Oil Company Profits and High Gas Prices: Here We Go Again
Posted by Prof. Goose on May 22, 2007 - 4:45pm
Topic: Alternative energy
Tags: gas prices, gas tax, oil, oil prices, peak oil, price gouging, windfall profits tax [list all tags]
A good bit of this story was originally posted on September 6, 2005, when the politicians first began talking about price gouging and windfall profits taxes after the price rise due to Katrina--and was put together by SuperG, Yankee, and one of our old contributors who was an industry "insider." Since we're back where we started, yet again (we also re-ran this post on April 25, 2006, I thought this post should resurface just one more time. (You can go back to the dated link above for the old comments.)
(By the way, we're not the only ones noticing a cycle of talking about gas price gouging, go to EE and check this one out, it's a good one.)
Oh, and one more thing, can I yet again state my call for a gas tax (that I know won't happen, but I need a catharsis), just one more time? I've been doing it for three years, why stop now? (even if some would argue that it could be a regressive tax). Cheers, PG.
There's been some grumbling in the media about how Big Oil is gouging the public by charging record prices for gas while they reap record profits and "gouge" consumers. No one can dispute that oil companies are doing really well. And certainly no one can dispute that gas prices are high. But is the connection as straightforward as it gets portrayed in the media? If the oil companies were less greedy, would we see lower prices as the pump? Find out below the fold...
In order to answer these questions, you have to understand the path that oil takes from the ground to your gas tank. "Oil companies sell to refiners. Refiners sell to distributors. Distributors sell to retailers." Whoa. That's a lot of steps. Let's break it down.
Oil companies sell to refineries
Not all oil companies own refining companies. In fact, a very few actually own their refineries. They just find, drill and produce crude which they sell on the NYMEX or other markets, to refiners. A refiner can take crude from anybody—Exxon from Shell, Chevron from BP, etc.
Refineries sell to distributors
This means that an Exxon refinery can sell gasoline to a Shell distributor. The distributor chooses where to buy his products from. Naturally, Shell Oil Refining would offer a Shell Distributor a pretty discounted price, but not necessarily the lowest he might find. Thus distributors can buy from anybody and sell to anybody, regardless of their "affiliation" with a given oil company. A distributor may be an "Authorized Chevron Distributor", and thus he can sell Techron type gasoline. But that doesn't mean he is restricted to just selling Chevron products. Independent distributors (more of them than any other type) are listed in the Yellow Pages under Fuel Companies or Fuel Distributors. These are the middlemen.
Distributors sell to retailers
These independents actually buy gas from whoever they get the best deal from, then sell it to their customers. If you have ever wondered why there is an Exxon tanker filling up a Fina gas station tank, it is because the distributor is an Exxon affiliate, but the Fina station owner got a better deal from Exxon than from Fina. This happens all the time. Distributors also sell grease and transmission fluid and hydraulic fluid and motor oil to industry. You can often see distributors trucks servicing construction sites or businesses operating a fleet of vehicles.
Retailers can buy whatever they want from whoever they can get the best price! These corporations are usually very divorced from the nuts and bolts of oil companies, that focus on retailing gasoline and convenience store operation. The retail chain may be a Shell-owned convenience store, supplied by a Shell affiliated distributor, but he (distributor) may buy his oil from Murphy Oil Refining. So while the buyer thinks he is getting Shell gasoline, what he is getting is gasoline from a Shell Distributor, but produced by Murphy Oil Refining.
I have loosely used Big Oil Company names here to make a point. However, many of the big guys keep a close reign on their distributors. But that does not preclude them selling whatever they want to independent retailers, like Samir's Quicky Mart.
Thus unless a gasoline has a patented ingredient (like Techron) or other additive, it will not necessarily wind up being sold by the affiliate retailer. And we haven't even gotten to supply contracts yet, which further complicate things.
Summing up...
At every level of these distribution chains, people are trying to buy low and sell high. This is extremely confusing for everybody, but it is the way it works. But if you keep this in mind—oil companies sell to refiners—you can quickly see why oil companies get pissed when the finger pointing starts.
So, if there is gouging, where is it happening?
My opinion is that the gouging, if any, is going on at a very local level, no higher up than the local gasoline distributors. The most opportunistic way to maximize your cash would be to buy this week's gasoline for $2.50 a gallon, and then if something (like high oil prices) allows you to, mark this shipment of $2.50 gas up to $3.00. [Keep in mind that some states regulate the maximum profit on a gallon of gas.] Normally gas markup is about a nickel a gallon or such. The convenience store makes much more on food—the gasoline is the draw to get them into the store to buy cigarettes or candy or a coke, which have much higher profit margins.
The people who control the final price at the pump are the retailing companies or independent store owners. And these guys are more than happy to put it off on the oil companies, as they are very removed from them!
I know—as clear as mud. But it is the "free economy" at work...
Why are oil companies making record profits?
Because the wells they are producing from today were drilled in past years, where they used $15-25 per barrel as their estimated selling price for the oil. Thus when the market got tight, they have cheap oil going at a higher price. Why? Simple—demand is high.
Now this higher priced oil is filtering back to them in the form of higher priced goods, so the profits decline slowly over time as higher priced energy enters the economic mill. But right now, they are making a lot of money.
So, it is not the case that oil companies are incurring high exploration costs and passing these costs onto the consumer?
No. Oil companies are not setting the retail price except via the NYMEX, where they sell to refiners.
When the traders run the price up, oil companies naturally win. But the crude price is set by market demand i.e., what will they pay today?
