through the roof. In systemic terms, this kind of pattern indicates a break from established norms (remember stock prices, March 2000?)
• The actual gross dollars earned by the oil producers (green) is comparatively stable, probably indicating the effort to manage acceptable (agreed upon?) oil producer corporate earnings and avoid "profit taking" regulatory investigation.
• There is a very tight linkage between a change in the cost of oil, and a change in the price of gas (blue). I count 31 times that the cost of oil and the price of gas change direction in the same direction, at the same time, and to the same degree. EXCEPT ....
• There is an interest period of gas price stability, beginning July 12th 2004. It persists until September 20th 2004. There is no other feature in this data like this period of stability.

Hypothesis; current suppressed US average gasoline prices constitute a campaign contribution to the Bush administration.

At over 375,000,000 gallons of gas per day (www.eia.doe.gov), oil producers are watching $1,800,000,000 A WEEK that is not appearing at the pump (that's $2.63 - $1.94 = $0.63 times 375,000,000). Now, why would a corporation sacrifice that kind of capitol... "invest" is the concept of choice? One point eight BILLION, a WEEK? Over six weeks, $10.8 billion?

See the July 2006 update...

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Peter Schubert
Portland, Oregon