How to Profit Off of Taxes, Politics, and Rising Fuel Prices
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In an appearance on Meet the Press on Feb. 5, 2012, former House Speaker Newt Gingrich claimed that “President Obama has an Environmental Protection Agency proposal that would raise the price of gasoline by 25 cents a gallon. There are very few Americans who want to see the price of gasoline raised by government ... 25 cents a gallon.”
All politics aside, how much of the price of gas is a result of the US government, foreign governments, and the oil and gas companies?
The EPA is working to create a new set of emissions standards to reduce pollution from light-duty vehicles. These would update standards that EPA set in 1999. It would also be very expensive to implement these new regulations. A study by the consulting firm Baker & O’Brien, estimated capital and annual costs of complying with the new regulations of $17 billion and $13 billion respectively and predicted oil refinery closures and an increase in gasoline prices of 12 to 25 cents per gallon.
Hence Speaker Gingrich’s claims.
But! That’s not the end of the story, if you are looking for a full and well-rounded story.
The study was conducted for the American Petroleum Institute, an oil industry trade group. It is not wise to rely on a study that benefits the person that paid for the study. There are several other reasons to ignore the study which you can read here. The bottom line is that it is a bloated study, and Gingrich should have known better than to cite it.
The study aside, the EPA will indeed under direction from President Obama be instituting new regulations that will potentially, and most likely influence the price of gasoline. This includes reducing the amount of sulfur in gasoline. A study conducted by the refinery consulting firm MathPro, determined that the price of one gallon of fuel would change by less than one cent. Not exactly as inflammatory as the Former Speaker would have us think.
Fuel prices at the pump are greatly impacted by taxes, just not in the way that Speaker Gingrich is claiming.
To better understand fuel prices (and the corresponding stocks), there are a few things to consider when you hear, see, and feel high gasoline prices. They won't make filling your gas tank any cheaper, but if you know how to win at the stock market when prices do rise, at least you'll feel like you are not losing money when you fill up your car.
Understanding oil prices
ExxonMobil’s (NYSE: XOM) earnings come from operations in more than 100 countries around the world. The part of the business that refines and sells gasoline and diesel in the United States represents less than 3 cents on the dollar of total earnings. For every gallon of gasoline, diesel or finished products manufactured and sold in the United States in the last three months of 2010, a little more than 2 cents per gallon was earned. I repeat, two cents.
ExxonMobil owns less than 1 percent of the world's oil reserves, and produces less than 3 percent of the world's daily oil supply. The prices at your local neighborhood gas pump are controlled by operations around the world, and not just what is happening at ExxonMobil headquarters this week.
Crude oil, like all commodities, is affected by many factors such as production, demand, supply, and even the value of the dollar and other currencies. (All things that can also change the overall stock market as well.) The weaker the dollar, the less crude oil it will buy, meaning your fuel provider has to spend more dollars to get the same amount of fuel.
Foreign currency rates make a difference, as do international conflicts. The oil and gas companies all trade in different currencies. Keep an eye on the Greek debt crisis and the conflict in Syria. If more countries (particularly Iran) get much more involved in Syria, it has potential to greatly impact prices at the pump. Just five weeks ago we saw gas prices rise when Iran and the US had a little skirmish in the Strait of Hormuz. Considering Iran’s presence in Syria, their involvement could again hit home in the US with some impact.
State and federal taxes also come in to play. Taxes in California are as much as $0.66 per gallon, while in Alaska they are merely $0.26 per gallon. Local regulation issues also change the price at the pump. These are all costs on top of the prices set by the actual fuel companies themselves. Last year, taxes and duties paid by ExxonMobil to the U.S. government topped $9.8 billion, which includes an income tax expense of $1.6 billion, for almost $59 billion over the past five years.
The average cost to produce a barrel of oil, including exploration, development, extraction and taxes, is about $30, according to a U.S. Energy Information Administration survey. The price of a barrel of oil is around $101.15 right now. The record high for oil prices was most recently September 22, 2008, when oil settled at $120.92. (On that day, ExxonMobil shares were at $80.20.)
How to Profit Off of Rising Fuel Prices
When gas and oil prices rise (because of oil costs, and not because of taxes) expect the five biggest oil companies (ExxonMobil, BP (NYSE: BP), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), and Royal Dutch Shell (NYSE: RDS-A)) to report that they are flush with revenue. Exxon earned $10.7 billion in the first and second quarters of 2011, and $10.3 billion in the third. In fact, of the Big Five oil companies, all but BP reported quarterly earning increases last year. (BP, plagued with their sins in the Gulf of Mexico, saw first quarter earnings last year drop, due in large part to the $384 million spent on cleaning up their little spill.)
What does this tell you?
First, it is the actual oil and gas companies worldwide that primarily control the cost of fuel. And that those costs are greatly impacted by international political events and demands.
The next price factor is determined first by federal taxes, and then by state and local taxes.
Third, Speaker Gingrich’s accusations are mostly false and poorly founded.
Fourth, US consumers can beat the system and make money off of rising fuel prices with well-picked stocks.
While the US consumer was experiencing record high prices at the pump, the oil producers were making billions of dollars. Some might argue that oil companies are robbing the consumer and giving it to ... the consumer. Oil company profits help consumers by going into the mutual funds, pensions, and retirement funds of millions of people (whether or not they realize this is happening). But oil company profits and activities do not help communities by creating local jobs! And much of their profits are invested in business activities and production overseas.
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