So, let's say, very hypothetically, that Exxon Mobil wanted to make a gesture of good faith. Could they sell the crude for cheaper in hopes of lower prices at the pump, or does the nature of the futures market and all of the middlemen make that impossible?
It would not work for exactly the reasons you think.
But...
ExxonMobil, owning their own up and down stream divisions, could sell at a loss or reduced profit on the retail end, provided they compensated their convenience store owners for their lost gasoline revenues (these stores are franchises). But that would make whatever cut they did offer twice as financially painful—they would take the announced cut and associated reduction in profit, and then have to pay the store owners their traditional profit to keep them happy.
So you are not asking them to just fall on their own sword, but to get back up and hurl their bloodied body on it again...ouch!
So—if ExxonMobil did do this, it would be a huge gesture! But only those in the same business would understand the magnitude of what they had done. And whoever did it would shortly be replaced by the Board of Directors as the principal shareholders all called for his head on a pike!
Good.
'bout time oilcos made a decent stash. 17 /20 years in recession.
If you dont like the price, dont buy the product.
But if you really , really hate big oil and the attendent service companies, then I have no doubt that the state certified mentallist retards (you call them Congressmen and Senators) will windfall tax them and break them up.
After you have rogered your own oilcos (and caused about 500 000 layoffs in the only bit of none real estate sector of the employment register left) you will only have to deal with the really, really big boys who actually call the shots.
They live in KSA and Russia.
And they dont play by your Congressman's rules.
They have there own rules and they dont even publish the book...
Maybe it's just me, but your comments have gotten better and better lately, or maybe I just am paying more attention than usual. In any case, kudos.
New Meds....:-)
New Meds....:-)
As I have said elsewhere, gasoline prices are realigning to the relationship to oil prices that had been exhibited all the way up to July 2004 (the Democratic Party Convention in Boston). Instead of an overlapping cost (relative to a baseline date), they have been largely on parallel tracks. Only recently has gasoline again approached the "old" relationship.
I drove through NY, PA, and am now in Ohio.
Weirdly, gas prices were the same in all three states. Usually, gas prices are so much cheaper in Ohio that I try to gas up at the border. And PA is so much cheaper than NY that again, I often make a special stop near the border.
I've been doing this trip for over 10 years now, and this is the first time Ohio gas prices haven't been significantly cheaper. Very strange.
New Jersey is still cheap, though.
According to gasbuddy
http://www.gasbuddy.com/gb_gastemperaturemap.aspx
PA is the cheapest, followed by NY then Ohio.
It is interesting the regional differences that manifest.
I see no difference at all, with my eyes. It's $3.07, plus or minus a couple of cents, in all three states. Though of course I only saw the gas stations I actually passed, which were heavily weighted toward those near major interstates.
But it's weird, because I've taken the same route for years now, and have come to expect gas to be 15 to 20 cents cheaper a gallon in OH. And it's not, at least in Youngstown area, which is where I am at the moment. The price is the same as in NY.
$3.33 and has been for weeks in OR, but we are "adequately" supplied.
WT's bidding war needs updating to add one side of the US from the other. Funny for an extra 10% we get all we want. Go figure.
Stay on vacation! You need the time off.
Leanan, you're great, I really appreciate your work. But the seven day a week gig makes anyone burn out. I really think you should split the drumbeat job, and stay off the website for a couple of weeks to let your head clear.
I am on vacation.
But I ain't staying off the web site. No way, no how.
Ah...the addiction that is TOD. Hard to break this habit.
I've also noticed that all stations in KC metro were at $3.29 for 4 days or so and then this morning..boom...they all went down to $3.25 in lock step. It is odd because when the prices change, it usually takes a day or so for all the stations to get close to each other.
"New Jersey is still cheap,"
About $2.95 here in South Jersey across from Philadelphia.
Not only that but they pump it for you. No self service in New Jersey.
Don't forget to tip!
I make sure I have a pocket full of Sacagawea Dollars for when I drive through Jersey. They are great for tips.
You should use the new Chuckee Cheese tokens, whoops, I mean the new presidential dollars.
"You should use the new Chuckee Cheese tokens, whoops, I mean the new presidential dollars."
Worst. Reverse. Ever. Rest assured that I was on the Numismatic websites within minutes, registering my disgust throughout the world.
very low state taxes in NJ. that's the big difference.
That, and four refineries in the state, all working at full capacity, and the port for imports of gasoline.
6;26 am? What kind of vacation is that?
I pretty much buy the argument the OC's make.
IMO a very big component of the higher gas prices is the huge devaluation of the U$S compared to even just last year.
The overly complicated distribution arrangements always insure that there are a few middlemen making a profit for very little added value, but that's the way with everything in this system
A hefty gas tax would be a solution, but it is a catch 22 in the sense that with that much money involved it would be virtually impossible to find a mechanism to administer it without a big part being stolen or rerouted to special interests.
IMO the system needs to crash before it can be rebuilt, for the simple reason that it can not be fixed in the current political environment.
I'm in favor of the oil co's keeping the cash and building rail as thier new PO business model. I don't think they are running for office.
I'm seeing musashi to be right on this one. A weakened dollar has a good part to play.
But, everyone is complaining about prices. Back when Microsoft was the highest valued corporation on Earth, nobody complained about the cost of MS Office. (oh, wait, I did.)
Back to the point, the gripe is over prices. Correct me if I'm wrong, but doesn't the government get more revenue from gas taxes than the oil companies do profits over one barrel of oil? Somehow that gets overlooked. This may be why the government isn't really serious about fuel economy. They stand to lose a revenue stream in not only fuel taxes, but potential windfall taxes.
