Oil Companies’ Record 3rd Quarter Profit Reports Omitted “October Surprise” Profit Drop;

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Matches Gasoline-Pricing Pattern of Two Previous Election Years

Santa Monica, CA — The recent sharp drop in gasoline prices from this year's record highs is steeper than the drop in the price of crude oil, indicating that refiners are taking less profit in order to push the retail price lower as the election approaches, said the nonprofit Foundation for Taxpayer and Consumer Rights (FTCR). It is a pattern that is also evident, though less sharply, in the autumn of the last two election years, 2002 and 2004.

Oil companies were able to post another round of record or near-record quarterly profits last week, despite a 70-cent-a-gallon drop in pump prices from the summer's record highs. It's all in the timing, said FTCR. The majority of the drop from the $3.00 (and more) per-gallon highs of late spring and summer has occurred since the last half of September, so any substantial shrinking of profit wouldn't show up until the fourth-quarter profit reports that will be issued next February, said FTCR.

A snapshot of federal gasoline and crude oil price data for the first week in October over the last decade, compiled by independent oil analyst Tim Hamilton for FTCR, found that though gasoline prices did not necessarily fall in election years, the difference between the spot cost of crude oil per gallon and the price of gasoline narrowed in recent election years compared with non-election years. Since oil companies' costs of refining and taxation are typically stable over time, this gap between the cost of crude oil and the retail price of gasoline is a good indicator of rising and falling profit on gasoline production. Analysts and oil companies have said they expect a dip in oil-company refining profits in 4th quarter reports.

Hamilton analyzed the gap between pump prices and the spot price of crude oil in election years, compared to the non-election previous years. He found that in 2002, 2004 and now in 2006 there was a moderate to substantial shrinking of that gap, meaning less profit potential for the oil companies, in measurements taken the first week in October. See his charts here:

Gasoline Prices

Gap between crude and gasoline

Underlying Data

"This pattern of the last three election years is an indication that motorists who smell something fishy in the rollercoaster prices they've endured this year may be on to something," said FTCR President Jamie Court. "The rise to record high gasoline prices this spring unleashed a wave of justified criticism of bloated oil company profits. Now the price drop in the pre-election period, by a percentage well beyond reductions in the price of oil, smells just as bad."

Even the loss of half of the oil shipped by BP from Alaska after a pipeline accident did not put a dent in steadily rising gasoline production, which exerts downward pressure on retail prices. The situation is the opposite of spring and summer, when gasoline production and inventory, particularly in the Western states, kept falling from the previous year, said FTCR. "Ordinarily an event like the BP shutdown in August would have been an excuse to cut production and raise prices for at least a couple of months," added Court.

Though this year's price decline was exaggerated by last year's post-hurricane high prices, the 51-cent drop in this key profit indicator is far more than this year's absence of hurricanes could account for, noted Hamilton.

"The public and even state regulators have access to so little information about oil company operations that they can never entirely prove what they may suspect, but the oil companies also cannot disprove it without opening their books," said Judy Dugan, FTCR's research director. "The oil companies will never do that on their own, but state and federal governments should certainly demand more and better public information about pricing, production and reserves of gasoline."

As for the current downward price blip, motorists shouldn't expect it to last, said FTCR. The inexorable trend of gasoline prices and oil company profits is up — at least until the robust development of alternative energy eases U.S. dependence on oil. One model is California's Proposition 87, the Clean Energy Initiative.

"Despite the blizzard of warring TV ads that voters have had to endure on Prop 87, the truth is that oil companies have abundant incentives against commercial development of alternative fuels," said Dugan. "The companies' most profitable scenario is to sell less product for steadily higher prices, even though they have tens of billions in spare cash that could be going to development of clean fuels. That's why voters have to ignore the negative ads bought by Chevron and other oil giants, and vote to get oil alternatives to a point where they're truly competitive."

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Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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