Is Big Oil toying with us?
They are stuffing their pockets while avoiding the $4 barrier, but there could be negative repercussions.
This post comes from Lynn Mucken at MSN Money.
They took us to the brink, then stopped.
Just as the average price of gasoline at America's pumps was set to push past $4 a gallon, a point at which even the most-committed SUV and speed lovers begin to question the wisdom of their devotion, Big Oil pulled back.
Over a six-day period, the price dropped about 3 cents, to $3.962 on May 11, according to AAA's Daily Fuel Gauge Report. The nation rejoiced. The media, most of which had "the end of the world has come" stories set to run, quickly flipped to some version of "we've been saved!"
Experts were quoted giving the usual reasons -- lower oil prices, higher U.S. dollar, disheartened speculators, less demand, suddenly mended refineries -- and predicted that $3.50 gasoline, if not just around the corner, was no more than a couple hours drive up the freeway.
Meanwhile, gas popped back up to $3.984 today. Might it be possible that the modern-day oil barons are just toying with us?
While shrugging their collective shoulders and poor-mouthing about their debilitating rise in expenses, four of the Big 5 oil corporations announced that first-quarter profits were up, stunningly so. Exxon Mobil was up 69% over 2010, to $10.7 billion; Royal Dutch Shell up 30% to $6.3 billion; Chevron up 36.5% to $6.2 billion; Conoco Phillips up 43% to $3 billion. BP, still feeling the pain of that little spill in the Gulf of Mexico, actually saw profits drop 2%, but still made $5.5 billion.
One question: Why do they do it?
Even factoring in a CEO's fiduciary responsibilities to the stockholders (Exxon Mobil's stock is up about 40% in the past year), or even plain and simple greed, why are they doing something that could be so long-term stupid?
There's an old saying: "You can fleece sheep again and again, but you can only skin them once." Here are some possible downsides to this skinning:
People will reduce their driving. In 2008, Americans responded to $4 gasoline by cutting back by 15 billion miles a month, driving gas prices down dramatically. That was before the economy collapsed into the Great Recession. This year, with unemployment at 9% and family budgets squeezed, the cutbacks will be quicker and deeper. Already, gas consumption has dropped for five straight months.
Just look at the numbers: In the third quarter of 2008, Exxon announced a $14.8 billion profit. For the first quarter of 2009, it was $4.55 billion. It's a good bet that some numbers guy at Exxon has figured out the tipping point, but it might be just as likely that the number chairman Rex W. Tillerson is looking at is how much he can grow the $29 million he earned last year.
There's always mass transit, too. In San Diego, where the car is king and 12-lane freeways move traffic efficiently, ridership figures for the trolleys, bus and trains are showing double-digit increases.
The consumption cutback won't just come in the United States either. At these prices, how long can big gas consumers India and China subsidize pump costs?
Car drivers will go small. Vehicle sales in the U.S. rose 18% in April, the biggest jumps coming in the fuel-efficient category, with the Chevrolet Cruze, which gets 40 mpg on the highway, leading the way. What does that mean?
It means the oil companies are cutting their own throats. The average American car is on the road for 10 years. Which is better for Big Oil: 10 years of dribbling gas into the Cruze or 10 years of pouring it into a Chevy Suburban, which gets 15 mpg?
Panic among the politicians. Everybody drives, and a lot of them vote. This has pushed Congress and President Obama into some tough talking. According to a breakdown by the nonpartisan Joint Committee on Taxation, oil companies receive about $4 billion a year in federal subsidies and can avail themselves of tax breaks at virtually every stage of the prospecting and drilling process. Post continues after video.
"When oil companies are making huge profits and you're struggling at the pump, and we're scouring the federal budget for spending we can afford to do without, these tax giveaways aren't right," President Obama said recently.
The oil lobby is powerful, and it would be foolish to predict it will fail to protect its interests this time, but politicians sway with the prevailing winds. And right now, those potential voters are howling.
Why tick off the consumer?
Americans are a forgiving lot, but outrage over the Exxon Valdez oil spill in Alaska in 1989 cost Exxon its position atop the oil world and cut its annual profits by 27%.
Sure, car owners will still need to drive, but after being slapped around twice in three years, they might be bitter enough to keep riding the bus or switch to another brand of gasoline -- just out of spite. All those feel-good TV commercials would be a waste of money.
"Historically, gas prices have been a great source of irrationality for consumers," said Kit Yarrow, chairwoman of the psychology department at Golden Gate University in San Francisco and author of The Why Behind the Buy blog on the Psychology Today website.
Yarrow said the angst can be magnified: "There's a mismatch with how emotional consumers get about gas prices compared with the difference in their budgets that higher gas prices make."
Source: AAA's Fuel Gauge Report
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