It is the same in every system, bloated government becomes a reservation for the incompetent, everyone has their little angle and will fight to death over it rather then go to work and it is as unmovable as the Rock of Gibraltar.
It takes a weapon of mass destruction, economical in this case.
Look what moveon.org is doing ("stop gouging"):
http://pol.moveon.org/stoppricegouging/o.pl?id=10385-1373658-gQBsbT&t=4
Very sad. And as long as the public remains ignorant, it's only going to get worse.
I think everyone should sign it. Then we can see what its like to live WITHOUT gasoline, instead of expensive gasoline.
Before careful what you wish for...
Isn't being ignorant the price of admission to MoveOn.
Please!! At least MoveOn didn't support the worst president and one of the most corrupt administrations in the history of the United States.
I presume this, selling below market price, would be a step towards rationing by queuing rather than price. How long would people be prepared to queue for a 20 cent discount?
Boy, I have to say for the most part I've come to expect much better from the Oil Drum, but this is a lame argument about how the oil industry works. First there's not one number in the damn thing and all sorts of meaningless statements like, "Not all oil companies own refining companies." or "At every level of these distribution chains, people are trying to buy low and sell high." And you guys blast the politicians - hah.
But to take an article that is well over a year old and put it up and not address the very real spike caused this Spring, and this is no secret, at the refinery level is to say the least not helpful. Here's a list of US refineries, so everyone can see just how much the oil companies are in fact involved in the refinery business http://en.wikipedia.org/wiki/List_of_oil_refineries#United_States
A simple question for the recent spike is why have so many refineries gone down at once, and that won't be answered without subpoenas. All the rest is just speculation, but you think the oil industry as a matter of good faith would open their records, don't you think? No foul, no harm, eh?
The oil industry is comprised of a lot of vertically integrated oligopolies, and I'm including national players in this, not just the old whipping horses, that explains how it works to a great a degree as market dynamics. To simply dismiss the market power of these entities is ludicrous.
I support $5 a gallon gasoline and as little of that as possible should go to the oil companies.
Brutus, you're not only a troll but a moron. Go back under your bridge!
Well. I only THOUGHT what you just said. So thank you for saying it!
I guess whats so offensive about him is that he makes personal attacks and accusations without researching any evidence. He ignores facts, maybe he should run for the Senate.
For the record, I'm an independent consultant. I work for independent operators, and have never gotten any business from the Majors. I've inherited some Exxon-Mobil and some Chevron stock, but I'm considering selling it. I do receive some royalties from Exxon and Chevron, but its less than $100.00 a month.
I don't love the majors. Anyone critising their ignorant political donations to various nuts and Nazis, and their public disinformation campaigns is right on. The majors are filled with beaurocrats who wear blinders and are selfish and conceited. But they are not to blame for peak oil, for the wild price manipulations by hedge funds that have destabilised the oil pricing system, and only partially to blame for not telling consumers to rein in their consumption. They have the most brain-dead public relations of any industry.
If the government takes the majors apart or slaps on a windfall profits tax it will collapse the whole house of cards in our economy. About 80% of their stock is owned by pension funds and mutual funds, and a very substantial amount of the rest by the retired employees. The levereged-buy-out vultures will take the good assets private, and we'll truly be screwed.
I suspect this is exactly the plan. But its a tad more complicated the LBO's will take over the refineries and run them into the ground so to speak with a huge debt load that will be minimally serviced say interest only payments and the deal structured to isolate each refinery as its own corp. The government in supporting the tax payer against big oil will ensure that the payment requirements on the debt are minimal to "help the people" and if needed will do the loans. When we start seeing real shortages and we eventually have extra refining capabilities and of course some government subsidies during the whole process to "protect" the consumer. The current owner might even continue to get a nice cut. In any case once we hit over capacity then the per refinery corps are allowed to go bankrupt with a huge still unserviced debt load if the government secured the debt then and additional taxpayer bailout will be used for even more wealth extraction.
Everyone involved gets paid twice or three times plus profits and the consumer might see some moderation in prices via subsidies either explicit or hidden.
If this is really the plan then its not a bad thing for the Big Oil to be forced to divest at a hefty profit.
Either way it plays out looks like a win win for the connected rich. The reason to favor this approach is it keeps all the money out of the pension plans and 401k's.
Of course a select group of investors and management will be involved in the deal first taking big bonus's on the sale then moving over to help run the new independent companies for the people.
What can't happen is to allow all this oil wealth to flow back out to Joe6Pack via pensions and 401k's this in intolerable.
Oilman Bob,
Two post up, you seem to have the same habit:
and from your own post:
and then the next gem:
Yes, let's discuss the Nazi's. It's always good if you can compare people to Nazi's. Because after all, no post is worth reading if it does not contain a reference to the Nazi's, right?
I like how you CONVENIENTLY left off the caveat, Richard:
I should have put "like" in quotation marks.
Richard, you're right. I should never respond heatedly to a troll, that's the response they're looking for. I appologise to the OilDrum crowd.
Calling the Major's public relations flacks "brain-dead" is pretty well justified. Through funding the global-warming deniers and the CERA peak deniers, they've sacrificed good will from people who would otherwise be more sympathetic to them.
As far as Nazis, its only partially hyperbolie. Texaco supplied them with oil up until Roosevelt put an embargo in place in 1941. They used to fly a black flag at their headquarters in Houston. Within the last 20 years Chevron was using Cuban mercenaries to fight for them in Angola, and they have used their money to support the Neocons and their war in Iraq. The founders of Exxons children gave the Bushes the money for both presidential runs. I could elaborate more, but I'll stick with my accusation and comparison, even if it makes you think I have forfited the argument.
