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Petroleum Retail Price Played by the Oil Industry!

May 8, 2011

A few months ago, Headlines across the country read: Gasoline retail prices reached a 2-year high – Regular grade at-the-pump gasoline top $3 a gallon in all regions of America – Los Angeles hits $4 – Oil and gas supplies grow even as demand for gasoline is weak – $5 gasoline predicted by Memorial Day!

In a surprising correction, oil prices took a steep dive last week, falling by nearly 13 percent. On Tuesday, the spot price for West Texas Intermediate crude delivered in Cushing, Okla., was $110.60 a barrel. By Friday, it was selling for just over $97 a barrel.

Traditional excuses for increasing gasoline prices are hard pressed to justify recent and possibly past price adjustments, such as:
• OPEC supply shortages
• Decreases in U.S. crude oil production
• Strong consumer demand
• Disruptions in the supply chain.

The following chart shows the at-the-pump prices of petroleum from 1193 actual fill-ups made in Fort Worth, Rio Vista, College Station and Houston over the last 32 years. Two curves are shown on the plot. The lower curve shows the actual price paid for each gallon. The upper curve is the data adjusted for inflation.


While, many of the spikes correlate to recent oil crises such as the OPEC oil embargo of 1973-1974, the Iranian revolution of 1978-1979, the Iran-Iraq War initiated in 1980, the first Persian Gulf War in 1990-91, the oil price surge of 2007-2008 lacks few if any of these factors. The curve shows a steady increase since 911, but fails to explain the steep drop in 2009.

When oil prices started to rise in February 2011, demand for gasoline was on the decline. Supply was essentially unaffected by the unrest in the Mideast. Geo-political conditions have not significantly changed from February to May. In fact, unrest in the Mideast, which was never a real reason anyway, may be intensifying rather than easing. Especially on the heels of Osama bin Laden’s death.

If supply, demand and global conditions are not contributing factors, why then is the market reacting this way. Rather it seems that petroleum prices have more to do with control: the prospect of heavy profits leveraged in times of crisis on top of a flawed U.S. energy policy. Like the Emperor’s New Clothes, the oil companies finally show their true colors.

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