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Posts Tagged ‘Valero’

Think Again about Koch, Soros and Crude Oil Prices

In Koch Industries, Oil on July 5, 2011 at 4:53 am

Lee Fang of ThinkProgress (“TP”) makes additional claims about Koch Industries and oil speculation [1].  Before we look at his specific charges, let us step back and assume most normal people have never heard of Koch Industries.

Charles and David Koch are the primary owners of Koch Industries, one of America’s most successful private companies.  A number of left-wing interest groups and websites such as TP are very focused on Koch Industries because the Koch brothers are philanthropists who contribute to conservative interest groups.   The Koch brothers have been hiding in plain sight for decades (e.g. David Koch ran as the Libertarian Vice Presidential nominee in 1980), but the fact the Koch brothers backed the Tea Party group Americans For Prosperity seemed to have set off a liberal media storm with an August 30, 2010 New Yorker article by Jane Mayer reporting on the Koch brothers’ political giving.

Despite the breathless tsk, tsk tone some of these liberal groups use about the Koch brothers, there is nothing remotely wrong with funding political advocacy groups.  It is a legal use of free speech.  Many liberal groups are funded, for example, by the billionaire speculator George Soros [2].

In fact, Soros is a financial backer of, drumroll please, ThinkProgress and its parent, the Center For American Progress [3] [4].   “Billionaire investor George Soros bought an $811 million stake in Petroleo Brasileiro (Petrobras)” and bought into Canadian oil firm Talisman Energy [5].  There is nothing wrong with these purchases, though it is interesting TP’s backer Soros happened to be making huge investments in oil companies in 2008.

Koch Industries has a number of businesses, including a pipeline company and six refineries at its Flint Hills Resources subsidiary.  Koch is not involved in oil exploration or production (“E&P”) [6].  

Because Koch Industries is a private firm, we do not know how big its Flint Hills refinery subsidiary is. Wikipedia has Koch at $100 billion total revenues. Koch owns Georgia-Pacific Paper, which was $20 billion when GP was last a public company in 2004.  Koch also owns ranches, a pipeline company, a major fertilizer company, and a chemical maker that makes Stainmaster carpets.   We cannot say with any confidence just how big Flint Hills is, but I will take a guesstimate of an average refinery size by dividing the $82.2 Billion 2010 revenues of Valero, the nation’s largest refiner, by Valero’s 15 refineries [7].  This implies Flint Hills may be somewhere in the neighborhood of $30 billion of revenues, which also seems ballpark accurate as a plausible place for Flint Hills within the $100 billion Koch Industries.

Oil refining is a high volume, low margin business.  Valero reports a cost of sales in excess of 90% of revenues [8], meaning Flint Hills is likely purchasing $20 Billion or more of crude oil per year.

Oil refiners make their money from the difference, after costs of refining, between the wholesale price they get for their refined oil products and the price they paid for crude oil.  E&P companies drill for oil and sell crude oil to refiners.  Refiners then sell refined products like gasoline to retail gas station companies (“oil marketing”) and the other products like kerosene or aviation fuel to other users.   There are actually two groupings of US futures markets for oil: crude oil (primarily West Texas Intermediate (“WTI”) Crude) and finished product markets (heating oil, kerosene, aviation fuel, diesel, and refined WTI gasoline) [9].

The implication to the facts above is Koch’s Flint Hills Resources has an interest in a LOWER crude oil price.  If Koch were to try to ‘manipulate’ markets, wouldn’t it presumably be to lower the WTI crude price?  TP does not understand this.  

TP’s article says an attorney at Koch’s law firm replied to TP’s ‘investigation’ by “claiming that Koch is solely a bonafide [sic] hedger, meaning that it only participates in speculative markets to reduce risk for the oil the company refines”.  TP, of course, dismisses that out of hand.  Hedging is a legitimate and common business tool used in various industries.  A refiner like Koch might purchase crude oil futures in the market to lock in today’s price and also sell futures for the refined products like gasoline and kerosene; locking the two prices removes the risk of  short-term moves in the price of oil. 

TP shows its so-called proof of Koch raising prices as Koch leasing “four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead.”  TP cites a Koch executive as saying  “The drop in crude oil prices from more than US$145 per barrel in July 2008 to less than US$35 per barrel in December 2008 has presented opportunities for companies such as ours.”  [10]  All this shows is that Koch was helping smooth out prices.  With the worldwide financial and economic collapse in late 2008, the anticipated future demand for oil plummeted, driving down prices.  Furthermore, the US dollar strengthened as a safe haven, also driving down the dollar price of oil.  Koch apparently took advantage of the price collapse and bought crude oil at about $35 per barrel.  While that would have a small marginal impact of raising crude oil prices in late 2008, TP is forgetting that the crude oil must later be used by Flint Hills or be sold back into the open crude oil market, having the exact opposite impact: lowering the price of oil.  It actually is advantageous to US consumers if the price of oil went up some tiny amount in December 2008 when the price cratered and then the consumer enjoyed the mirror image impact of a tiny amount of price reduction later when oil prices have recovered. 

Given that Flint Hills is a refiner purchasing perhaps $20 billion or more of crude oil each year, Koch Industries has an interest is in a lower price of crude oil.  It is quite possible Koch may, at an unusual time such as December 2008, stock up on crude oil when its expertise lead the company to think it is an artificially low price.  But the impact canceled out over time when Koch used or sold that oil back into the market in 2009 or 2010.  We also know the Koch brothers are libertarian in outlook and have been involved in political giving for decades.  There is nothing scandalous about the Koch brothers giving to conservative and libertarian causes.  The fact the Koch brothers supported deregulation proves nothing about oil ‘speculation’.  Lots of people have opinions one way or the other.  For example, George Soros is a famous speculator, who was investing in oil production companies in 2008.  Soros is a backer of TP and liberal causes, which may explain why TP does not attack Soros for investing in oil companies in 2008.   The TP ‘report’ about Koch and oil speculation is much ado about nothing.  I have probably given TP far more attention than it merits, but the TP articles are Facebook “liked” by thousands, suggesting an unwarranted following.  I hope TP readers will think twice about its wild claims.

[1] http://thinkprogress.org/report/koch-oil-speculation/

[2] http://en.wikipedia.org/wiki/George_Soros accessed 7/4/11

[3] http://www.nytimes.com/2008/11/07/us/politics/07podesta.html?_r=1&ref=politics

[4] http://en.wikipedia.org/wiki/ThinkProgress accessed 7/4/11

[5] http://gulfnews.com/business/oil-gas/soros-hedge-fund-invests-811m-to-buy-petrobras-stake-1.125134

[6]  http://en.wikipedia.org/wiki/Flint_Hills_Resources accessed 7/4/11

[7] pgs. 3 & 4 of http://media.valero.com/flash/AnnualReport2010/pdf/report.pdf  Valero sold the 15th refinery at year end (pg. 6).  Both Valero and Flint Hills are in ethanol refining.

[8] pg. 4 of http://www.valero.com/InvestorRelations/FinancialReports_Filings_Statements/Documents/VEC%201Q%202011%20Form%2010-Q%20Final.pdf

[9] https://www.theice.com/productguide/ProductGroupHierarchy.shtml?groupDetail&group.groupId=18

[10] http://thinkprogress.org/economy/2011/04/13/153206/koch-industries-price-gouging/