But, brother, peace. Once again, I apologise.
Oilman Bob,
I should also apologize.
The score is now 1-1, let's go for a beer.
;-)
Richard, I don't drink, but its not moral principles, just a simple inability to drink and stay out of jail. But I'll buy you one! What part of the world do you live in?
Japan, actually. But I'm from the Netherlands.
I must be missing something but aside from the histrionics Brutus seems to have the only comment in this string consistent with the last several weeks discussion, right here, saying that the reason for the high prices today is a refinery issue not a peak oil issue. He certainly made an honest effort to back up his argrument by providing a list of refineries and their owners. Now I'm gonna go study that list.
Oh, horse manure. Several people have been pounding the refinery drum before the troll even arrived here at TOD. Robert Rapier amongst them.
The troll is arguing that the failures in the refineries are ALL deliberate and part of a pattern of collusion to drive prices higher. He can't prove that so he resorts to personal attacks. And he ignores data when provided by accusing anyone with whom he disagrees of being in cahoots with big oil.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
jjhman, thats a bad list. Where are the Dow Chemical, Celanese, and Goodyear refineries in the Houston area. How about Formosa Plastics and Celanese in the Bay City area? How about Bayer in the Baytown area? Plus about a hundred more just in Texas
good bob, now why dont you do us a favor and add the refineries you just mentioned and the capacity of the oil companies and give us a %
Why don't you do your own flipping homework for once, instead of constantly tossing out mud and hoping something sticks? You come around with all of these accusations, and never anything to back it up with. Bring something of substance to the debate.
You are an idiot, but a useful idiot. An idiot because much of this has been explained to you before. You simply refuse to process or consider the explanations, because your carefully crafted conspiracy theories would fall apart. But you are useful, because your views reflect those of most citizens. So, watching you spew more or less gives us the pulse of the public. You are the average Joe.
I tried to help you at one point. You asked for information, and I went out of my way and made some inquiries to find it for you. What do you do in return? Thank me for going to the trouble? No, you just hurled a bunch of accusations at me and at the industry. You don't understand jack, and refuse to even try to understand - witness your comments on Sankey's testimony - you discounted it immediately by saying "Yeah, what else is a Deutsche Bank analyst going to say." You are incapable of learning, and are therefore condemned to your ignorance. But that's your choice.
Where are the Dow Chemical, Celanese, and Goodyear refineries in the Houston area. How about Formosa Plastics and Celanese in the Bay City area?
I worked at the Celanese plant in Bay City for 2 years (making butanol) and the one in Houston (in Clear Lake, close to NASA) for 1 year. They are not actually refineries; they are chemical plants. They buy from refineries and turn refinery products into various chemicals.
I think the original article is a bit misleading to unclear on one point: All of the major oil companies own refineries. What he should have said is that are tons of small producers, and they do not own refineries. But the big guys in the U.S. - the Exxons, Shells, BPs, etc. - all own lots of refineries.
I also think the article could have been a bit more clear on profits. Why do the oil companies make huge profits when the price of gas skyrockets? Because their margins skyrocket. So it is true that the oil companies are profiting nicely from the run-up in gas prices. What is not true is that they are somehow controlling those prices.
What is also not true is Brutus' implication about refiners purposely withholding product. Imagine you own a refinery capable of producing 200,000 barrels a day. Are you really going to to run it at 150,000 barrels with these margins? You would be insane to do so. As they say, you make hay when the sun is shining. There is no way to predict prices in 6 months. So you maximize your revenue stream now.
I would also point out to Brutus that refiners have made record amounts of gasoline this year. How does that fit into his theory of withholding supply?
Why do the oil companies make huge profits when the price of gas skyrockets? Because their margins skyrocket.
I've searched this thread and this topic seems oddly overlooked. What am I missing?
1: oil companies planned using, say, $20 oil prices
2: oil company profit *margins* were slim, single digits
3: oil prices went up to $50-$75
4: oil industry cost inflation was very high, 25% or more (?)
5: oil companies sometimes hedge
What would a stock analyst say? You're final price went from $20 to over $50 and your profit margin went from a small percent to a higher but still small percent??? Was it mostly #4 or #5 above? Or is it really a big percent now?
there are not a hundred refineries in Texas.
You are looking at petchem plants which may be taking in refined product streams from refiners and might be returning components that get blended back into traditional refining products (ethylene crackers feeding naphtha spit out a little mogas sized molecules for example). My 1991 Oil and Gas Journal Annual refining survey lists 31 operating refineris in Texas and 194 nationwide. There will be fewer now with closures though overall capacity has grown through expansion of the remainder.
OilcoEx, Im a upstream guy, not a downstream guy. The plants I mentioned are all petrochemical plants, but they all use a substantial amount of oil, mostly imported through the Houston Ship Channel. The list on wickopedia said that it was US refineries, not gasoline refineries. Maybe my definition of refineries is too broad? at any rate I do know that gasoline is the least profitable part of the petrochemical business, but by far the greatest volume.
The "obscene profits" that the pols are targeting include the profits made on the petrochemicals, and if not for them 100% of crude could be cracked and combined to make gasoline, so I think they should be part of the dicussion.
Yes oilmanbob, your one of the great apologists for the industry on the blog. Quick to blame the politicians, but never once bringing the industry to task, nor it would seem much of an understanding how its run.
