ECONOMIC ANALYSIS:

Watch the March 16 OPEC Meeting Closely, Folks!

by Fred Cederholm

There may be other reasons too, but we are seeing an overall upward trend in crude pricing over these past years mostly due to the erosion of the purchasing power of the US buck.
I’ve been thinking Isfahan, Shah Abbas I, oil pricing, Euros/Dollars, motor fuels taxes, and cost of (petro) goods sold. The 135th Meeting of the OPEC Conference (topic: "Stability of the Oil Market") will open on March 16 in Isfahan, Iran. I find it most interesting that this particular meeting should be held at this particular location at this particular time. It will be well worth watching closely--trust me.

You see, Isfahan has quite a history. I first learned about it while serving as a dormitory floor advisor during my graduate school days at the University of Illinois. A couple of my residents called that ancient city home. It became the capitol of Shah Abbas I (the Great) in 1698. Think of him as the Persian equivalent of Alexander the Great (of Macedonia), or William the Conquer (of Normandy)--he was THAT towering a historical figure. It is no accident that the current generation/class of Iranian missiles (with capabilities of delivering a nuclear payload) are named the "shahabs." I also believe it is no accident this OPEC conference is being held in his capital city.

As the price of oil approached $56 a barrel, both American motorists and the petro market pundits speculated on this summer’s pump prices. How high will it go? Will there be adequate supplies? Will Iran, Syria, Libya, and Venezuela push to axe the dollar as the official currency of OPEC? Or at least give the EURO status as an equally acceptable alternative when purchasing their oil? We already know that is Putin’s intention for Russian oil.

Temporary price spikes in crude can be attributed to supply/output and demand/ consumption, to regional stability/ instability, to growing markets (India and China), and to weather conditions. But... we are seeing an overall upward trend in crude pricing over these past years mostly due to the erosion of the purchasing power of the US buck.

When the price of crude jumps in the Middle East, the pump price increase seems to follow that afternoon. But--when the price of crude drops in the Middle East, it’s days/weeks before the pump price declines as well. Kind of makes you wonder, doesn’t it?

On March 10, 2000 you got a EURO for $.97 and the price of crude was $31.00 a barrel. On March 10, 2005 a EURO cost you $1.34 and the crude oil spot price was $53.40. If you do the math ($31.00 /.97*1.34), and you get a 2005-priced barrel (in 2000 purchasing power of the Dollar relative to the EURO) at $ 42.82.

Consider the growth of dollar holdings by the rest of the world over these past 5 years--we’re buying over a $ BILLION a day more stuff than we’re selling. Figure in some diminishing marginal utility factor for acquiring even more dollar holdings--I mean when you are already sitting on TRILLIONS of Dollars, what are you going to do, buy one of our states? To me this more than explains the current $ 53.40 price. However....there’s more to the pump price than the rising cost of crude. Read on!

Crude oil makes up 44% of the pump price, refining costs and profits are 15%; distribution, marketing, retail dealers costs and profits are 14%; and motor fuel taxes (Federal and State) are 27%. These are national averages which vary by State (county and city are not included in these percentages). Concerned about summer prices? Keep reading!

Please note that not all State, county and local motor fuel taxes are "priced" per gallon. Some are computed more like a sales tax on the combined price of crude, the refinery costs/profits, and distribution/retailing costs/profits. Depending on where you live, these taxes ride on the back of all those other increases--creating a nice windfall for the "road trust funds." Note also that surplus/unspent road trust fund monies are frequently used to supplement general fund deficiencies--just like Uncle $ugar raids the Social Security Surpluses for his general expenses.

There should be some uniform cost-of-goods-sold inventory pricing model applied to setting the price at the pump, like first-in first-out (FIFO), or last-in first-out (LIFO); but I can’t figure it out. When the price of crude jumps in the Middle East, the pump price increase seems to follow that afternoon. But-- when the price of crude drops in the Middle East, it’s days/weeks before the pump price declines as well. Kind of makes you wonder, doesn’t it?

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2005 Fred Cederholm. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer who contributes the column "TH*NK*NG" to The Weekly Observer in Creston, (Ogle County) Illinois. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

To "audit" this column and to learn more about motor fuel taxes, gasoline pricing, and the Isfahan Conference: Check out

American Petroleum Institute Policy Analysis & Statistics Nationwide and State by State Motor Fuel Taxes as of November 2004 (Note: this excludes any local/ county fuel taxes and is the most recent compilation available on line.)

State Motor fuel taxes and related receipts, by State, 1950-1995. How those tax revenues on fuel have grown!

American Petroleum Institute Website with current fuel taxes

Weekly US Retail Gasoline Prices, Regular grade (in dollars per gallon, including all taxes) also presented by region, by state and by city.

The Energy Information Administration of the US Department of Energy.(EIA DO) webpage (primer on gasoline prices) is an eyeopener and really puts pricing into perspective.

Live streaming of the 135th Meeting of the OPEC Conference which begins on March 16th, 2005.

Monthly Oil Market Report developments in the world economy, data on oil prices, supply and demand, crude and product stocks and much more. (According to OPEC, that is.)



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This story was published on March 11, 2005.