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

by Ed Wallace

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.