The oil industry is done, the only question is if it will take us all with them?
Brutus,
If you don't want to pay 3 US$ for a gallon, that's fine with me.
The US is importing 1-2 mbarrels of gas per day. If you don't pay the 3$, then these tankers will just go back where they came from. Europe for instance, or China, or India.
Gee Richard if you read my post I said:
!!!!!!
Good luck taxing saudi armaco and the rest of those state owned foreign giants that control most of the worlds oil.
Paraphrasing Simmons:
Whether it's fair or not, the reality is that if the oil companies continue to make huge profits, the government will find a way to take it away from them.
Oil companies and those who own refineries have no incentive to spend money on maintenance. If refineries go down, the supply falls, and prices go up, and then they make more money. Current prices are not high enough to cut demand. It is the right of the oil companies to make money on their investments. If you want cheaper oil, then go drill for it, or better yet, stop using oil and gas! When demand goes down, then prices will go down. The problem is oil is like a drug..... people think they have to have it..... It is probably worth a whole lot more than $3.00 per gallon in what it can do, but people got used to cheap oil. As long as you are willing to pay, you are not being gouged. Since gas is $7.00 per gallon in Europe, we are not being gouged. We are getting a bargain. As long as our price is cheaper, people will keep wasting it until it runs out, and then they will cry why????? If crack went up $2.00 per ounce, people would not slow down one bit..... same with gasoline..... I predict that the government will step in like in WWII and ration, limit and stop the sale of gasoline so they can keep it for wars and farm machinery.
Nowhere is Now Here!
Bah.
Some refiners did indeed skimp on maintenance when margins were poor. BP did a terrible job. But the idea that a refiner would knock out a big chunk of their production (enough to move the market) because they'd make it back on the rest is brain dead. First, the majors generally have their production committed to retailers already. When one of their refineries fails, they are the first ones rushing in buying up the market at prices over what they've sold at to meet their commitments. If you check out any refiner's quarterly reports, they usually get creamed when a refinery falls down due to a fire/explosion/operator error. Or are the accountants in on the conspiracy and hide the profits until later?
"the idea that a refiner would knock out a big chunk of their production (enough to move the market) because they'd make it back on the rest is brain dead".
This is an interesting comment. If you substitute the word "refiner" for "oil producer", isn't this EXACTLY what OPEC does with undoubted success in the oil market?
To clarify, I do NOT believe that this behaviour is occurring in the US gasoline market, but, if it were, it would be extremely effective and prices would be substantally higher that they are at present.
This is an interesting comment. If you substitute the word "refiner" for "oil producer", isn't this EXACTLY what OPEC does with undoubted success in the oil market?
Yeah, but note that even with their regular meetings to discuss the issues, they have historically had horrible problems with producers cheating on quotas. Only recently have they seemed to cooperate. And XOM and Shell certainly don't sit down to discuss quotas or they will find themselves in jail.
That was my point, Robert. OPEC can do it, but big oil can't - it's a matter of law.
That said....
1. with the new "NOPEC" law, do we envisage Mr al-Naimi et al getting "extraordinarily renditioned" to Guantanamo Bay after their arrest at the nect OPEC shindig in Vienna?
2. OPEC's successs with oil prices of late (ie post 2003) is a result of the significant reduction in marginal production capacity and much higher prices. They have seen that they benefit collectively by sticking (more or less) to quotas under the present supply/demand scenario. And, of course, it is much easier to balance the national budget (or top up your Swiss bank account) with oil at $65 than at $25, so the incentive to cheat is much diluted to begin with.
I've never agreed with this idea that you guys push occasionally, that it is the retail gas stations which are responsible for high prices and "gouging". Surely anyone can see that gasoline retailing is by its very nature one of the most competitive businesses in the market. Not only are gas stations found on street corners throughout the country, with competing stations usually only a few blocks away at most and often right across the street, they are required by law to post their prices in large, clearly readable signs! This is a perfect recipe for robust market competition and is the last place in the production/delivery chain where one would see gouging and monopolistic behavior.
For once I'm going to agree with Halfin. If there's price fixing going on the most logical place is at the top. The assertions that there's no way the crude suppliers would ever collude and that the price of oil that costs $10 to produce is solely set by traders may be self-evident to PG, but not to most of the rest of us.
Halfin knows better and so should you. The market price is always set by the marginal producer. So the market price is set by whomever is producing at high costs and selling in the $60 range. Why should Exxon or Shell or Aramco accept less than this for their product? Oil is FUNGIBLE and that means anybody can provide the oil. DEMAND sets the price. This is basic stuff, guys. Sheesh.
What you are pissed about is that Exxon had the foresight to drill early and has wells that produce at $10, $20, or $30 per barrel versus the tar sands and biofuels who are producing at much higher costs. And those costs are what set the market value for everyone. You don't like those costs? Use another fuel or energy source. What will that do? It will reduce demand which means the marginal producer (the one causing oil to be near $65 per barrel) will go out of business. That leaves the next guy down the totem pole. You cut back enough and all that is left is Exxon and Shell and Aramco producing at lower costs and then they don't dare raise prices because someone else could undercut them. But right now? The market is sopping up every drop produced! If you demand more than the low guys can produce, higher cost producers move in and all the producers sell near that price.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
So the market price is set by whomever is producing at high costs and selling in the $60 range. Why should Exxon or Shell or Aramco accept less than this for their product?
Absolutely no reason under our system. Of course, charging 5X their cost of production just because they can is going to be gouging to 99% of the population. For some reason people seem to think that competition should result in lower prices, not everyone instantly maxing out.
