Oil Watchdog

Santa Monica, CA — The recent sharp drop in gasoline prices from this
year’s record highs is steeper than the drop in the price of crude oil,
indicating that refiners are taking less profit in order to push the
retail price lower as the election approaches, said the nonprofit
Foundation for Taxpayer and Consumer Rights (FTCR). It is a pattern
that is also evident, though less sharply, in the autumn of the last
two election years, 2002 and 2004.

Oil companies were able to post another round of record or
near-record quarterly profits last week, despite a 70-cent-a-gallon
drop in pump prices from the summer’s record highs. It’s all in the
timing, said FTCR. The majority of the drop from the $3.00 (and more)
per-gallon highs of late spring and summer has occurred since the last
half of September, so any substantial shrinking of profit wouldn’t show
up until the fourth-quarter profit reports that will be issued next
February, said FTCR.

A snapshot of federal gasoline and crude oil price data for
the first week in October over the last decade, compiled by independent
oil analyst Tim Hamilton for FTCR, found that though gasoline prices
did not necessarily fall in election years, the difference between the
spot cost of crude oil per gallon and the price of gasoline narrowed in
recent election years compared with non-election years. Since oil
companies’ costs of refining and taxation are typically stable over
time, this gap between the cost of crude oil and the retail price of
gasoline is a good indicator of rising and falling profit on gasoline
production. Analysts and oil companies have said they expect a dip in
oil-company refining profits in 4th quarter reports.

Hamilton analyzed the gap between pump prices and the spot
price of crude oil in election years, compared to the non-election
previous years. He found that in 2002, 2004 and now in 2006 there was a
moderate to substantial shrinking of that gap, meaning less profit
potential for the oil companies, in measurements taken the first week
in October. See his charts at:
– Gasoline prices
– Gap between crude and gasoline
– Underlying data

"This pattern of the last three election years is an indication
that motorists who smell something fishy in the rollercoaster prices
they’ve endured this year may be on to something," said FTCR President
Jamie Court. "The rise to record high gasoline prices this spring
unleashed a wave of justified criticism of bloated oil company profits.
Now the price drop in the pre-election period, by a percentage well
beyond reductions in the price of oil, smells just as bad."

Even the loss of half of the oil shipped by BP from Alaska
after a pipeline accident did not put a dent in steadily rising
gasoline production, which exerts downward pressure on retail prices.
The situation is the opposite of spring and summer, when gasoline
production and inventory, particularly in the Western states, kept
falling from the previous year, said FTCR. "Ordinarily an event like
the BP shutdown in August would have been an excuse to cut production
and raise prices for at least a couple of months," added Court.

Though this year’s price decline was exaggerated by last
year’s post-hurricane high prices, the 51-cent drop in this key profit
indicator is far more than this year’s absence of hurricanes could
account for, noted Hamilton.

"The public and even state regulators have access to so little
information about oil company operations that they can never entirely
prove what they may suspect, but the oil companies also cannot disprove
it without opening their books," said Judy Dugan, FTCR’s research
director. "The oil companies will never do that on their own, but state
and federal governments should certainly demand more and better public
information about pricing, production and reserves of gasoline."

As for the current downward price blip, motorists shouldn’t
expect it to last, said FTCR. The inexorable trend of gasoline prices
and oil company profits is up — at least until the robust development
of alternative energy eases U.S. dependence on oil. One model is
California’s Proposition 87, the Clean Energy Initiative.

"Despite the blizzard of warring TV ads that voters have had
to endure on Prop 87, the truth is that oil companies have abundant
incentives against commercial development of alternative fuels," said
Dugan. "The companies’ most profitable scenario is to sell less product
for steadily higher prices, even though they have tens of billions in
spare cash that could be going to development of clean fuels. That’s
why voters have to ignore the negative ads bought by Chevron and other
oil giants, and vote to get oil alternatives to a point where they’re
truly competitive."

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