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Who’s getting fat on higher oil prices?

Bob Moon May 21, 2008

Who’s getting fat on higher oil prices?

Bob Moon May 21, 2008


KAI RYSSDAL: It’s the 21st of May, Wednesday, great to have you with us. The same welcoming sentiments did not hold true on Capitol Hill today. The Senate Judiciary Committee brought Big Oil to its long, green witness table to talk about rising prices and their corporate profits.

The questions and answers were pretty much along the lines of what we’ve heard before. Senators wanted to know whether the industry’s doing all it can to keep prices low. The words windfall profits tax were uttered. Oil executives defended themselves by saying, in essence, “Hey! It’s expensive to go out there and drill for this stuff.”

What wasn’t really discussed was what seems to be a pretty basic question. Who’s on the receiving end of the $130-whatever a barrel it is that we’re paying. Our senior business correspondent Bob Moon tried to find the answer.

BOB MOON: OK, so we’re all grumbling that they’ve got us over a $133 barrel of oil. But do you wonder who “they” are? Who’s pocketing that $133?

Economist Philip Verleger watches the oil industry. He says the ultimate price is decided by traders in New York, London and other global markets. There are no wellheads that read out in dollar signs. Instead, producers write contracts based the prevailing price at a future date — when a Saudi shipment arrives in Houston, for example. The producer gets almost everything.

PHILIP VERLEGER: Saudi Arabia would be getting $126 today, the Canadians would be getting something like $125. The intermediaries might be getting a dollar or two, depending on their management of it. But most of the money is going back into the producer’s pocket.

Verleger says that might leave a few dollars for the speculators, but the price is mainly determined by supply and demand.

And, oil industry analyst Stephen Schork says, by the quality of the oil. Not every barrel sells for $133.

STEPHEN SCHORK: A sweeter, lower sulfer will yield a greater premium relative to other streams of a heavier blend.

It’s the sweeter variety that’s in high demand right now, because it makes more of the more profitable diesel fuel. Verleger argues that $133-a-barrel oil won’t sell if there’s no buyer.

VERLEGER: It has nothing to do with speculators. It has everything to do with the inability to make enough diesel fuel to meet the European, Chinese, Asian and U.S. demand.

He says as long as that’s the case, the producers can pocket what the market will bear.

In Los Angeles, I’m Bob Moon for Marketplace.

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