One gets an image of oil executives slapping price tags onto barrels of oil ("charging 5X their cost"). Something tells me this image is incorrect.
Whatever happened to the bidders of NYMEX?
They're in cahoots with Big Oil! =/
Absolutely every reason under our system because if you don't allow the marginal price to be the demand driven price then demand goes even higher!! By supplying oil at below market prices you would encourage even more demand, NOT slow demand!!
Have you got a better system? Command and control economies DO NOT WORK because of what we are.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
This is the way its allways going to be, thats what happens in markets. Say you institute a price cap below demand, then people will buy up the product and sell it on the black market with less efficiency and more juice going to the middle man.
This is the principle that was stated on PBS Lehrer News Hour this evening. The price of the whole is set by the marginal producer, which also holds in a glut situation. However, in a glut, he who has the least oppressive financial obligations usually drops out or reduces production.
Reducing production can be a voluntary move. Increasing production may fall beyond the doable. Thus, positive price spikes can become plateaus if the supply side response isn't possible. This is one reason why we have the Strategic Petroleum Reserve and used to have the Ever Normal Granary of the FDR era, and price supports for agricultural goods and so on. The catastrophic price swings produced by the 'invisible hand' are too much for Joe Shmoe when it comes to staples, of which petroleum is now one. When tomatoes or oranges do the same thing nobody gets near as upset and we don't have Senate hearings. Nobody is taking Minute Maid to task over the doubling of OJ. But oranges will come back.
Saw a 'sumotruck' passing - what else - a Smart Car today, [we have them in Canada] and wished I had my camera. This is a passing opportunity as the sumos are soon to be toast, I thought. But then people pay huge prices for drugs and oversize houses and all sorts of irrelevant paraphernalia of egodom, so expecting that fuel prices will eliminate irrational behavior in the car markets may be fantasy. In fact, as the prices rise, the statement of 'I can afford to be totally wasteful of large amounts of money' becomes stronger. If diamonds were cheap, nobody would want them. Just hard , clear rocks. Carbon, actually, but hard to light.
I'm not sure I follow you. Sound a lot like economic theory only.
The current situation has proven one thing for sure:
Single choke points can disrupt the supply easily, esp. when the margins between supply and demand are thin.
In this very real and practical (not theoretical) situation we are now in, the end products of oil are priced not only by demand, but also by supply.
Refineries are one such choke point currently for gasoline (esp. in some global regions).
Also, I've yet to see:
- an impartial
- comprehensive
analysis of all refineries, their ownership (tracked to the major holding source) and their utilization historical rates and current reasons of down-time.
If such a list existed, it would be MUCH easier for an oil-industry outsider to toss out all "price gouging" arguments out of the window.
It's just a factor of tight margins and coincidence of synchronous down-time that the gas prices are high now.
Now that there is no proof, it is easy for anybody outside the industry to think that the companies are doing exactly the same what they did during the Enron scan: choking the markets on a demand that is highly inelastic AND then reaping the profits through price hikes via scarcity.
I'm not claiming this myself, but it is very easy for me to understand that people think like this, unless they have all the facts.
Calling them 'brain-dead', 'stupid' and what-not does not help the situation.
Also, intellectually it is akin to calling somebody a moron before you tell him what he is supposed to know.
Nobody told him that. Not everybody knows everything.
Let's educate, not call names.
the data you seek are in the DOE's tables. Refining operable capacity and % utilized are reported.
http://tonto.eia.doe.gov/dnav/pet/hist/wpuleus34.htm
I like the 4 week rolling averages as it smooths out the noise somewhat. You can see that 2007 had a pretty normal looking shutdown season (feb-->April) but May is looking terrible as the equipment is not coming back up as fast as normal.
However, the Colonial went on proration today which means nominations have exceeded pumping capacity. That spells high production coming and knocked a dime off of RBOB in a single session.
Your reply is posted to me but is factually in error if intended for me. I never once called anyone "brain-dead", or "stupid", even if they deserved it. I did not call anyone names. If the tone of my post is exasperated it is because I am exasperated at trolls like Brutus who incessantly REFUSE to be educated.
And if the only alternative explanation you have for these prices is conspiracy theories then you are the one out in left field, not me.
If you studied the industry you would see that spring is traditionally a time of (a) refinery downtimes for maintenance, (b) of normally low demand so that supplies build for summer, and (c) a period in which crude inventories normally grow due to low demand.
What we had this spring was maintenance coupled with unplanned outages on plants that are over 30 years old (and getting older every day) coupled with unprecedented demand from people like you and me. The result was easily visible.
1. Crude inventories grew, as expected, because they can continue building crude inventories when the refineries are down.
2. Gasoline inventories FELL, because of unplanned outages and extremely high seasonal demand.
Now what do you think is going to happen in this situation? Do you think gasoline prices are going to magically decline just because you want them to? Do you think that punishing your supplier will get you more of what you need or less?
This situation has been building all spring, as Robert and others have constantly been pointing out. And now, only now that prices have finally caught up with demand, are people squealing like stuck pigs. It's absurd beyond belief. It's idiotic. It's lunacy. And it is a perfect demonstration of why the politicians we elect will never ever understand resource depletion issues and respond to them intelligently.
Instead of an intelligent response we get the Congress passing a law allowing the US to sue OPEC???? How insane is that?
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
GreyZone, yes sorry, posted to a wrong part of the thread and none of the stuff was attributable to you. Sorry for confusion.
