Are Current Oil Prices Fair - Essay Example

Bao Lai Nancy Long ENG 191 9/11/2006 Are Current Oil Prices Fair In this highly industrialized economy, fuel is considered a necessity for the government, business organizations, and households alike. It is noted that consumption in the United States has sharply risen to support the growing economy and accommodate technological changes. However, this makes the life of the Americans fully dependent on oil. The rise in oil prices often presents financial hardships for households as their disposable incomes are squeezed to contain the mount in prices.

The current gasoline price averages at $1.68 per gallon and even reaches $2.00 for other states (Issues and Controversies). Though oil companies attribute this high price to crude oil cost, operational expenses, and external factors like calamities, this paper argues that the true villain is the companies' quest to generate extremely high profits. Globally, the price of oil is highly dictated by the price of crude oil. The United States imports crude oil from Oil and Petroleum Exporting Countries while local refineries process this to fuel.

Increase in the local oil prices is often linked by oil companies to the prices charged by OPEC. However, the Energy Information Administration states that only 47% of the prices charged by oil companies accounts for the crude oil cost (Hebert 1). Thus, more than half of the local oil prices covers the company's operation, marketing expenses, and profit. Furthermore, the OPEC president asserts that the current crude oil price of $60 per barrel is fair and equitable. Crude oil, being priced equitably and accounting only for less than half of the local oil price, cannot become the sole factor in determining oil prices.

One of the highest costs being incurred by oil companies is allocated for refinery expenses. However, Allan Greenspan recognized that "American business, to date, has largely succeeded in finding productivity improvements that have contained energy costs." This emphasizes that the oil companies' investment in refinery capital has been recovered and is now offset by economies of scale. Furthermore, recent studies show that the "crack spread," which is the difference between the price of a barrel of crude oil and an equal amount of refined gasoline, is now over and above the $8-$9 per barrel needed by the company to have a good, consistent profit.

Currently, refineries' crack spreads range from $20-$30 which signify excessive profits in the expense of American customers (Stupak 3). Since the oil companies currently reap economies of scale and are able to generate wide crack spreads, high oil prices cannot be reasonably attributed to high operational costs. The financial statements of oil companies sufficiently support that high oil prices bring in generous profits. For the first three months this year, the oil price hike has brought $15.

7 billion combined profits for Chevron, ConocoPhillips and Exxon Mobil. It is also found out the increases in oil prices "result in large transfers of wealth from consumers to a few companies that refine and market gasoline. Over the course of a year, each 10-cent increase in the price of gasoline results in approximately an additional $10 billion in revenues to the oil companies" (Davidson 25). Oil, as a basic commodity in an industrialized country like the United States, should be priced equitably for the benefit of every customer.

However, the quest for fair prices is hampered by the profit-maximizing goal of each oil company. It is shown that the price of crude oil, refinery cost, and calamities do not fully account for the high and unfair oil prices. The major villain is companies' desire for profits.Works CitedDavidson, Lee. "Blame game: Just who is the price-villain, anyway" Deseret Morning News. May 21, 2006. Salt Lake City Greenspan, Allan. "Economic of Oil." CQ Congressional Testimony. June 7, 2006Hebert, Joseph.

"OPEC President Says Oil Priced Fair." September 10, 2006. Retrieved September 11, 2006 (http://www.wtopnews.com/index.phpnid=111& pid=0&sid=713225&page=1)Issues & Controversies. Update: Fuel Prices. Facts.Com. May 24, 2000. Retrieved August 22, 2006 (http://www.2facts.com/ICOF/Search/i0901140.asp)