What’s getting harder? This whole thread is surreal. It’s like arguing about 9/11 with the Loose Change people. Facts are offered and explanations are given, only to be countered by more conspiracy theory nonsense, after which we are told how hard it must be to defend our position. It’s like arguing with Martians over the color of Jamie Lee Curtis’ ball hair. How genuinely absurd.
Its been explained several times in this thread already, but on the off chance you simply missed it, and since I happened to find this cite earlier and its pretty simple and easy to understand I’ll post it here to see if it makes sense to you. The process really is complex…which is probably why its so little understood.
Take a look at the chart in the cite and read through the explanations of how the cost is broken down for your dollars vs a gallon of gas (this is applicable only in the US btw…other countries have a different breakdown). Note that 59% of the price comes from the cost of crude oil, another 10% comes from refining costs (IOW nearly 70% of your dollar goes to just buying the oil, getting it to the refinery and refining it), with another aprox 20% going to taxes. Then think about the margins left after all this for profit…and try and project other commodities and what their projected profit is on a percentage basis. Also, look over the raw figures for how MUCH gas we actually use in this country and then realize that we are talking about a huge amount…so even though they are only making pennies on the dollar for profit, there are a LOT of pennies there.
If, after reading this simple (very basic) explanation (and the myriad better explanations throughout this epic length thread) you still don’t get it, or still think as our good friend gonzo there…well, I’m afraid I can’t help you.
-XT
Who said they were benign lovey fluffy companies who are doing everything as an act of charity? I think the contention has been that the oil companies (I guess we should define who we are talking about at some point, majors, independents, NOCs?) are not colluding to control the prices to influence elections, are not colluding to control the price to make huge profits (they are trying to make huge profits but are not colluding) and they do not have the capability to control the prices.
Now your link, whilst wholly irrelevant to the debate, does raise an interesting point about production storage and consumption numbers, in that they are remarkably difficult to comeby. OECD countries have pretty good record keeping , and those numbers are released on a fairly timely basis. Other countries do not keep records, or will not release in a timely fashion for security reasons or in the case of Iraq and anywhere where one country has a controlled price and the neighboring country does not - smuggling. You can add in the terminal guessing game about how much oil is in transit or in floating storage if you like.
The result is the demand, stocks and product numbers that the traders are using have some errors associated with them, and are regularly revised forwards and backwards. The quantities of all this smuggled oil/unregistered oil are estimated and factored in to supply side, although no major oil company will be buying it or selling it, so difficult to see how they will profit from it. The result is we can see price fluctuations based on revised stock or demand numbers when we find, hell we have 2 billion bbls more than we thought in storage.
So, my glurge, irrelevant - probably , but your weblink does give an additional insight into some of the issues that affect the supply and demand calculations, namely, the data is not always as robust as we would like.
Xstime, you are obviously conflating what others have said with what I have said. Nowhere in your post have you disproven anything I have said. Yes, we all understand how businesses work. If you have a specific point to make, then make it; posting generalities about how businesses operate doesn’t do anything.
To denigrate your opponent by vague hand-waving about how he “doesn’t get it” and “it’s so simple” is a cheap debating trick, and we don’t fall for those here.
P.S. - My arguments and gonzomax’s are not the same, and saying “you are like so-and-so” is yet another cheap debating trick. Equally useless.
I hope we can agree that the example is a simplistic evaluation, but I would disagree with the idea that raw cost increases to a manufacturer should be passed through with no mark up to the consumer. The essence is the company has invested 100 million, be it in buying raw materials, going to Vegas with the exploration budget, building a refinery etc, and the sell for 120 million. It has taken 100 million to make 20 million profit.
If the cost of raw product is up, hookers and blow in vegas has gone up and the contractors building your refinery doubled their prices and now we are at 200 million. the company absolutely has to sell the stuff for 240 million, and maintain the 10%. You cannot use 200 million to make 20 million when last year it only took you 100 million to make that same 20 million. Well you could but the shareholders would have you out in a flash.
