Summary of Key Points
As the midterms approach and his support ratings plummet, Trump has publicly criticized ExxonMobil and Chevron for profiting excessively from the U.S.-Iran conflict, calling on them to lower gasoline prices to ease inflation. The profits of both companies surged in the second quarter (Chevron increased by nearly 400%, and Exxon doubled), due to a bottleneck in refining capacity that makes gasoline prices volatile. The U.S.-Iran conflict has also led to a sharp reduction in oil shipments through the Strait of Hormuz, and the limited effectiveness of OPEC+’s production increases has further exacerbated supply shortages. Trump’s move is essentially aimed at gaining votes, but reducing gasoline prices is unlikely to be easy.
Detailed Analysis
1. **Surging Profits of Oil Companies: Not Due to Rising Crude Prices, but from Refining Margins**
The significant profits of these two oil companies in the second quarter are not because crude oil prices have been rising (crude prices have actually fallen recently), but rather because the profit margins in the refining process (the difference between crude and refined products) have increased significantly. Simply put:
- Refineries are operating at full capacity, but there is still a shortage of production capacity;
- The use of more environmentally friendly gasoline formulations during the summer has made production more complex and demand exceeds supply;
- The conflict has heightened concerns about supply shortages, further driving up refining profits.
This is similar to how restaurant prices rise immediately when the cost of ingredients increases, but they only lower after selling out their inventory of the more expensive products.
2. **Trump’s Urgency: Gasoline Prices Must Be Addressed Before the Midterms**
Trump’s support ratings have dropped to record lows (32%-34%), and the midterms in November are a critical moment for him:
- The midterms determine control of Congress; if Republicans lose, Trump’s policies will be hindered by Democrats;
- Gasoline prices are a sensitive indicator of inflation for voters;
- Lowering gasoline prices could help reduce inflation and decrease the likelihood of the Federal Reserve raising interest rates (which would slow down the economy and increase voter dissatisfaction.)
Therefore, Trump is targeting oil companies to make an appeal to the public.
3. **Gasoline Prices Are Volatile: Why Don’t Consumers Feel the Impact of Lowering Crude Prices?**
Many people notice that despite falling crude oil prices, gasoline prices remain unchanged. There are two reasons for this:
- Delayed Price Adjustment: Refineries and wholesalers hold inventory of expensive crude and will not immediately sell gasoline at lower prices; it takes 2-6 weeks for the new prices to reach the retail market;
- Actual Supply Shortages: U.S. crude oil inventories are at their lowest level in eight years, and even with full-capacity operations, refineries cannot produce enough gasoline due to environmental regulations.
4. **OPEC+’s Production Increases Are Ineffective:** The Middle East conflict has severely impacted supply:
OPEC+ announced a production increase of 188,000 barrels per day last week, but with little effect:
- Transportation Restrictions: The Strait of Hormuz, which handles one-fifth of global crude oil shipments, has seen daily traffic drop from 6.6 million barrels to 2.57 million barrels (a 61% decrease), making it difficult to transport additional oil;
- Problems for Oil-Producing Countries: Saudi Arabia, despite having spare capacity, is struggling with attacks by Houthi rebels and transportation disruptions, preventing the export of extra oil.
Therefore, OPEC+’s decision to increase production is largely symbolic, as the underlying supply issues remain unresolved.
5. **Market Reaction: Stock Prices Drop, but Will Oil Companies Lower Prices?**
After Trump’s remarks, Chevron’s stock price fell by 1.85% and Exxon’s by 0.24%, but neither company responded to his call for price cuts:
- Oil companies face high refining costs and limited capacity; cutting prices would reduce their profits;
- Trump’s pressure is not very effective; oil companies are private entities, and the government cannot force them to lower prices.
Whether gasoline prices will decrease ultimately depends on whether supply shortages can be resolved. Until the Middle East conflict ends, supply issues will persist.
Conclusion
Trump’s attempt to pressure oil companies to lower prices seems more like an election tactic. The real solutions lie in ending the Middle East conflict and increasing refining capacity, but these are not achievable in the short term. For consumers, gasoline prices are likely to remain high for some time. Before the midterms, Trump may have no choice but to continue to criticize oil companies.