Be an Insider on the Big Oil Game

the news for this week of April 10th, 2008 is the fact that the OPEC cartel oil ministers refused requests by the Bush Administration and European diplomats that the 13 nationalized companies that control 40% of the globe's oil supplies pump more oil in order to increase supplies and thus lower fuel prices, especially prices on gasoline.

International crude oil futures traded near $109 a barrel on Tuesday, April 8th, after hitting a record $111.80 a barrel about one month ago.

Saudi Arabian Oil Minister Ali al-Naimi insisted that a large measure of the rise in oil prices has nothing to do with supply vs. demand but rather with the falling value of the U.S. Dollar, in which all the world's baseline oil prices are calculated.

"We are not going to dump oil in the market. The world is producing more oil than it is consuming. There are many, many reasons for the price increase, least of which is the supply side," he said.

While the U.S. Congress, in its usual point-the-finger blame games (and all its fingers are always pointed away from itself, no matter what), has recently made a public spectacle of trying to do a shake-down of "Big Oil" and essentially demanding that the industry giants lower prices in the wake of record high profits, the industry representatives rightly refused doing that.

And they should have, for more reasons than most people realize.

Forget the fact that Big Government (which was never meant to be) has no Constitutional Authority to do any shaking-down of the free market.

The fact of the matter is that the "record high" profits that the politicians made a big deal about are in a certain and very important way an illusion. There is record-high global demand for oil as global wealth is on the rise, and there is record-fast delivery of said oil due to technological developments invested in by those same wicked Big Oil companies.

Oil companies, especially refiners, are barely making any money per barrel right now, when one compares their costs to their profit margins.

In fact, oil and gas companies' profit margins are so pathetically low at present that they are close to selling their product at cost.

Some industry insiders have let it slip that only diesel fuel, for which there is much less overall demand, is making them any significant money these days.

Check the stock charts of giant ConocoPhillips, whose main business is refining and producing consumer fuels from oil, much of which it drills and brings up itself. It was not feast, but rather famine, for them in the first three months of 2008. Another United States oil refiner, the independent Tesero, which imports all the oil it uses, lost $86 million at just one refinery alone during the final three months of 2007, more than erasing every penny of profit it had made for the whole year to that point.

Those involved in the industry refer to the "crack spread" difference, or relationship, between the prices of oil and gas. Usually, a volume of gasoline costs more than does the production of the equivalent volume of oil. Which of course makes perfect sense, for the same reasons that it costs more to buy X amount of canned tuna fish at the supermarket than it did to catch and clean X amount of tuna from the waters.

But in March, when that record-high oil price was reached...the crack-spread was getting so low that oil companies were almost selling their wares for less than cost.

And their margins are still dismal-with producers making an average profit of $0.25 U.S. per one dollar they spent to purchase oil.

When the "crack spread" is above 0, producers are indeed pretty-sitting fat cats. But when goes below 0, those are tough times for them. And the "crack spread" is in constant vertical oscillation over time. When the oil industry representatives told the Congress that they depend on big profits in good times to see them through the dismal times, they were telling the absolute truth.

In March the "crack spread" hit a rock-bottom of -2.39, and it hasn't gotten much better since then.

Insiders in the industry right now are sure of one thing: gas prices are going to go up, and as they do oil companies and refiners are going to raise their prices. They have to. They will raise them by as small an amount they can, but they need to get paid, and right now they essentially aren't.

What this means for you is two-fold.

First, no matter how atrocious you think gas prices are right now, prepare your mind for them to rise. Don't whine. Whining is futile.

Second-now's the time to invest in some oil industry companies-especially oil refiners. They are about to see some profits, and you can, too.

Who really owns all these companies, anyway? CEOs? CFOs?

No. You do.