I agree that politicians should know (and probably do know) better, but it is in their interest to suck up to the popular vote on this.
As for the masses, I can't blame them, nobody is doing a country wide mass media blasting to educate them.
Coverage matters.
What I don't understand are the media reporting this quite badly in many places.
It is their job to get the facts right and get to the bottom of the things.
Either: they are being played or they are doing this on purpose or they don't know how to find the facts.
In any case, they are incompetently handling the reporting (many of them at least) and they are to blame for many of the ordinary people still believing in all sorts of conspiracies.
They should get the facts that I asked about and OilcoEx posted a link to, in all the news and the situation would be at least partially settled.
Now it seems as if media is on a feeding frenzy and wants this to escalate, along with the politicians.
Hell, it smells like a stink PR job to me :)
And the answer is... "they don't know how to find the facts."
That is the honest to gosh answer. Connie Chung got indignant several years ago when chastised for just repeating White House press releases with minor tweaks. Her comment was something to the effect that the news rooms lacked the budget and the manpower to do real research and that besides, their job was to entertain.
In other words, the blind leading the blind.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
TJ
Conspiracies are fun when people are powerless, but 80% of the world crude is produced by national oil companies. The US dollar has slipped at least 20% compared to the Euro, and many countries don't want them anymore-Kuwait, Iran, Venezuella are all selling them as quickly as they get them for Euros.
The majors only refine about 40% of the US gasoline. They don't have enough of the market to control prices.
Yes, we are being diddled. But its by the Bankers, not the major oil companies. Not that they wouldn't if they could, its just not possible. They've lost control!
that was sensible right up the point where you drug in Bankers to be the whipping boys. Our problem is there is no spare crude capacity. Nigeria is SNAFU as is Iraq. Our idiot president is rattling his sabre at Iran. OPEC held together and is keeping 1-2 MMBD off the market to support crude price. Put the blame/credit on crude where it belongs -- OPEC and energy hog consumers. On gasoline, these refining margins are indeed huge. But with a fleet average mileage around 20 for the USA, we deserve it. Buy Prius; cut your effective price of gas in half or more.
It seems "blame" has little to do with "is being done" but with "shoulda done."
How did we get to this cheap energy circus? I knew if would end, but why was it never common knowledge?
No one knows a thing about energy or economics. This is accidental, yes?
The oil companies/government/advertising/banking got "us" addicted and liked it while it lasted...
Two things, 1. Remember, this was an interview with one of our industry insiders...not my POV. 2. in the long-term, I agree with both of you...but in times of crisis or shocks (remembering the context for this post was originally right after Katrina, etc.), there did appear to be evidence of short-term collusion at the end of the supply chain in certain areas.
I guess the point is this, if there's going to be gouging, that's where it is most likely...and even then, it's not all that likely.
Sorry if that wasn't all that clear...
After ADM, Enron, and other like examples you think collusion is more likely at the retail end than at the corporate end? I'm somewhat surprised.
You are correct. the bulk of the current rise in gasoline price is accruing first to crude producers as crude moved from $20/bbl to $65 (roughly $1/gallon increase) and then another $25/bbl (60 cts) of improved refining margin on the gasoline element.
I'm shedding no tears for retailers but they aren't the problem.
This is really priceless
http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&D...
WASHINGTON (AP) - Decrying near-record high gasoline prices, the House voted Tuesday to allow the government to sue OPEC over oil production quotas.
The White House objected, saying that might disrupt supplies and lead to even higher costs at the pump. The Organization of Petroleum Exporting Countries is the cartel that accounts for 40 percent of the world's oil production
We don't have to stand by and watch OPEC dictate the price of gas," Judiciary Committee Chairman John Conyers, D-Mich., the bill's chief sponsor, declared, reflecting the frustration lawmakers have felt over their inability to address people's worries about high summer fuel costs.
The measure passed 345-72. A similar bill awaits action in the Senate.
Separately, at a House hearing, lawmakers were told that crude oil prices have played a relatively minor role in the sharp increase in gasoline costs over the last three months, putting the blame on lower gasoline imports, refinery outages and continuing growth in demand from motorists.
Gasoline prices "may ease somewhat," Guy Caruso, chief of the Energy Department's statistical agency, told the House Energy and Commerce investigations subcommittee. But he said pressure on gas prices will remain strong "with the hurricane season approaching, continued tight refinery conditions, low gas inventories and increased demand for summer travel."
Nevertheless, the House felt it was important to take on OPEC, whose member states last t year agreed to cut production by 1.1 million barrels a day to counter what had been a buildup of world oil stocks.
Conyers accused the OPEC engaging in a "price fixing conspiracy" that has "unfairly driven up the price" of crude oil and, in turn gasoline.
His measure would change antitrust laws so that the Justice Department can sue OPEC member countries for price-fixing, and would remove the immunity given a sovereign state against such lawsuits.
But the White House said President Bush will be advised to veto the bill should it pass Congress because such suits could spawn retaliatory measures and "lead to oil supply disruptions and an escalation in the price of gasoline, natural gas, home heating oil." global oil production.
Lawmakers have been frustrated over their inability to counter the surge in gasoline prices that last week averaged just under $3.22 cents a gallon, within a half penny of an historically inflation-adjusted high in March, 1981.
"As politicians ... there's no other issues of greater interest to us than gasoline prices and the impact it's having on the American public," said Rep. Ed Whitfield, R-Ky., at a hearing by the House Energy and Commerce investigations subcommittee.
Rep. Bart Stupak, D-Mich., the panel's chairman, told of a person in his district complaining that gas had increased 21 cents a gallon over 10 hours this past weekend.
