The Professor Who Knew Too Little

Oil buffs will enjoy this.. It covers every weird claim and misunderstanding about the business..

Obama haters....not so much. We'll see the birther approach.

http://www.consumerenergyreport.com/2012/03/12/the-professor-who-knew-too-little/

The Professor Who Knew Too Little


It is clear that many people have a very simplistic — but wrong — view of the energy markets.

This extends to politicians who believe they can usher in a return to $2 gasoline, as well as those who underestimate the difficulty of replacing oil with renewable energy.

For the average person, gasoline prices go up because oil companies are pulling strings, meeting in secret to set prices, or withholding product from the market. To top it off, we are sending them our tax dollars as subsidies while they are wallowing in cash! That’s the view from the man on the street. Somehow, I would have expected a USC business school professor to have a more sophisticated understanding of the situation — especially if he decided to write an article about it. But I would have been wrong.

Normally, when I read something like the following, I am more prone to just shake my head over the sad state of the person’s energy IQ. But I am making an exception here in the case of Professor Ira Kalb, a marketing professor at USC’s Marshall School of Business. The professor recently wrote the following article for Business Insider:

The Only Reason Gas Is $5-A-Gallon Is Oil Companies Have Convinced Us Prices Are Out Of Their Control

The article is so full of misinformation, red herrings, conspiracy theories, and half-baked notions that it warrants a response, especially since the professor is probably passing on this misinformation to his students. If misinformation like this is not addressed, it simply helps create more generations of people who believe all sorts of energy myths. I attempted to engage the professor in the comments after the article, but his responses were about as informative as his article. As I break down the article I will also address some of our exchanges in the comments.

Marketing or High Oil Prices?

There is so much wrong with the article, I don’t know where to start. The premise of the article is that gasoline prices are flirting with $5/gallon because “oil companies must be marketing geniuses.” Bear in mind, that these same “marketing geniuses” are overseeing plummeting natural gas prices that in many cases are below break even.

Following his introduction, Professor Kalb talks about “Huge Profits” even as “the average price at the pump in the US is expected to hit $5 per gallon by summer’s peak driving season.” The source that he frequently cites for his claims is not the SEC filings of these companies, but rather he relies on the Center for American Progress to put these profits into context for readers.

He cites their “energy experts”, which as I point out in the comments: “CAP’s “energy experts” consist of bureaucrats and journalists, and all are openly hostile to the oil industry. Not a single person among them has any experience actually producing energy. Why would you expect them to be able to give an informed, objective opinion about the topic?”

Profits vs. Profit Margins

We can agree that oil companies are making large profits. But then I tried to explain to him in the comments why his premise that $5 gasoline is driving oil company profits was wrong. To demonstrate this, all we have to do is look at the profit margins of Tesoro and Valero, the country’s largest pure refiners. If high gas prices are driving their profits, we would expect to see that show up in their profit margins. After all, this current gasoline price spike is not the first one we have seen in the past 5 years, and therefore we should see some pretty hefty profit margins from these pure refiners.

But in fact, the profit margin for Tesoro has ranged from -3.83% to +7.91% over the past five years. Their average profit margin was 0.93%. Valero’s profit margin was worse, averaging -1.39% over the past five years. Ah, but they had one great quarter in 2007, when their profit margin skyrocketed to 9.3%. Not quite as impressive as Apple’s 28.2% profit margin of last year’s Q4, but then that’s why Apple trades at double-digit PE ratio and Tesoro and Valero trade at single-digit PE ratios. It is certainly apparent that investors aren’t treating these refiners as money printing machines.

So I tried to explain to the professor that all he had to do was look at the profit margins of the refiners to understand that his basic premise is in error. Refining margins are historically very poor, which leads to poor profit margins and as we have seen, shuttered refineries. But when I and others pointed out that it was actually oil prices that were driving oil company profits, the professor responded “If it is the price of crude, which is a cost to the oil companies, then how do you explain the profits going up so much?”

I don’t have to tell most readers what a bizarre reply that is. Is Professor Kalb unaware that the oil companies that are making big profits are either integrated companies, or merely oil producers and not refiners? Does he know the difference between a refiner — for which oil is indeed a cost — and an oil company?

conntinued.........

http://www.consumerenergyreport.com/2012/03/12/the-professor-who-knew-too-little/

 

Ah Yes Margot but you see it is still Obama's fault because we are talking about a PROFESSOR here - obviously "Liberal" because he has an education so he has to be wrong and he would have voted for Obama so it is Obama's fault

Follow the logic?

 

Nope.. I don't.. The professor who has it all wrong does blame Obama.

But the article is accurate and explains how the industry works.

 

yeah,,, but,,,,,,,yeah,,,,,,,but,,,,,,,,yeah....but...........

It HAS to be Obama's fault!!

The same people have been denying peak oil and will unashamedly tell you oil wells are refilling by themselves

 

LOLOL

Well, they prefer their hatred and tantrums rather than learning about the industry and what drives it.

Don't you see that here on PF every day?

Its the same with the birther loons.. Most of them have never bothered to read the citizenship laws.