Prices at the pump are dropping sharply for consumers, while the profit margin for gas stations is getting fatter.
According to data from the Labor Department’s producer price report, the margins for fuel and lubricant retailers dived 7.7% in November, following a 26.1% spike in October.
That still leaves margins 18.5% above where they stood in November 2013, according to the producer-price data.
Goldman Sachs estimates that consumers stand to make $125 billion from the gas-price plunge, as prices have skidded from $3.68 a gallon as recently as July, to $2.68 in December, according to Energy Department data.
Gas stations are a notoriously low-margin business.
According to financial data provider Sageworks, profit margins at privately held gas stations were 1.7% in the 12 months ending in October.
In June, 8 cents out of every dollar that Americans pay for gasoline went to distribution, marketing, retail costs and profits, according to Energy Information Administration data.
TIME FOR OPEC TO SURRENDER, NOW THAT IT CAN NO LONGER CORNER THE MARKET
OPEC — the cartel that used to bully superpowers, unnerve financial markets, and bilk drivers throughout the world — is clinically dead.
Yes, the Organization of Petroleum Exporting Countries is still out there, commanding a phalanx of accountants, lawyers, statisticians and press secretaries who inhabit a nice building in Vienna where self-important ministers from 12 countries and three continents meet periodically to bicker, plot, and issue statements to the world.
Yet the market manipulation that is OPEC’s specialty has become financially ineffective, industrially anachronistic, and — for the cartel’s own populations — economically ruinous.
Some might argue that oil’s 42% dive since July happened not despite OPEC, but because of it; that if the producers had decided last month to cut production, as the markets felt they would, crude’s freefall would have been blocked, and maybe also reversed. Technically, that is true, but fundamentally oil’s collapse is about deeper trends that signal the end of an era.
Back when it was established, 54 years ago last month, OPEC actually had a commendable cause: to transfer oil’s pricing from the foreign companies that pumped it to the developing countries that owned it. It was an act of de-colonization much the same as Egypt’s assertion of its sovereignty over the Suez Canal half-a-decade earlier.
However, having wrested the power to price, OPEC soon abused it. The most famous act in this regard was in 1973, when producers used oil to involve the entire world in the Middle East conflict. Yet that was the exception. The rule was that OPEC coordinated production in order to maximize its members’ income. It was a visible hand’s obstruction of competition, a conspiracy that, if committed in a decent economy, would have landed its architects in jail.
Challenged, the global economy’s invisible hand soon responded. First, soaring prices made automakers produce smaller cars, smaller engines, more efficient power stations, and more energy-conserving buildings, all of which sharply reduced demand and prices. By 1986 the price of an oil barrel that in 1980 sold for $35 plunged to $10.
OPEC responded by trying to flood the markets with oil, hoping that new surpluses and cheaper prices would temper the world’s new energetic discipline. It was in vain. OPEC’s war on economic gravity was failing.
The cartel could have realized at that point that its cause, eternal war on the markets, was not only unjust but also unworkable. They could have but they didn’t. Not one OPEC member used its petrodollars to thoroughly industrialize. OPEC’s members watched indifferently even as China and India industrialized and expanded their middle classes.
To OPEC, Asia’s new economic drive meant only that demand for oil was once again soaring. Emulating the rising Asian powers, and using oil returns to empower the masses — crossed no mind between Caracas and Riyadh.
In Venezuela, a founding member of OPEC, addiction to oil has debilitated the economy so badly that the country now is a powder keg mixing inflation, shortages, emigration, and street riots.
In the Arab world, every third oil barrel’s returns were wasted on arms, and much of the remainder was invested abroad by a thin upper crust of kings, princes, sheikhs, and generalissimos. The rest of 300 million Arabs produced the angry masses that in recent years took to the streets, unseated five rulers, and drowned in five civil wars’ rivers of blood.
Much of this might have been averted had oil incomes reached not the elites that created and ran OPEC, but the masses in whose behalf they purported to act.
There is no indication that OPEC realizes its historic sin, and will now seek its citizens’ prosperity. There are, however, signs that it understands the limits of its game.
It was one thing to pressure markets and blackmail governments when OPEC owned two thirds of known oil reserves, as it did three decades ago. It is an entirely different thing to do this while controlling only a third of the world’s crude.
Worse, from OPEC’s viewpoint, the decline in its share of global oil reserves stems not only from new oil findings, like Norway’s, but from the rise of a new technology, shale, which already has put the U.S. well on its way to becoming a net exporter, and in upcoming years will likely see China joining the American trend.
In short, the laws of supply and demand that OPEC originally set out to defy are winning. Suppliers who consciously choked competition and created shortages soon encountered new competitors creating surpluses. This is certainly true for shale, whose production OPEC will not be able to prevent through price manipulation, as has been rightly argued here.
In sum, the emerging oil glut means that OPEC has lost its right to life.
Even when its market share was twice what it is today, the cartel was ultimately defeated by the developed world’s reduced demand and expanded prospecting. Now, with its market share half what it was, and with the industrialized world developing alternatives to its oil — OPEC has lost the ability to tell the markets what to do.
Consequently, it no longer makes sense for its members to face the markets as a group. Sooner or later they will get this, and effectively disband, like any defeated army.
Hopefully, once they realize they lost the ability to trick the markets, and economic conceit will give way to moral introspection and social compassion — OPEC’s governments will finally ask not what oil can do for them, but what they can do for their people.
[From current articles published by MARKETWATCH]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis