10-16-08 by dugan
As the price of oil dropped today to less than $70 a barrel (that would be $1.67 a barrel), the industry was in a panic. OPEC, the Prmarily Middle Eastern oil cartel, was calling an emergency meeting to cut production. The major oil companies fretted that dropping prices would undermine the "stability of energy markets." What stability are they talking about? The rocket-like rise of oil prices this year to above $145 a barrel was just as unstable, and far more damaging to the U.S. and world economies, than the current fall.
Early last year, the price of oil was as low as $50 a barrel in February, and the national average price of gasoline was $2.30 to $2.40 per gallon. At those prices, oil companies were still churning out record quarterly profits. The president of Shell Oil, John Hofmeister, told a Congressional hearing in May that the industry would remain stable and profitable with oil prices as low as $35 a barrel. "I think in a range — somewhere between 35 and 65 dollars a barrel —
is what has been consistent in our ability to run a successful
company," Hofmeister said. The other oil execs at the hearing seemed a bit stunned to hear that statement in public, but it’s on the record.
That kind of price range does sound like stability–even if it’s a very comfortably profitable range for the companies. The insane profits that oil companies have made this year, and will certainly announce in the next few weeks for their third quarters, have been economy-killing. If OPEC, Exxon and friends succeed in cutting production enough to start the price of oil back upward, that’s what will do damage.
Another point to remember as those quarterly profits are announced: Fuel prices are not falling nearly as fast as oil, even accounting for refinery lag time. Oil is down about 53% from its peak and gasoline, at $3.084 a gallon today per AAA, is down about 25%. Yet consumer demand continues to fall because of the deepening recession. It’s down 9.5% from last year.
The price of gasoline has a lot further to fall, unless the oil companies and oil producers succeed in artificially propping up the price of crude oil. They demand that they be immune from economic downturn, even though they helped cause it in the first place. Of course it’s not fair, but that’s not how Exxon thinks. Only government, and a much tougher oversight of trading markets and refinery operations, can make it think differently.