Signs of spring
Sure signs of spring: Bardon's is open for ice cream in Traverse City, the robins and warblers have returned, and gas prices are up. Any day now a Washington politician will call for an investigation into price gouging by Big Oil.
There have been more than two dozen federal and state investigations into the oil industry in the last seven years. None have found evidence of illegal price fixing or artificial tightening of the oil supply. It would be foolish for an industry under such scrutiny to illegally raise prices. Yet the accusations persist.
Complainers like to criticize oil company profits as proof that something fishy is going on. The size of the profit is impressive; Exxon set a record in 2005, earning $36.1 billion dollars. That's a lot of zeros! But keep in mind there are a lot of zeros in Big Oil's expenses. They don't just siphon pure gasoline from some magical oil pond. Building just one offshore well costs up to a half a billion dollars.
In 2004 Exxon earned 9.8 cents profit for every dollar of revenue. Exxon's profit margin grew to 10.7 percent in the fourth quarter of '05. Not bad, but not much compared to Apple (22 percent), Intel (24 percent), Citigroup (33 percent), or Yahoo which earned 45 cents profit on every dollar of revenue. We don't hear any price gouging theories about Big Software or Big Banks or Big Yahoo Thingys.
Local critics claim that our neighborhood gas stations raise prices on Thursday anticipating heavy weekend traffic, and then lower prices on Monday after the tourists leave. Coincidence? Maybe. Maybe not. I've also witnessed gas prices go down before a major weekend. If there is any truth to the theory that operators purposely raise gas prices on weekends, critics should also aim their remarks at hotel operators.
The price of a good hotel room in Traverse City nearly doubles from January to July. Rates are higher on weekends than on weeknights. Demand for hotel rooms goes up and so does the rate. Imagine the profits from a hotel built 30 years ago. The price of building materials and labor was much cheaper, the mortgage is paid, but the owners charge about the same as properties built in the last few years. Talk about unfair profits and gouging! Shouldn't there be some kind of cap for these profit-mad hoteliers?
Like hotel rooms in Traverse City on a sunny July weekend, oil is in high demand and low supply. Prices are bound to go up.
Many people think nothing of paying $3 for a 12 oz. cup of coffee ($30 a gallon) which seems to be in endless supply. Yet, they curse the oil companies and local retailers when the price of gas hits $3 a gallon.
Consider that oil companies have to hire a lot of brainy people to figure out where they might find some oil. Then they have to pay a load of engineers to design a system to extract the oil from under the ground or beneath the sea, if it indeed exists. At this point they've invested a lot of money on the chance of discovering black gold. If they hit a gusher they have to pay a bunch of engineers, lawyers, and other assorted smart people to figure out how to get it from the ground to the refinery without violating any environmental regulations. Oh, and they have to invest in a lot of expensive equipment to be operated by an army of high-priced employees.
The oil companies now have a big pile of money invested (a lot of zeros) but no gasoline and no revenue. They have to refine the oil into a variety of fuels including different gasoline blends for different regions at different times of the year-all required by law. Then they have to get the refined gasoline to a gas station via ships, trucks and pipelines. Yes, this also costs a lot of money.
Amazingly, gasoline is available around the clock at practically every major intersection. We just have to pull in, swipe a card, put the hose into the side of our car, and drive away! Not a bad deal in my book.
Almost forgot about the taxes. For every gallon you buy you pay the State of Michigan 19 cents in gas tax, plus 6 cents in sales tax and you pay out 18.4 cents to the federal government. The tax revenue is supposed to be used for road construction and maintenance.
If you still consider "Big Oil" to be a sinister force engaged in price gouging and market manipulation, get ready for corn. The price has doubled and is at a near record high and climbing. As a result, we're paying more for everything from beef to fertilizer to taco shells. And the federal government is handing out tax breaks for the corn-based ethanol industry, soon to be recognized as Big Corn.
Ron Jolly has been on radio and/or TV in northern Michigan for 23 years. He has hosted the WTCM NewsTalk 580 morning program for 12 years and is the author of The Northern Michigan Almanac (U of M Press/Petoskey Publishing, 2005).