But the latest price surge at the pump may have had little to do with OPEC oil production.
"Increased crude oil prices have played a relatively minor role in (the recent) increase in retail prices," William Kovacic, a member of the Federal Trade Commission, told Stupak's subcommittee. He said the price of benchmark West Texas crude increased no more than 15 cents a gallon over the last three months, while retail gas prices jumped 80 cents to 90 cents a gallon, depending on location.
"Big Oil is often quick to blame world crude oil prices, but that argument doesn't appear to be the full story," said Stupak.
"While consumers pay record prices, oil companies are making record profits," said Stupak. Refinery profits have jumped sharply to as much as 70 cents for every gallon of gasoline produced, he said.
Oh my gosh... the utter stupidity of it all! And some of you folks expect these fools to lead the way to a reduced fossil fuel future? Ha! Absurd! Comic!
But keep placing faith in politicians, folks. You place faith in politicians and some of us will take other paths. Good luck to you on yours because you sure need it.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
GreyZone, everything is politics, even some stoners sitting around on the commune floor deciding whether to get photovoltaics for the hydro pot crop, or go with wind.
I agree its nuts and out of control in Washington, but I'm still going to vote. And, I'll join the revolution if it starts, but I've gotten to be 55 and grey-headed without the Americans getting the cojones of the Zapatistas.
Thanks. What the world needs now is more cynics.
Sorry Greyzone, I just re-read the article to which you were responding, and take back my comment. Those guys are a bunch of freekin' boneheads. We're screwed.
Oh, dear. People really are starting to go insane, aren't they?
Notice both those guys are from Michigan.
Now maybe people can understand why we are leading America down the road to collapse.
I would like to know the IQ of the people in Conyers district. They are either the dumbest bunch on earth or blown out of their minds on drugs. This is typical of all the brain dead crap the guy has pushed for decades. He is a total freaking moron.
Name recognition is what keeps him in office.
His district is comprised mostly of poor blacks. Their attitude is one of unity against whites.
The people who vote for him are in such abysmal poverty that after 30+ years of black leaders in Detroit(e.g. Kohmeni Young) that it cannot be accidental.
It seems that local black leaders have hit on a formula for success, keep the constituency poor and ignorant and they'll vote for whatever you want.
At least till now.
Detroit is being evacuated to the point that the local school board bought a truck to patrol the city streets looking for students to enroll.
Strange as it may seem the above attitude is echoed in certain upper class blacks as well.
Observing them at work(I work in a cutting edge technological field), they will always acknowledge and greet one another regardless of station, vice-president and janitor for instance.
My cube(cell?)mate, a middleaged black male and I talked about this and he said that the image of their past slavery was so vivid to most blacks that they can't help feeling being back on the plantation and brought in from the fields and allowed into the mansion for the first time! This cat makes probably twice what I do!
Fortunately I recently had a chance to work with a young black guy(in his 20's) and there seemed to be no acknowledgement of this. That was his Dads reality, not his.
I know I'll hear calls from some about being racist but that is pretty much how it is here.
OMFG!! If you weren't a d00m3r before you read this article, then welcome to the darkside! How can this possibly be successful?? Are their any lawyers in here that can explain how one country can sue another country? How do you enforce the judgment? Militarily? WTF?
Not a lawyer, but what usually happens is that the U.S. seizes the assets of the loser nation. Whatever they happen to have in the U.S.
Not sure how it would be enforced, but the only real winners in any law suit are the lawyers...
I put forward a motion to sue mexico for keeping more of its oil for its own people and not exporting enough.
All those in favour say yea
"As politicians ... there's no other issues of greater interest to us than gasoline prices and the impact it's having on the American public," said Rep. Ed Whitfield, R-Ky., at a hearing by the House Energy and Commerce investigations subcommittee."
We have a $600 billion annual trade imbalance.
We have an annual national budget deficit of $500 billion, and 90 % of our national debt has been accumulated in the last 20 years.
Our currency has fallen 40% against the euro and the pound sterling since early 2002.
We have the highest murder rate of any major industrialized nation.
We have the highest incarceration rate of any major industrialized nation.
Our borders are being violated ten thousand times a day by poor and desparate people seeking some hope for a better life, but quite unprepared educationally and linguistically to funtion in our society.
We have almost 40% of our children living in single parent homes and almost a third of them living at or below the poverty level.
We are facing a funding crisis in medicare and social security; the only debate that occurs is when will it happen.
We are bogged down in a seeingly unwinnable war, in the very region that controls our precious oil supply.
As a nation we are not well liked, indeed, we are becoming increasingly disliked and deeply despised in some parts of the world.
And there is NO GREATER ISSUE BEFORE OUR ELECTED GOVERNMENT THAN THE PRICE OF GASOLINE????????????????????????? I don't know whom to blame more, our government or us!
Certainly, I do appreciate the many sincere and well founded messages here to educate others about the concern for a world that is threatened with the future of ever declining global oil production. Like our social security funding crisis, it seems the argument is mostly when, not if it will happen. If indeed, that is what Mr Whitfield were addressing, I would agree that it is a concern of paramount importance.
But no, he is just addressing the public whine about gasoline prices, and this almost childish whine distracts our elected government from all of the issues I mention above, and gives them an excuse not to deal with the very huge and very real problems in our society. When will we as US citizens take responsibility for our own collective choices about how we live, whom we elect, what we demand of whom we elect, and become part of the solution to and not the problem of the very real issues of finite natural resources in an increasingly overpopulated world?