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SEIFFE:  We've Done Our Part

Wednesday, September 20, 2006

By Ralf Seiffe

Editor’s Note: Senate committee hearings on gas prices scheduled for this week were suddenly adjourned for lack of a quorum at the last minute. The following statement was found on the back table of the hearing room apparently left there by a staffer unaware that the hearing would not occur. We are told that these were to be the opening remarks by Ephraim Johnson, Chairman of Oriental Petroleum, more popularly known as OREOil.  Word in the cloakrooms was that the sudden break in gas prices obviated the need for a hearing.  

Good Morning Honorable Senators and thank you for the opportunity to present the OREOil story.... 

Over the last several months, the papers and the electronic media have been full of stories about the rise in oil prices. While most reporters are dilettantes, aghast at pump prices, let’s look at these increases as the excellent news that they are. If there is a theme of my remarks this morning it would be that OREOil--and the rest of the participants in our industry--have done our part. We have performed brilliantly as the partner for Congress to achieve its objectives and I am delighted to report that to you, here and now. 

OREOil is an integrated exploration, refining and distribution company. We operate all over the world to bring oil to our shores, refine it into gasoline and make it available to motorists in 38 states. In doing this, our job is to bring value to our stakeholders which includes two major constituents, our shareholders and our government partners. Today, I’ll mostly direct my remarks towards our federal, state and local government partners.  

I must say that this has been a most successful collaboration for more than a century. I have been involved in the business for nearly forty years and in each of our major operations--exploration, refining and distribution--we have been good partners with each other. Let me explain.  

Up until the early 1970’s, companies like OREOil competed to sell a boring commodity called gasoline. We put tiger tails out of gas tanks, had imaginary horses kick horseshoe shaped dents into fenders and even told our customers that we had added exotic chemicals into gasoline to scrub our customers’ engines. Despite the best Madison Avenue talent, we couldn’t get the price up. 

That’s when you, our partners, came to our rescue the first time. By disconnecting the dollar from the gold standard as President Nixon did in 1971, oil, an international commodity, was free to rise in price. When the supplying nations in the Middle East noticed, they substantially raised prices and our industry was finally able to raise prices and expand our margins.

Since then, the profligate policies of our government partners have diminished the value of the dollar so that the value of our foreign reserves, expressed in dollars have increased. The long-term decline of the dollar has been a wonderful opportunity for us to increase our margins by keeping a few pennies of every increase. That would not have been possible without your help, Senators, and our thanks to you!  

In terms of actually producing our products, that is, our refining operations, nothing helps profits more than restricting supply. Once again, OEROil is grateful for our partners in federal state and local governments for creating the conditions that restrict supply. Through the cooperation of the EPA, state governments and the retinue of lawyers that surround the environmental movement, we have cooperated in two major areas for our mutual benefit.

First, we’ve outlawed building any new refineries and that has prohibited any new entrants into the market. This has helped us consolidate our markets and keep prices up. Without the pressure of new guys with good ideas, we’ve managed to arrest any progress in the markets and to avoid the associated costs. Can you imagine how tough this business would be if we had to be as innovative as say, the steel or car business? 

Limiting supply by denying new entrants a refinery is an excellent long-term strategy. We are just beginning to enjoy those benefits because our growing economy’s demand has now begun to exceed the capabilities of our 30-year old refineries. Given the nature of commodities, we can expect quickly rising prices. Even so, I cannot let this opportunity pass without complimenting our partners for the genius and efficacy of their second supply-limiting strategy. I refer to the numerous formulations the EPA has required us to make despite almost no evidence that the program limits air pollution. That’s allowed us to reposition from a commodity business--always driving to become the lowest-cost producer--to a much higher-margin boutique product. As everyone in this room knows, shopping in a boutique always costs more and we are pleased to enjoy this new arrangement and again offer our thanks to those in this room. 

The third leg of our business is distribution--selling our products in our own and leased gasoline stations. Here again, we’ve forged a great partnership with government to keep the public from understanding the real distribution of profits. Other than liquor, gas pumps are the only distribution technique that quotes the gross price rather than the pre-tax price.  

Our industry learned this trick from Congress who invented principle in the form of withholding taxes. This was a stroke of genius and, collectively, our industry has proudly adopted it.  Just like the effect it has had on Joe Sixpack’s paycheck, this technique has had the utterly predictable result of allowing you, our partners, to camp onto our pumps and invisibly raise tax gasoline to  extortionate levels. 

By the way, I notice that Senators Boxer, Durbin, Menendez and Schumer are in the room. They all hail from states that have turned gas tax-gouging into an art form. In Illinois, for example, gas is selling for $2.95 per gallon while across the river in Iowa , it’s only $1.89. OREOil sells it to both states for nearly the same price so I cannot understand why the folks in Illinois pay nearly 50% more. For whatever reason, three cheers for Illinois , Senator Durbin!   

But enough about our side of the partnership--what are the benefits for the governments? They are huge but one fact makes the situation easy to understand. Consider this: even at $3.00 per gallon, governments get at least two dollars for every one we make. That’s a pretty good deal because you take no risks, needn’t invest any capital and regulating us provides good jobs for your friends. And, you can do this all by simply agreeing among yourselves and printing up some tax forms. Please do not mistake this observation for a complaint--OREOil wants our one hundred years of partnership to survive another century.

One final observation; certain environmentalists actually believe that we are running out of oil. This is not true; but, if it makes them feel any better, I’ll make this pledge. If it becomes clear the world’s petroleum is running out, OREOil and I will personally release the 200 mile per gallon carburetor that we took off the market and have been hiding since 1957. We will grant royalty-free licenses for any manufacturer interested in using it and that will solve any supply problem for at least 50 years.  

© 2006 Ralf Seiffe

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.

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