MILNET Opinion: A Clear and Present Danger to the U.S. Economy

MILNET Opinion

A Clear and Present Danger to the U.S. Economy
7/1/2008

It is not hard to go from a clear and present danger to the U.S. economy to a clear and present danger to the national security of the United States. MILNET believes that is the case with gasoline and diesel prices in the U.S. today -- we are facing a clear and present danger to our National Security and indeed, the paranoid might equate this to an attack on our nation.

It is quite clear that there is a lot of confusion over the cost of gasoline at the pumps.

Questions arise as to just how the price is set, however, everyone assumes the price at the pump is related in one way or another to the price of crude oil paid by the U.S. refiner (obviously for U.S. gas prices).

However, the question arises as to actually who is paying what price and how that price compares to oil futures price so often cited as "the price of oil" by the news and financial reporting media.

For instance, it is difficult for the average person to figure out whether or not Standard Oil, Exxon-Mobil, or Shell Oil pays the price quoted on the commodities exchange for oil futures. Is there actually a link to the oil futures price to the price actually negotiated and paid by the U.S. oil refineries?

Or, as it would seem more reasonable to assume, that the oil price negotiated on different financial terms? Could oil be purchased through deals such as:

long term contact buys ("we will buy four times this year and the price will at this price or on a pricing schedule to reflect a certain percentage increase")
one time large quantity buys at a price set by the supplier for one, a few, or all of its customers
or is the the negotiated price based upon some other criteria that could include the oil future's price
or are there other methods actually used by U.S. refineries to buy oil

In addition, few people understand how the the oil future's price applies to the large U.S. refineries. For instance, is there a broker who fields options orders from someone representing Standard oil, and then at some time in the future does Standard sell that future? Or does Standard use that future as a financial instrument to make the actual purchase of crude? After all, purchase of stock in GM does not in any direct way effect the price of the automobile GM is selling, does it? How then does an oil futures price relate to the actual oil purchase by large refineries?

In order to make sense of just exactly WHO is making the outrageous profits on crude oil versus gasoline at the pumps, one would need the information list below, much of which oil company lawyers would quickly point out is proprietary and therefore unavailable. That problem can easily be overcome by simply masking the name of the U.S. buyer with a code number. In addition, it should be noted that obsfucating the purchase price clearly makes it impossible for the U.S. government to make judgements as to where the exorbitant profits are going.

IF the U.S. Congress were really serious about "getting to the bottom of the exorbitant profits" made in the oil marketplace of late, then they should assign the GAO to ascertain the facts and direct the CRS to draft a report detailing the findings and extrapolating worldwide pricing as well.

Passing legislation to force compliance based upon national security issues should be the legal means to force the oil companies to comply with providing the data. Setting a date within a rationale amount of time (six months seems overly long, 30 days far too short) would also be appropriate for this study. The data is clearly available as the oil companies use much of the data already to compute their expenses and profits and to make necessary corporate decisions.

Establishing Crude Oil Pricing

The data must be provided by every U.S. refiner of oil, regardless of size.
The data should be sorted by size of quantity (largest to smallest), grouped by supplier organization (Russia, Nigeria, OPEC, Venezuela, Mexico, etc.)
The data must be supported by company certification of the actual financial instrument used to secure any and all financial transactions to the oil supplier over entire delivery cycle including offload time at U.S. port, including tariffs but not to include shipping company charges not related to fuel for transfer vehicles unless statistically significant and not to include dockside transfer charges unless volunteered for completeness of pricing information.
Data provided should be:

Type of crude (sweet or sour)
Supplier (Nation, FOB location, shipping source location, tanker upload location, supplier's company name)
Price at purchase
Quantity purchased
Loadout of purchase (full tanker, partial load, or identify delivery load criteria)
Purchase price lockin criteria
Was the purchase priced modified enroute/prior to delivery after initial purchase price?
When did ownership of crude actually pass to the U.S. refiner?
Price adjustments before delivery into U.S. port
Time from purchase to delivery into U.S. port
Quantity of purchase at adjusted price
U.S. port which took delivery, date of delivery, offload complete date
Changes in purchase price effected during offload.
What tariffs were charged and paid during the transfer of ownership of the crude?
Did a tariff change occur during the transfer of ownership of the crude?
Were tariffs or tariff changes passed on to the consumer?

Other questions to be answered:

At any time was the price paid by the U.S. refiner established by and match the commodity markets price (i.e. oil future pricing) or was the transaction negotiated directly and based upon prior discounts or pricing established outside the commodity market?
If a non-commodity market based price was established, specify the negotiation practice or financial model used to establish the price (quantity price established via long term agreement or a one time quantity buy, OPEC price mark, supplier price mark, or describe in detail how the price was established).
At any time was the price established as a mutual price for more than one refiner in the U.S., that is to say, was the price established by multiplier refiners aggregating their orders to establish a larger buy and thus secure a lower price? (collective bargaining)

Note that the information requested says nothing about the costs of refining or transport from the refinery to the gas pump. The data will only reveal the price paid by refiners and thus the profit in the hand of the supplier. It will help answer the question, is OPEC, Russia, Venezuela, Mexico, or Nigeria pocketing the lion share of the $145 (7/1/2008) per barrel paid for crude.

If the Supplier is actually only charging $40 per barrel then clearly the oil company in the U.S. is the one gouging us. If the Supplier is getting $110 per barrel, then clearly the Supplier is the gouger.

The U.S. government reports and is responsible to the demands of the American People. It is incumbent upon the U.S. government to identify, to the American people, who is pocketing the oil money in a definitive way, so that the American people can direct our government to take the appropriate action.

To do otherwise, is a failure to serve the American people and calls into question the ability of our government to rule under the provisions of our Constitution. This is more than simply a serious issue, it is a crisis in governance, and could very well create a constitutional crisis.