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Beat Big Oil


With the price of gasoline down to pre-Katrina levels, I’m not hearing so much about the evils of “big oil”. When the price goes up again, folks will resume their mutterings of envy and victimhood. Complaining about the price of gas is standard American small-talk, much like complaining about the weather.

I don’t get it.

Despite repetitive and persistent investigations by Congress, proof of conspiracy or collusion by oil companies has not been found. Crude prices are set by bids in a global open market, and even OPEC’s cartel power has little influence on price.

Gasoline prices are determined in regional markets, each with distinct distribution and regulatory costs (State taxes and formulation mandates). But the pump price is still essentially determined by the well price, and nobody—no secret cabal—fixes the price of gasoline.

But let’s pretend there is some devilish group of manipulators behind the price of gas. We do not have to be victims. We can join them.

My standard exhortation when complaining about gas complainers is, “Buy stock!” Anyone concerned about multi-billion-dollar “windfall profits” can get a piece of the booty. If the system is rigged, why not at least balance one’s victimhood against a stake in the exploitation? If speculators are making a killing, let their fiendish work grow your portfolio.

Coyote puts it like this:

Let's say at the age of 30 I wanted to take an equity stake in my current and future fuel needs. I take out a loan to buy enough Exxon stock such that the annual dividends will cover my fuel purchases for the year. If fuel prices go up, the dividends likely go up as well, so I am sheltered from the vicissitudes of worrying about my monthly fuel bill, and all I have to do is pay off a regular and predictable mortgage on my Exxon stock. In 30 years, when the note is paid off, likely I have a big capital gain in my Exxon stock, which I could cash in at retirement if I want to downsize to less driving and fuel use. Or I can pass it on to my kids.

With such a strategy, one will not be a victim of rising oil prices. Instead, those rises are empowering. But then what if the price doesn’t rise too much? All that money tied into oil production could probably earn more somewhere else. Even ExxonMobil only managed to make 10% profits in the last couple of “windfall” quarters. Ten percent is pretty close ot the long-term average of all companies, nothing exceptional. It’s better than the bank pays, but there are risks.

One holding a Certificate of Deposit from Mainstreet Bank does not have to worry about refinery explosions, tanker hijackings, or a greedy Congress. Oil executives and oil shareholders do. That 10% profit is subject not only to the whims of nature and legislators. Consumers might change their habits and demand less oil. It’s happening—US driving is down 4%, and staying down even as pump prices are low. Doesn’t matter how high the price is; if nobody wants what you’re selling, you’re not making a profit.

Now I'm not saying that “big oil” is at risk of losing money. But consumers are showing their market power. In the mid- and long-term, the level of profit in oil is far from guaranteed. If it was, wouldn’t everyone invest in Exxon?