Again, return on capital employed, ROI and all that good stuff complicate things a bit.
Now you are right Oil co A could not pass on as much of the increase and undercut Oil co B and gain market share. Oil Co A will probably cut prices, market share and volume is very important given the huge cost of installed infrastucture, and tat is what happens. There is a limit though as to how much you can undercut and how much market share you will gain , and will that lower revenue per gallon be off set by the increase sales.
Anyway, a lot of the discussion has been related to what goes into that 100million of raw product, vegas cash and refineraries, and there are many more players involved than just the oil companies and the consumers, it may look seamless at the pump, but behind the scenes, many other companies are involved.
I maintain though that the profit margin should remain pretty much the same as the cost go up.
Cheers
Well I just want to say that I very much enjoyed reading your argument, NaturalBlondChap, and I want to thank you for actually addressing the issue with a well-presented argument without rancor or condescension. Good job.
I wasn’t posting generalities I was answering your seeming question about how the price of gas at the pump relates to the costs incurred by Big Oil™. If you read the cite you would see that it was SPECIFIC (though admittedly simplistic) data relevant to what we are discussing. My cite to gonzo was a generality, though related to what he was talking about (i.e. it discussed supply and demand)…but you ain’t gonzo. If you don’t see the relevance then either you didn’t actually read the cite or you don’t understand your own questions.
I didn’t denigrate you OR hand wave. I note with some irony that you didn’t address anything specifically in my post and seemed to instead focus on my supposed attack on you…instead of the points raised. Who exactly handwaving here, ehe? 
And who exactly is ‘we’ kimosabe?
There are a lot of cheap debating tricks, ehe? Like the misdirection one.
Well, if you understand and agree its all good then. 
-XT
You didn’t raise any points. You linked to a broad article and attempted to ridicule my position with unsubstantial insults. And now you are pretending that you didn’t compare me to gonzomax when you clearly did. I read the article and it was not applicable to any argument I have made. If you believe otherwise, then make a specific argument. Your M.O. is to try to ridicule, condescend and denigrate, and that doesn’t get us anywhere. I see you’re still trotting out that tired “I guess you can’t understand it” meme. Read NBC’s post for an example of a well-presented argument. Until you can do that, I’ve got nothing to say to you.
That’s only applicable in America, and only for one particular month in 2006. For that to be a valid breakdown today would require crude oil prices to be in the high 70s to 80 dollar range.
Let me paraphrase XT arguments. Agree with me and you are smart and get it. Disagree and you are by definition stupid and not with it.
Everyone tries to manipulate the price of oil, Saudi Arabia, Exxon, everyone. Sometimes they even succeed for a little while.
Free market theory only works in theory, it depends on too many assumptions that do not reflect the real world.
So let’s delve into this further. The claim was made that crude oil accounts for 57% of the cost of gasoline. So taking my simplified peanut butter example, the peanuts would cost 57 cents for a jar of peanut butter that sells for $1.00. Let’s say the profit is 10%, or 10 cents, so that would make the other costs total 33 cents. Now let’s say the price of peanuts doubles, to $1.14. To keep the shareholders happy, the company in turn doubles the price of peanut butter, to $2.00. Now, the cost of making peanut butter is $1.14 + 33 cents, or $1.47, and the price is $2.00, so the profit is now 53 cents, or 26 percent. So the profit percentage has not stayed the same at all, it has drastically increased. (And a higher initial profit would end up with an even greater percentage increase in profit after the price hike, I believe.)
So it would seem to me that, based on that 57% figure, that a doubling of the price of crude oil alone doesn’t justify a doubling of the price of refined gasoline, even assuming the the same profit percentage is obtained. So what we need is evidence not just that other costs are involved, but that these other costs have increased during the same time period in a amount that necessitates a doubling of the price of gasoline. Or tell me where my reasoning doesn’t hold.
