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May 24, 2007
Price Gouging at the Pumps
by Jack Lee
In response to Tina's questions I did more research and came up with some startling results. Such as, The U.S. Energy Department reports that refining capacity in the United States has grown by just 2.4% since 1977.
Jack: Tina, I can appreciate your perspective as a small business owner and how you are often perplexed by the strange and confusing ways of our IRS that can allow corporations to hide profits or show profits when there are none.
It shouldn't be that way obviously, but it's because the American people are not demanding strongly enough that it be changed! Then again, we practically have to beat Congress over the head to get them to respond to us, a case in point is immigration. So it's not entirely our fault either. Despite the polls showing that 2/3rds of Americans are absolutely hopping mad about unchecked, illegal immigration, Congress has been outrageously slow to react. This latest immigration bill was nothing more than capitulation for amnesty, fixing the IRS is monumental compared to fixing immigration...but I digress.
Tina: Q. When crop losses occur the price of the product to the consumer often goes up Jack...who is it that makes the money from the higher prices? How does that work?
Jack: A. Speaking only for ourselves as walnut growers, when we have a crop loss (about ever 5-7 years) we just lose the money. Unless it's an industry wide crop loss and the ag industry has no storehouse of reserves and IF we still have some crop left to sell, then and only then can we come out. That's a lot to ask and the odds are against this farmer, but not the oil companies, a shortage of product actually benefits them.
We get no gov. subsidies like the oil industry. Our tax breaks are few compared to the oil business too. Oh sure, we can buy expensive crop insurance and that's about our only defense for a bad year.
Lastly, the middlemen are the major benefactors of a favorable crop price. Everybody takes a cut from the end retail sale before it finally gets back to the farmer, the oil business realize profits almost immediately. Most of our crop payouts are done in 3 payments and you never know what your crop brought in until that final payment which could be over a year later!
Tina: Jack, i'm not a tax expert by any means but I've had a corporation that has seen both very lean and incredibly profitable years...and the "profit" or lack thereof on my returns never makes much sense to me. We have experienced "record profits" at times when we couldn't squeeze a dime out in terms of cash flow. These companies are a lot more complicated than my little enterprise and because of these things, I don't know how you can be so certain on this one...but I know you're not alone.
Jack: As to those complex IRS ways, with write-downs, write-offs by oil corporations for depreciation, losses due to natural disasters, fires, new capital investments, etc. Consider, the oil companies have been doing this for decades, so when a profit spike happens over an extended number of quarter filings for every major oil company in the USA, while said oil companies are delivering slightly less product (85% of capacity), then a prudent person must wonder... is it just an IRS thing or creative bookkeeping doing this or is there something else going on? Like price fixing and/or price gouging? I go with the latter till proven otherwise.
Oil speculators are known to justify their actions to raise prices by saying things like, "Oh gosh, we think the middle east might be unstable soon, so we better drive up the price in case there is a break in supply!" Joe Six-pack reads the headlines and says, "A crisis in middle east? When hasn't there been a crisis in the middle east? What going on here???!" I say with great confidence, that at least a portion of your pump price is contrived, not all, but enough to make excess profits by playing with our national security. The oil companies do it because they can...they have a monopoly and they have the power to tell us how it's going to be and we can like it or pump it.
I heard recently the oil industry has shut down 15 U.S. refineries over the past 20 years and big oil has bought out many smaller oil companies which goes to eliminating the competition. As to the refinery closures, most couldn't pass the EPA standards and upgrading them would not have been cost effective, so they just went down forever.
It's estimated that due to government regulations and red tape it would take 7 years and a minimum of $100 million dollars to build a small refinery - if you could find a site - and then if you ad in all the permits and fees the cost jumps to about 2.5 billion!
The U.S. Energy Department reports that refining capacity in the United States has grown by just 2.4% since 1977, while demand for gasoline has risen 27% during the same period, so there is one major bottleneck that leaves us in frequent trouble when everything doesn't go exactly as planned. Government on one side, monopoly on the other...we're S-O-L.
Posted by Post Scripts at May 24, 2007 10:07 AM
Comments
perplexed by the strange and confusing ways of our IRS that can allow corporations to hide profits or show profits when there are none.
Jack my CPA is an ex-IRS, Rhodes Scholar, straight shooter...she discourages "hiding" anything because she hates going to court.I document everything so we can fight them if we must. We work within the law to pay the lowest tax bill we can (who wouldn't?) but the law, because of it's complexity, often causes people to pay MORE than they must simply because they don't have a good CPA. Tax "cheating" is nothing more than a political hook...folks like Kennedy write these laws so THEY have legal ways to avoid paying taxes...NOBODY would ever show profits unnecessarily.
