(CN) — Oil company profits are way up, but gas station profits have declined in 2022 as prices soared, according to a study published in Barron’s.
Against the bluster from politicians about price gouging at the pump, former Treasury Secretary Larry Summers called the idea “dangerous nonsense” last month in an interview televised by Bloomberg.
"The 'price gouging at the pump' stuff ... is to economic science what President Trump’s remarks about disinfectant in your veins were to medical science,” he said.
Rather than solve high prices, Summers, who was President Clinton’s treasury secretary and director of President Obama’s National Economic Council, warned that anti-gouging legislation could lead to shortages.
Such warnings haven't stopped Democrats from rolling out new bills, investigations and even letters to the heads of the oil companies. “Profit margins well above normal being passed directly onto American families are not acceptable," President Joe Biden wrote in letters made public on Wednesday.
As many economists see it, however, the industry could be riding a wave more than creating it.
Oil prices account for about 55% of the retail cost of gasoline, but most large oil producers such as Exxon have virtually no control over Americans’ pump prices and indeed no ability to set prices in general.
They typically sell crude oil to the highest bidder in a global market, which might be a domestic refinery or an overseas processor or one of many international financial institutions that trade oil contracts.
Far from being a monopoly, Exxon owns less than 1% of the world’s oil reserves and produces less than 3% of its daily oil supply, so it has little if any power to influence global commodity prices. In addition — and perhaps surprisingly — Exxon frequently buys more crude oil than it produces for its refining operations. In 2010 the company spent $198 billion buying crude oil on the open market.
Although the U.S. is the world’s largest oil producer, all U.S. companies together account for only 14.5% of global oil production and thus even if they all somehow worked together they would have a very limited ability to sway global markets. The 13 OPEC countries, by contrast, produce a combined 44% of the world’s oil. Russia accounts for 13.1%, and Canada produces 5.8%, according to the U.S. Energy Information Administration.
Since oil prices are the result of supply and demand in the global market, when prices spike, oil companies can rake in huge profits, as is happening now. But when oil prices tumble — as they did during the pandemic due to dramatically weaker demand — producers can also register enormous losses. Exxon lost a staggering $22.4 billion in 2020.
At the other end of the supply chain are gas stations, which do control pump prices. Operators of the country’s 150,000 gas stations are generally independent retailers; although a station may use the logo of a big oil company, only about 0.4% are actually owned by one, according to the National Association of Convenience Stores.
“Basically nobody’s vertically integrated anymore,” said Patrick De Haan, head of petroleum analysis at GasBuddy, a website that tracks gas prices. “The big oil companies got out of retail a long time ago. There’s hardly any profit so why stay in the industry?”
Station owners set prices based on what they expect to pay for the next delivery and typically have very small margins; in fact most of their profits come from selling snacks, sunglasses and similar items, De Haan said. Because people buy less gas when the price goes up, most gas stations are actually far more profitable when prices are low.
Jason Furman, who chaired President Obama’s Council of Economic Advisors, dismissed claims that corporate greed was responsible for high prices as “just political ranting.”