Oil Companies Profit on Mideast Crisis

by John M. Curtis
(310) 204-8700

Copyright March 1, 2011
All Rights Reserved.                                             

               Expecting whopping profits for the first quarter of 2011, the nation’s leading oil companies have used instability in North Africa and the Middle East to gouge consumers at the pump.  Since revolutions in Tunisia and Egypt last month, U.S. oil companies have ratcheted up pump prices by around 25%.  While price of crude oil is vaguely attached to pump prices, the oil industry pounces on the chance to raise prices causing a surge in quarterly earnings.  Global oil and gasoline prices are bid up by traders on commodity-trading floors like the New York Mercantile Exchange.  Over 55% of U.S. gasoline is currently refined in Asia and exported via tanker directly to the U.S.  News of Mideast unrest gives cartels like the U.S. oil industry to the green light to fleece consumers.  Escalating pump prices is a punitive tax on consumers, hurting short and long-term economic recovery.

            Oil companies jumped on Libya’s unrest causing a 13% rise in oil prices in just one week, currently trading at around $100 a barrel.  Despite Saudi Arabia’s promise to ramp up oil production to compensate for any losses from Libya, NYMEX traders continue a relentless bidding war, driving crude oil prices through the roof.  West Texas intermediate crude jumped to over $98 a barrel while U.K.’s Brent crude exceeded $114 on ICE trading futures.  Pump prices in the U.S. rose 20% in only one week, putting more cash into publicly traded oil companies like Exxon-Mobil.  Protests in Iran also promise to give trading exchanges and global oil companies more reasons to drive up prices.  Small increases in crude oil prices have little to do with pump prices, arbitrarily decided by what oil companies can get.  There’s currently no federal agency putting a lid on gasoline pump prices.

            Growing protests in Iran make for a perfect storm in U.S. and foreign oil companies.  Though Iran accounts for about 2.5 million barrels of crude, it’s only about 3% of global output or demand.  News of Tehran’s problems, sparked by pro-reform movements in North Africa and the Middle East, spiked oil prices  Energy experts don’t expect the Mideast to settle down before the end of the summer, prompting rises in fuel prices.  Worries about the 1.8 million barrels produced in Algeria, the Mediterranean, North African nation just West of Libya, also gives oil companies the go-ahead to raise pump prices.  Given the price-gouging mood of U.S. oil companies, President Barack Obama must put the industry on notice that if quarterly profits jump, he’s prepared to hold the industry accountable, including implementing a windfall profits tax to rebate consumers.

            No one industry should gouge consumers at the expense of virtually all other industries.  Oil Price Information Service analyst Tom Kloza expects oil prices to rise from the current national average for unleaded regular of $3.35 a gallon to $3.50-3.75 a gallon by April, leaving consumers reeling.  “So we should see prices flatten out,” from the current rapidly escalating trend, seeing an eventual end to the latest round of price hikes.  Watching the oil industry torpedo economic recovery, Obama should put the industry on notice that he won’t tolerate price gouging during times of recession.  “The pressure on spare capacity will be immense, as will be that on oil prices over the course of 2011,” said Barclay’s Capital analyst Helima Croft in a research note, signaling to traders to keep driving prices up.  U.S. officials must disconnect analysts from global energy trading floors.

            Unbridled speculation in oil on global trading exchanges has pushed crude oil into the stratosphere.  Before we see another inexcusable run-up in crude oil and pump prices like we saw July 11, 2008 when crude oil hit $147.30 on the NYMEX, Obama must show some spine and put the oil industry on notice.  During Bush years, the oil industry made the biggest profits in U.S. history.  Most economists believe that if crude oil continues to climb, it’s going to fuel inflation and slow down economic recovery.  “The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation,” said Federal Reserve Board Chairman Ben S. Bernanke.  Bernanke knows that runaway pump prices is a punitive tax on the consumer capable of weakening consumer spending, stalling economic recovery, causing a double-dip recession.

            Profiting from geopolitical problems in North Africa and the Middle East, the oil industry must stop gouging consumers and play an constructive role in U.S. economic recovery.  Continuing to hike oil and gas prices, the industry becomes a threat to the U.S. economy.  No one begrudges any industry a right to reasonable profits.  Exploiting current events in the Middle East to justify runaway price increases shows a cavalier industry, placing greed above doing what’s right.  “All eyes continue to be on the turmoil in the Middle East,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.  Just like the oil industry, the stock market also has a responsibility to the U.S. economy.  Runaway oil prices trigger stock market profit-taking, assuring corporate profits but they also sow panic into responsible investors hurting the economy.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.