The tax laws are ever changing and so complex that CPA's must attend school every year just to try to keep up...even then the language of the law leaves nothing but uncertainty for comfort.
What I was trying to demonstrate is that "profits" don't necessarily mean a huge pile of cash is lying around. Tax reporting is like a snapshot...it's taken at a moment in time. No one reports the years when there are losses...no one reports what the "profits" will be used for or have already been earmarked toward...in my case it was parts for future orders, next years sizable pension deposit or a piece of new machinery. These expenses will show up on next years return. A "profit" in any given year doesn't mean anything except that things are going reasonably well.
When crop losses occur the price of the product to the consumer often goes up Jack...who is it that makes the money from the higher prices?
I was thinking you would say nobody. When there is a shortage due to crop failure the price goes up but the number of buyers goes down...some (maybe most)people would rather do without than pay the higher price. The same will happen with gasoline if the price really matters to people. they will make fewer unnecessary trips...BBQ in the backyard instead of going out to the lake...do without that loaf of bread and have soup for lunch...ride share with a neighbor or friend.
...is it just an IRS thing or creative bookkeeping doing this or is there something else going on? Like price fixing and/or price gouging?
How about an expanded market. More folks chasing the same amount of product...supplies become tight, competition for product comes into paly and the price goes up. Meanwhile the oil company is turning summersaults trying to figure a way to supply that demand...it's what they are in business to do...they want to keep their customers happy...they want the price to come down. The best possible scenerio is a low enough price to satisfy the customer and high enough sales to cover your nut and still allow for profit...some years it's high..some low and some in between.
It's estimated that due to government regulations and red tape it would take 7 years and a minimum of $100 million dollars to build a small refinery - if you could find a site - and then if you ad in all the permits and fees the cost jumps to about 2.5 billion!
And we worry about another dollar at the pump while many of us have no trouble at all paying much more per gallon for coffee or water! The oil companies are being squeezed from every angle and have still managed to deliver we Americans a lot of gasoline over the years at reasonable prices. The world is changing...they now must adjust as best they can...just like the rest of us. They may one day far in the future (or sooner given a miraculous discovery)go the way of the buggy whip...but for now, I would bet they are doing all within their power to bring you the best product they can at the best price possible.
The biggest culprit is government taxes and regs, including environmental idiocy...and the biggest wall is the growing world demand.
Oil speculators are known to justify their actions to raise prices by saying things like, "Oh gosh, we think the middle east might be unstable soon,
Oil speculators are playing a game just like the rest of us. They supply capital through investment...it is their job to speculate about the market in order to turn profit rather than loss. The benefit comes when their investment yields a new source of product. Theirs is a gamble much like farming...they don't know what will happen...dry wells and no rain...same thing. It's not insidious...it's how to play the game.
I heard recently the oil industry has shut down 15 U.S. refineries over the past 20 years and big oil has bought out many smaller oil companies which goes to eliminating the competition. As to the refinery closures, most couldn't pass the EPA standards and upgrading them would not have been cost effective, so they just went down forever.
Maybe big oil bought the small oil companies because they couldn't make it...it happens all the time. At least whoever owned the small companies were "bought out" rather bankrupted! It doesn't mean they set out to eliminate the smaller company.
The oil companies do it because they can...they have a monopoly and they have the power to tell us how it's going to be and we can like it or pump it.
'Like it or pump it"...nice turn of phrase...made me laugh. They don't have a monopoly...they are in fierce competition with each other. There are different companies in many countries around the world.
We are SOL Jack...but it's being caught in the midst of great change that is causing all the pain...so far it's not a holocaust or great depression. I always say we're just playing with monopoly money (it belongs to God not me and I can't take it with me when I'm gone) so...be happy and consider the lillies of the field...with faith tucked under your arm...right there in your heart...He will provide.
Posted by: Tina at May 24, 2007 08:25 PM
Tina in most cases oil speculators don't provide benefit to anyone except themselves. They are pro's trading on the futures market and it's a crazy dangerous business, just ask the traders for ENRON if you can find one. They like to manipulate prices whenever they can to gain some slight edge over their competition.
President Bush blamed the "futures" speculators for exaccerbating problems in supply and demand and I agree with him, but of course it's not the entire problem, there's so much, much more to this pricing situation as you have noted.
As for the government taxes of about .60 cents a gallon, we're getting off easy compared to Europe.
As to the tax loop holes I noted earlier, I was referring to legitimate ways corporations can show a profit when there was none and show a loss when there was a profit. It's all in how you structure your assets and count deductions.
Posted by: Jack at May 25, 2007 11:37 AM