“Hydrocarbon Myths Dispelled”

We are experiencing the full range of energy comments in the U.S. these days, some true and others completely void of any facts to support their assertion. In this article, we will look at common hydrocarbon myths being circulated to explain why oil prices are up, “Big Oil” is fixing prices at elevated levels, and why almost everyone is to blame, except our government.

“Big Oil” is shutting down refineries to constrain supply for excessive profits:

One quote on LinkedIn that I saw in June was, “…a huge number of refineries brought offline so Big oil could line their pockets”. When asked to provide me his facts to substantiate his claim…crickets. So is this really true that refinery runs as a percentage of capacity are really down, thus derating a refinery’s production in order to create a supply constraint? When in doubt, do a 20-second Google search of the Department of Energy’s Energy Information Administration (EIA) is shown in Table 1.

Table 1 demonstrates the refinery run utilization percentage for different weeks since early January 2021.

Table 1 – U.S. Refinery Run Utilization Percentages

Graph 1 shows the history of U.S. refinery runs since 1990, and it has been above 80% for most of those years, and since the COVID-19 pandemic in early 2020, the trend line has been growing. Since Jan 2021, rates have improved to a peak of 94.2% in week 1 of June 2022. Does this seem like shutting down refineries to you, America? With all-time high gasoline and diesel prices in the U.S., refineries have ramped up production to take advantage of those prices rather than cutting production. Isn’t that what a rational business is supposed to do: with high prices, increase production, and satisfy demand?

Graph 1 – U.S. Refinery Run Utilization Factor, 1990 to Present

Source: Weekly U.S. Percent Utilization of Refinery Operable Capacity (Percent) (eia.gov)

So when you hear this myth mentioned, ask the hard questions…and the hard proof of their false accusations. The DOE EIA clearly disputes these falsehoods.

Putin’s inflation of oil prices:

With the current high inflation in America (8.6% for May 2022, the highest inflation rate in 41 years), everyday Americans are recognizing a painful reality at the gas pump. Source: https://www.usinflationcalculator.com/inflation/current-inflation-rates/

This myth postulates that all the run up in crude oil and gasoline prices have been solely due to Putin’s invasion of Ukraine on 24 Feb 2022. Let’s refer to the EIA data to test this myth subjected to the light of day vs. Beltway Group Think.

To put this in perspective, the crude price in January 2021 per the EIA was $56.64/bbl.; the price in February 2022 was $95.72. That's a 69% increase in crude price well before the Russian invasion of Ukraine.

Of the 93.33% crude price jump from the January 2021 crude price of $56.64/bbl. to the crude price of  $109.50/bbl., 73.93% of the price jump occurred before the war started on 24 February 2022, and 26.07% of the price jump occurred after the start of the war.

Graph 2 illustrates the large and rapid increase in gasoline prices in America in the recent 16 months that are representative of policies detrimental to a vibrant and efficient oil and gas industry.

Graph 2 – U.S. Weekly Price of All Grades of Gasoline, Dollars Per Gallon

Source: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMM_EPM0U_PTE_NUS_DPG&f=W

“Big Oil” has caused this price run-up:

The recent comments by Secretary of Energy Jennifer Granholm, Senator Sheldon Whitehouse, and Representative Ro Khanna on a new Windfall Profits Tax (WPT) are an inhibitor to U.S. production of much-needed hydrocarbons. Their intention of this WPT is obviously geared to punish “Big Oil”, but who really is “Big Oil”?

Contrary to popular belief by some politicians, America's oil companies aren't owned by a small group of insiders as shown in Chart 1. Only 2.9 percent of industry shares are owned by corporate management. The rest is owned by tens of millions of Americans, many of them middle class.

A strong oil and natural gas industry is a vital part of the retirement security for millions of Americans. State pension fund investments in oil and natural gas companies are providing strong returns for teachers, firefighters, police officers, and other public pension retirees, according to a Sonecon study.

https://whoownsbigoil.com/#/?section=whoowns-the-oil-companies-2

Chart 1 – Ownership of U.S. Oil and Natural Gas Companies

Source: Who Owns America’s Oil and Natural Gas Companies, SONECON, October 2014

By punishing “Big Oil” with the WPT bill, it would really punish millions of Americans who depend upon the dividends from these companies, while discouraging oil and gas production.

