Oil Industry

Brittany Butler and Nick Schuchardt

MBA 633

Position Paper

The Oil Industry: "Why Companies Are Not Getting a Fair Shake"

Within the last two years, the oil industry has increased the price of oil causing gas prices to rise to $3.00 a gallon today. It was only a few years ago that the price of gas was $1.00 a gallon. There have been many complaints against the oil industry on price gauging and monopolizing the industry. Oil companies are reaching sales up to $100 billion and they are seeing profits in the $10 million range. These are the facts that we receive from the media and the government to portray a negative image on the oil industry. The oil industry does not seem to be getting their fair shake and peoples perception from the media and government reaction have clouded the statements issued by the oil industry.

Oil industry profits and taxes

The oil industry is still making .1% below the national average profit margin. One other item to consider is the cyclical nature in the oil industry. The increase in profit today is what helps the companies keep their heads above water in preparation for a future drastic decreasing period. Rayola Dougher, who oversees market issues for the American Petroleum Institute, says today's margins are helping refiners bounce back from the 1990s. "They're still as a sector struggling, but certainly the last few years have been looking good," she acknowledges. There have been many years where the oil industry has been performing at a low profitability level. The market value of petroleum products has been low. From the early 80's until just a few years ago, profits for oil companies fell behind in profits compared to other industries.

Based on historical data, the increase in profits by oil companies is only temporary. Two things could happen because of this: 1) many of the owners involved in producing fuels will re-negotiate their own agreements when it becomes feasible to do so, 2) it is doubtful that the highest prices can stay aloft for long, and when they fall, so will the profit margins. The 1980s tax caused U.S. production to decrease and rely more heavily on foreign oil. There has been a high demand for imported gasoline because of the specifications for environmentally acceptable fuel in the U.S. "Demand for imported gasoline now exceeds one million barrels per day." The imported oil is needed as a component for the blending process in order to meet market standards. The crude oil inventories at U.S. and gasoline are low. Domestic crude production is operating at its maximum, and the US will have to import crude oil. This drives gasoline prices to rise. There is a shortage of smaller, cleaner tanks which gasoline cargoes are transported causing higher tank rates which is passed on to the pumps.

Another factor that contributes to higher prices is the low levels of petroleum because of the high demand especially in Asia. Reinstating a tax like the democrats are proposing will make the United States more dependent upon foreign oil. The residents in the south around the Gulf had economic hardship in the 80s. Unemployment in Louisiana averaged 10.5% during the 80s compared to a little more than half that today.

Power and Politics

There is a lot of political power involved in the oil industry. There are a few strategies that the politicians have played during the last couple of years. The politicians "waited for a crisis to happen" before they even reacted to the increase in gas price. There were two factors that caused their attention: 1) the oil companies began raising gas prices which affected the entire country, 2) the two hurricanes, gulf crisis and refinery explosions have caused the government to react to this by placing blame on the oil industry. The government did not react or change its strategy when the oil industry was suffering in the 80s into the 90s. Gas prices were low and the oil industry was being taxed for domestic goods. There were no complaints from the public during this time period.

The government also used the "attacking and blaming others" political strategy. The public eye votes for the Senate, House, and President. In light of the recent complaints about gas hikes and oil company's sales topping into the $100 billion range, the politicians are placing blame on the industry and reacting to the news so they look good.

Investment in Refineries

Oil companies will invest in refineries if and only if they perceive future profits to be made from them. Drilling for oil is risky and the risk will be taken if the reward is greater than the risk. The real reason no new refineries have been built for almost 30 years is simple: any oil company that wants to stay profitable isn't going to invest in new refineries when they know there is going to be less and less oil to refine. The last domestic refinery built was during President Ford's term in office. Oil companies have been burned before and must make investment decisions based on the realities of the market, not the political push.

Decision Making

Oil companies seem to utilize the "analytical style" to decision making. Drilling for oil and creating refineries