State of the Shelanman

Theory #1: Oil Companies Are Making a Killing

Most of the companies that I buy gasoline from do not buy their oil on the market, they drill it themselves. As an example, consider Shell. The Royal Dutch/Shell Group drills for oil all over the world, including Russia, the Philippines, Nigeria and the United States. (source: Shell).

Why does this matter? Simple. If Shell is going to drill for oil, refine the oil into gasoline, and then sell me the gasoline, at what point does it need to buy oil on the open market? As far as I can tell, never. In fact, oil companies are making an absolute killing -- they are the ones who have oil to sell on the market... at nearly $49.00 a barrel, I might add.

This theory might explain why gasoline prices have not rocketted up as oil prices have, but something is missing.

Thoery #2:It Takes Time to Refine Oil

This theory is very simple, and I believe the most plausible of the 3. It goes as follows: Oil cost about $49 a barrel last week. So, over the course of the next 4-6 weeks, gasoline will be made and sold that used this expensive oil. Thus, over the next 4 to 6 weeks, we should expect to see a huge spike in prices at the pump as the gas that cost a fortune to make is finally sold.

About 2 months ago, oil was falling, it reached a relative low of about $36 a barrel -- and thus, recently we have been paying a bit less for gasoline -- the (comparatively) inexpensive-to-create-gas was still available.

Now, however, the cheaper gas is running out, and all that is left is the gas from nearly $50 oil, so we will pay more. Additionally, demand is creeping up again, Memorial Day and Labor Day are two of the highest-demand days of the summer.

Theory #3: Oil Companies are Co-Conspirators

You know how this theory goes... it is the most popular one, for some reason. There are only a few oil companies, and it is very difficult and expensive to enter the oil business. Thus, an artificial, government-created oligopoly exists. Since this oligopoly has complete control over gasoline prices, especially in California which has different gasoline formulation laws than the rest of the country, means that oil companies can charge whatever they want -- so long as they do it in a way that prevents consumer backlash in the form of lawsuits (price gouging). This explains why when gasoline prices fall, they do so at a rate of $0.03 - $0.06 per week, yet rise at $0.05 - $0.15 a week when they are on the upswing.

Indeed, Shell oil recently closed a functioning gasoline refinery in California. They did not sell it. They have no plan to repair or rebuild it -- they simply closed it down. There are debates as to whether or not the refinery was profitable. Shell claims it was not, that it was old and outdated and nearly worthless. The conspiracy theorists claim that it was a very modern profitable refinery. I have no information one way or the other, however there are no plans to build a replacement refinery, and yet oil companies insist that there is simply not enough refinery capacity to meet demand... smells of rotting fish, eh?

I am of the opinion that a mixture of these three theories is in play. I tend to lean strongest on theories 2 and 3, I know too little about international oil dealings to be certain my analysis in theory #1 makes sense... Well, Mr. Peltz. Here you are, now perhaps you will be less confused. Feel free to mention my theory in your next column, but do give me a mention if you do? Thanks!