COMMENTARY

Higher Gas Prices and J.I.T.

05/22/96

HIGHER GAS PRICES: THE OIL INDUSTRY TAKES A YEN FOR JIT
(PART 1 OF 2)

By Gerald Levinson CMA

If you've read any of the articles published recently in connection with rising gas prices, you will note that there is a lot of finger pointing and a lot of blame to go around.

Some of the reported reasons include the past severe winter; foot dragging negotiations between the UN and Iran; on-going requirements for cleaner-burning gasoline: major fires at refineries, and finally, the summer season is here when prices are normally expected to go up.

For whatever combination of reasons it is clear that oil refinery profits on a gallon of gas have more than doubled creating record breaking highs for the 1st 6 months of 1996.

This is evidenced by an analysis of revenue vs costs showing that although the cost of crude oil has risen only 14.4 cents a gallon, the profit per gallon of gas at the pump has gone from 21.3 cents a gallon to 46.4 cents a gallon, a 118% increase a 5 year high. Industry analysts expect this trend to continue for the next six months.

The burning question is how have OPEC and the oil companies been able to get their act together after so many years of disagreement and turmoil? What is the catalyst that links the energy infrastructure together with such cunning efficiency?

Well folks we only have to look to Japan and the transfer of their Just in Time (JIT) concepts to the oil industry which has succeeded beyond all expectations.

JIT, is a Japanese developed approach for managing inventories and subsequent production of manufactured goods. By using this methodology the Big 3 automakers and many other Fortune 500 companies have turned the competitive tide and are now gaining back lost market shares.

JIT espouses the premise that materials are delivered only when needed thus decreasing the need for filled pipelines which in turn decreases the need for storage tanks as well as labor and so on. JIT neatly fills the requirement for economically changing types of fuel without having to reformulate large quantities of inventory on hand. In this scenario purchases are made only when the need arises or gas prices need to be increased.

OPEC and the oil companies have fully embraced JIT and joined together to efficiently solve many of their problems of production and cost, while at the same time using this new tool to control the market place.

Current statistics bear this out. Keeping in mind the 118% in gas prices, last year's gasoline in storage equaled 211 million gallons in contrast to the current level of 204 million gallons. More dramatically the level of crude oil last year was 338 million and today that level is at 297 million gallons which is a 12.4% drop in inventory availability.

What we are now seeing is a highly sophisticated supply system where there is a controlled release of production from the oil fields based on forecasted requirements tagged with prices that will in the future produce steadier, more lucrative profits for both OPEC and the oil companies. From a stockholder's point of view this is good news.

But is this good for the consumer?

Well the answer is a mixed bag and I'll cover that in my next article in which I discuss a unique thread of evidence that seems to point to a unusual trend of circumstances and events now taking place.