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Wednesday, October 22, 2008

Crude closes at $66 a Barrel a 16-month Low. Why is Gas at the Pump Still High?

I see the price per barrel of oil dropping daily yet the price at the pump seems to stay the same. Every time I fill up my car I ask myself what's up with gas prices not going down? In downtown Seattle gas is still going for $3.53 at the 76 Station on 351 Broad St N & Denny Way and $3.39 at the Shell on 1500 Broadway Ave E & E Pike St. Why does it take so long for the gas price to drop yet if there's a hurricane developing in the gulf the price at the pump jumps overnight?

I'm been doing some research that surprisinglyis contradicting my perception regarding the correlation between prices at the pump and price per barrel. In Seattle since we have such a high tax on fuel the numbers might be skewed so they don't accurately reflect a decline in gas prices at the pump. Here's a list of all US States and total taxes on gas http://www.seattlegasprices.com/tax_info.aspx. Washington State is one of the highest, check out your state's total taxes on fuel. The price you pay at the pump, is based on the projected supply and demand months out.

The WTRG.com http://www.wtrg.com/daily/oilandgasspot.html has a very useful graph that maps the relationship of crude vs. gas prices. This number of course will vary by region. There seems to be a direct correlation between price per barrel and price at the pump even though sometimes it feels otherwise. Here’s another graph out of the UK demonstrating the correlation http://www.whatprice.co.uk/petrol-prices/petrol-oil.html.

Another surprising fact about oil companies I discovered is that after taxes the big oil companies with their so called "windfall profits" only keep a fraction of their initial profit. http://seekingalpha.com/article/63131-exxon-s-2007-tax-bill-30-billion For example in 2006 Exxon Mobile had $39.5 billion in profits, but had a tax bill of 28 billion. Leaving a 2006 profit of 11.5 billion. Walmart to give you a comparison posted a profit of 11.23 billion http://money.cnn.com/magazines/fortune/fortune500/snapshots/1551.html. In 2007 Exxon Mobil had a profit of 40.6 billion and a total tax bill of 30 billion. Total profits for 2007 were 10.6.

Don’t get me wrong 11.5 and 10.6 billion is a ton of money, but perception of a totally corrupt oil market doesn’t always equal reality. I withhold judgment at this point… where there’s billions of dollars there’s got to be some corruption and/or manipulation. There’s no don’t that the market/price for crude oil is controlled just look at OPEC who called an emergency meeting this past Friday spooked by the 50% decline in the price per barrel from $147. The 13-nation group might cut production by millions of barrels in order to get a price spike. Iran is looking for a price of $100 a barrel, and Venezuela at $80-$90 (http://ap.google.com/article/ALeqM5iTKFqY44EEha_Fb9CRDMjU692BWgD93VLFI00).” They have to be careful though not to further fan the flames of a global recession with the help of high energy prices. Doing this will decrease demand even further thus lowering the price per barrel even more.

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