Due to the hysteria on ATS concerning the recent run up in gasoline prices and to correct some misconceptions about the subject matter I thought it worthwhile to offer some facts concerning gasoline prices and oil prices from someone that has been in the business for 35 years.

For the record 26 gallons of unleaded gasoline can be refined from a barrel of Saudi Light Crude oil. There are 42 gallons in a barrel and the refining actually results in a recovery of 43 gallons as the molecules are separated. The byproducts produced in the other 17 gallons will generally pay for the cost of refining. I have been confused as to why gasoline prices are so low, not why they been so high. At $100/bbl the tail gate refinery price, before taxes and profit is $3.85/gallon. Of course gas prices around the world are $8-$10/gallon, but this largely due to taxes. Also note that when gasoline prices in the US were $.30/gallon they were already paying $3-5$/gallon.

Oil prices have been manipulated, since Drake produced the first commercial oil well in Pennsylvania in 1869. The oil produced in the beginning was primarily refined to be used for illumination replacing the burning of whale oil for this purpose. The more volatile hydrocarbon, gasoline, was a waste product until its usage in the internal combustion engine by the later part of the 19th century. For all of the environmentalists reading, if it wasn’t for kerosene replacing whale oil as the primary illumination liquid there wouldn’t be a whale alive today.

John Rockefeller and Standard Oil manipulated the price of crude oil keeping it artificially low, eliminating competition, and creating a monopoly that in essence controlled the entire oil business until 1913 when Standard Oil was broken up into the “Seven Sisters”. This break up created Exxon (Standard of New Jersey), Mobile (Standard of New York), Amoco (Standard of Indiana), Chevron (Standard of California) etc. Although still closely affiliated the breakup ostensibly created competition.

The first attempt to increase oil prices by restricting supply was attempted by the Texas Railroad Commission in the 1930’s upon discovery of the East Texas Oil Field. The field was so prolific that crude oil prices that were around a $1/bbl dropped to less than $.10/bbl. This Texas oil field regulatory agency restricted production from the field to try to match demand to support prices that are set by major oil companies. The oil business through out its history has been feast or famine. Historically a major discovery devastated prices causing a collapse, the excess supply is used up and a shortage ensues, because everyone went broke and exploration and drilling stopped.

Everyone needs to understand that all of the integrated oil companies (companies that own both crude oil production as well as refining capacity) only make money from selling refined products to the public and get marginal benefit from increased crude oil prices. Being an independent operator (oil producers that only make money out of selling crude oil) I can assure you that crude oil prices were controlled by the major oil companies until 1971. Exxon buys crude oil for refining they don’t sell crude oil, so the argument that major oil companies want high crude oil prices is wrong. How does Exxon Production Company make any money by selling crude oil to Exxon Refining Company? They will improve their profits on the oil they produce, but have to buy the majority of crude oil they refine. The refinery margins for them are better at low crude oil prices than at high. Profits reported are a shell game where they can show profits where ever they want to show it on the balance sheet. Until crude oil was traded as a commodity in 1981 every refiner put out a posted price each month which was the price that they were willing to pay for crude oil that month. Incredibly every refiner independently posted the same price every month for crude oil. In any other endeavor this would have been considered price fixing, but for nearly 100 years this was considered normal in the oil business. Just to prove the how much the Major Oil Companies controlled the market, there used to be an “entitlements program” for independent refiners. In this government program Major Oil Companies were required to deliver crude oil to independent refiners (those who do not own crude oil reserves} at their cost of oil. In this fashion independent refiners would have a chance to be competitive with their products, when otherwise they would have been out of business. In short the gasoline prices were so low that independent refiners could not make a profit if they had to buy crude oil at the “posted prices”.

Until OPEC changed the game in 1971 crude oil prices were maintained artificially low by the major refiners. This resulted in the conversion to oil as the primary energy source since any competing energy technology could not economically compete with oil. OPEC in 1971 was the first time a crude oil producer set the price of oil as opposed to a refiner. Crude oil prices were still manipulated, but now by a producing cartel rather than a collusion of refiners. Oil went from around $2.80/bbl to around $12/bbl from 1971 to 1976. OPEC continued to increase pricing up to around its peak of $40/bbl in 1980. Through this period the US experienced unprecedented inflation all blamed upon oil prices by that idiot peanut farmer, Jimmy Carter. He was actually right except the inflation was due to a weakening dollar as we allowed other countries to clone our currency and devalue the dollar. They in turn converted their francs, pounds, marks and yen into twice as many dollars and paid the same price for oil in terms of their own currency. Thus while we experienced 18% annual inflation rates while we were only importing 25% of our oil needs, Germany who imported 90% of their oil from OPEC was only experiencing 1% over the same time frame. OPEC was taking devalued dollars. They of course deposited them at Chase Manhattan Bank at 15% CD rates. Thus we were soaking up the entire world’s inflation by a large expansion of our money supply from Eurodollars. Reagan fixed this problem and started trading crude oil as a commodity in 1981. However the manipulation of crude oil price really probably ended in 1986. At that time there was production capacity in the world of around 75,000,000 bopd and the world was consuming around 55,000,000 bopd. When the Saudis (OPEC) decided to regain market share they quit manipulating the commodity markets and the price of oil dropped to around $8/bbl. This was probably the first time in history that the market truly set oil prices. Please note however that prior to the crude oil market collapse the Saudis and other OPEC nations had executed net back agreements with refiners or had gotten into exporting gasoline as much as oil so that they were no longer solely dependent on crude oil sales.

The trading of crude oil as a commodity worked effectively through about 2001. From 1986 to 2001 the exploration and production business as well its infrastructure were devastated by low crude oil prices. Meanwhile the excess production capacity was being used up by worldwide economic growth increasing consumption at the rate of nearly 2,000,000 bopd per year. The first time in history demand exceeded capacity was the winter of 1995-96 because of extreme cold caused by the Mt. Pinatubo eruption. Easily obtainable production increases maintained enough capacity to meet demand and the market reflected the effect of lack of excess capacity until the market began to be taken over by hedge funds and other market manipulators by 2006. The “Jewish barrels” now control the oil price not the actual refiners, producers and Major Oil Companies. The supply/demand that finally set the price of oil and gasoline in 1986 has been usurped by unscrupulous speculators in the commodity market. This could be fixed if the regulatory authorities would require 100% margin requirements on energy commodities, but since the US Government is bought off by Wall Street crooks, the markets will continue to be unstable and cause dramatic swings in crude oil therefore gasoline.

As an independent producer there is no love of the major oil companies. If you think they are arrogant and overbearing dealing with them at the gas station you ought to try to deal with them in the oilfield. Exxon is historically 120 day pay to their vendors. Of course they are so big a “poor boy” vendor cannot afford not to work for them. Virtually all of the majors share this attitude. If they weren’t so inefficient and bureaucratic we would not be allowed to exist if they decided that they could produce as efficiently as an independent on marginal production.

Great Post,

Very informative. Once again the bankers getting their greedy little hands into everything and it allways seems to hit the regular folks the hardest.

amazing post Billy. exceptionally well written.
it would be interesting to see market value as well.

I think the speculative forces should be accountable for subsidized oil pricing. wouldn't that toot a new horn?
thanks for the information. excellent read.