“Big Oil” is controlling prices:

We hear the term, “Big Oil” a lot in the media and per the discussion above, the facts of who “Big Oil” is and what is represented is very skewed…and for a reason. We also hear that “Big Oil” is controlling prices and they are just printing money so much that President Biden is quoted as saying, “…ExxonMobil made more money last year than God…” For one thing, I didn’t know precisely that God was a capitalist making astronomical megabucks, but that’s a different subject.

So if “Big Oil” as we know it in the U.S., including ExxonMobil, an obvious favorite of President Biden, and Chevron, control oil prices, they must control a lot of oil to be able to just “print money”, right? Once again, let’s look at the facts before we reach our conclusion.

Looking at the top 10 oil producing companies in the world, as shown in Table 2, we see that our U.S. “Big Oil” companies are in 6th and 8th place, respectively. Not really a commanding position to dictate the price of oil for the entire world, right?

Table 2 – Oil Companies Worldwide Ranked By Daily Crude Oil Production (thousands of barrel of oil per day)

Source: https://www.statista.com/statistics/280705/leading-oil-companies-worldwide-based-on-daily-oil-production-2012/

So America’s “Big Oil” of ExxonMobil and Chevron control a whopping 12.37% of only the top 10 largest crude oil producers in the world. When ExxonMobil and Chevron’s oil production of 3,271,000 barrels per day is compared to the worldwide production of ~100 million barrels per day, their control is 3.27%. Enough to control the market and dictate worldwide crude prices? Not hardly.

Oil companies control the price of oil and are gouging customers:

If oil companies truly controlled the price of oil, wouldn’t they have avoided the low prices shown in Graph 3, especially the lowest prices in 1998 and 2020? Wouldn’t this graph look like a steadily ascending line of increasing oil prices to validate the “oil companies control world oil price” theory? The EIA facts tell a much different story.

Graph 3 – U.S. Crude Oil Price History

Source: https://www.macrotrends.net/1369/crude-oil-price-history-chart

If ExxonMobil (according to President Biden) makes “…more money than God…”, why couldn’t they do so in 2020? Perhaps they really don’t control oil prices after all, and feel the market pressures when prices are high, and when prices are low.
We need a windfall profits tax for the oil companies:

Is it the “American Dream” to punish success and making money in this free enterprise, capitalistic society called America, even when companies pay their federal taxes as enforced by the IRS? So why a windfall profits tax (WPT)?

Several analyses of the 1980 WPT have found it reduced domestic production and increased reliance on imports. A Congressional Research Service paper found that the tax reduced domestic oil production by between 1.2 and 8.0 percent, and increased reliance on foreign oil by between 3 percent and 13 percent between 1980 and 1988 (when the tax was eventually repealed).

Jimmy Carter’s WPT in 1980 established an excise tax of 70 percent on the value of oil sales exceeding $12.81 (in 1980 dollars). Is this the way to stimulate more domestic production? It obviously didn’t work in 1988, and it won’t work in 2022 or beyond.

As oil prices have skyrocketed, Sen. Sheldon Whitehouse (D-RI) and Rep. Ro Khanna (D-CA) have introduced a bill targeted at oil company profits. This WTP would result in higher reliance on imports while punishing domestic production. This is the last thing we’d want to do in the current energy crisis. 

With a WPT, there is less incentive for oil producers to make major capital expenditures for more oil production from which they reap a smaller return. Like all Americans, oil producers and individual investors must weigh the risk/reward relationship of an investment.

Oil and gas producers are intentionally sitting on 9,000 federal leases and choosing to not produce:
Most of the leases on federal lands are currently producing oil and gas. There are about 37,500 total oil and gas leases in effect, with about 75 percent of them producing, and the other 25 percent going through a complex regulatory process or being held up in litigation. 

Oil and gas producers could immediately ramp up production to meet increased demand, which would lower energy prices:
The oil and gas industry is heavily-regulated by local, state, and federal agencies at each phase of the energy production process. It takes months, if not years, of planning, permitting, and preparation to find producible reserves and then drill and complete a well before any oil or natural gas can reach the market. It also takes time to increase or build infrastructure capacity to move the new oil and gas production to markets.

The Biden administration has done all it can to lower energy prices for the American people:
By not holding legally required lease sales, shutting down energy pipelines, not approving permit applications, and implementing regulatory roadblocks to production, the administration has taken several actions that stymie production, and hence negatively impact the price of oil for consumers.

Oil companies do not have the ability to set the price of oil or natural gas, only to make long-term assessments of investment based on, among other things, capital availability and the current regulatory environment.

The federal government should build its own refinery:

The Department of Energy should solve the high gasoline/diesel price problem in America by building its own refinery. It could then easily get the required permits, finance the refinery, construct the refinery, buy crude on the open market, operate it, and sell its product into the market to easily-make excessive profits to fund the government’s annual deficit. I’m not really serious about this myth, because with the government’s historic efficiency and business acumen, it would not be wise nor profitable for us, as U.S. taxpayers. Buying crude in the open market, operating a complex refinery with extremely high temperatures and pressures to process crude oil into gasoline, diesel, and jet fuel is not easy to do, nor to do so profitably.

“Big Oil” profits are obscene:

Researching ExxonMobil, Amazon, Apple, Facebook, and Microsoft’s net income in 2021 provides the following results:

Apple                     94.68 billion $

Microsoft               61.27

Facebook               39.37

Amazon                 33.36

ExxonMobil          23.04

Of these five corporations, ExxonMobil made the least net income in 2021, yet they are being singled out for a Windfall Profits Tax because they made too much money, as if that was a cardinal sin in America. Compared to the other four companies who made decidedly more net income in 2021 than ExxonMobil, we hear no call from the Administration to tax their Windfall Profits. How fair and American is that?

Some fun facts about our five corporations and the small amount of money they made:

• The current stock market valuation of America’s five technology titans, Apple, Microsoft, Google, Amazon and Facebook is $9.3 trillion which is more than the value of the next 27 most valuable U.S. companies put together, including corporate giants like Tesla, Walmart and JPMorgan Chase, according to data from S&P Global Market Intelligence. Source: https://www.nytimes.com/2021/07/29/technology/big-tech-profits.html

• Apple’s profit just from the past three months ($21.7 billion) was nearly double the combined annual profits of the five largest U.S. airlines in pre-pandemic 2019.

• Facebook expects to dole out more cash outfitting its computer hubs and offices in 2021 than ExxonMobil spends around the world to dig oil and gas out of the ground in a year.

Taking a look at ExxonMobil’s net income history from 2009-2021 in Table 3 with results in $ millions.

Table 3 – ExxonMobil’s Net Income 2009-2021 (million US$)

Source: https://www.macrotrends.net/stocks/charts/XOM/exxon/net-income

Doing the same analysis for Apple, Microsoft, Amazon, and Facebook, yields the following results:

Graph 4 – Apple’s Net Income 2005-2021 (billion US$)

Source: https://www.statista.com/statistics/267728/apples-net-income-since-2005/

Graph 5 – Meta (Facebook)’s Net Income 2007-2021 (million US$)

Source: https://www.statista.com/statistics/277229/facebooks-annual-revenue-and-net-income/

Graph 6 – Microsoft’s Net Income 2002-2021 (billion US$)

Source: https://www.statista.com/statistics/267808/net-income-of-microsoft-since-2002/

Table 4 – Amazon’s Net Income 2017-2021 (million US$)

Source: https://www.wsj.com/market-data/quotes/AMZN/financials/annual/income-statement

Summary:
In summary:

• Calibrate all that you hear in the media,
• Ask questions,
• Do your own independent research,
• Ask an energy expert with experience, and
• Consider the source and their potential prejudice in making any false statements before believing them

Finally, in the real world outside the Beltway:

• “Big Oil” is not reducing refinery capacity to constrain supply as the June 2022 94.2% capacity utilization rate attests
• Americans endured 74% of the oil price inflation before Putin’s war in February 2022
• The majority of “Big Oil” stock is owned by everyday Americans through their 401k and pension plans
• “Big Oil” has done a lousy job over history (post John D. Rockefeller) in controlling the price of oil to its advantage
• The windfall profits tax proposal would discourage new oil production and refinery expansion, raising prices for us all
• Oil and gas producers are waiting on permits that have been delayed by federal and/or state regulators
• Oil and gas production cannot be raised in the blink of legislative fiat
• There is a lot the Biden administration could do to mitigate current and future energy price spikes, if it changed its energy ideology
• “Big Oil” profits are not obscene, it’s called timeless law of supply and demand, and market economics

Copyright © July 2022 Ronald L. Miller All Rights Reserved