In my original example I referred to total cost doubling and so the price should double, leaving profit margin at the same %
In your example of 57c raw material rising to 114 and mfg cost remaining at 33 c with 10c profit, I would argue that the sale cost should be 163 not 200, thus maintaining a 10% profit margin ( costs of 147c profit 16.3)
As you say - it needs to be demonstrated that total cost are doubling, not just raw material cost, to justify a doubling of sale price, and keeping profits in line.
This can be done, I have plenty of anecdotal examples in my head on the rising cost of the oil and gas industry, although anecdotal examples are probably not going to wash. Therefore I need to go & get some hard information. (shipping rates, rig costs, price of steel (the O&G industry uses a imperial shedload of high grade steel), 3rd party service cost (hell look at how Schlumberger, Baker, Cameron (the big service providers in the Upstream area) etc profits have risen as well) ect etc)
(ok you can figure out the parenthesis placements, I got lost)
It is also important to note once more that there are many stages between the E&P and the gas dispenser, including two futures markets which complicates the picture
The doubling of gas is one numbers that has been chucked around (myself included), however that needs to be examined, in a volatile market it is pretty easy to pick two points and get any % increase one wants. So we need to look at the benchmark crude prices, the main hub prices for refined product and the untaxed price at the pump. These need to be corrected for inflation. We can then examine the rise in profits in relation to these. The effect of taxation reformulation etc can be looked at as well.
Final point is the oil cos make money off of diesel/aviation fuel, petrochemicals etc ect ect , so this will complicate things.
guess I have some work, unless we still disagree that with a doubling of total cost , it is fair to double the sale cost to maintain the same profit margin on total sales.
cheers
What would really shed some light on this debate is two such charts: one that shows the breakdown from when gas was just over $2 a gallon this winter, and another showing what the breakdown looks like now that gas is around $3/gal.
Because the fractions surely aren’t constant. Taxes are usually set at X cents per gallon, so they stay the same in absolute terms, but increase or diminish as a fraction of the pie. If crude oil was at $50/barrel in the winter, but $65 now, that would explain an 18% increase in the price of gasoline if the fractions stayed constant - but it’s actually gone up by more like 40%. And so forth.
There’s no way the pie is chopped up the same way now as it was four months ago. Without seeing the changes, it’s hard to get a sense of who’s really causing or benefiting from the price increases.
Someone’s playing silly buggers with the refineries, right now, seems to be the game. Last year, it was T. Boone, wasn’t it? He’s pretty much directly responsible for running it up.
What I posted was a simple how too guide for someone who obviously doesn’t have the first clue how any of this stuff works…it wasn’t a definitive historical analysis. It was obviously not appreciated by its target audiance either. 
That said, I’m looking at the historical figures for the price of crude vs the price of gas at the pump and it looks like the correlation shown in the simple how too cite pretty much holds within a few percentage points. Since you seem to be saying this is in error, feel free to do your own analysis and let me know what you come up with…I can’t find another all in one site that shows exactly what you are asking for. I’d be interested too in seeing if there is a wide deviance from the aproximate precentages shown in my earlier cite…and how wide that deviance is.
Well, the above cites I gave give the raw data (both adjusted for inflation and in period dollars). Unfortunately the crude oil cite doesn’t break things down by month, but instead averages over a year. Still, you can look at both charts and see (roughly) how they rise and fall together. Couple that with knowledge on how speculation works in the commodities market and its pretty easy to see why and how the price of gas at the pump rises and falls…and how that directly relates to the price of crude.
I’m sure the fractions aren’t constant…I’m guessing they vary by + or - a few percentage points. The way commodities are speculated on (especially oil) is going to vary the price of crude alone, which is going to vary that particular percentage. Still, I doubt its a huge swing and I would be surprised if its more than 5% in any one direction.
Well again I don’t have the month to month data (at least I couldn’t find it in a quick search), so I can’t be sure. Looking at what I DID find though I would again be surprised if the pie chart changes noticably…especially in such a short period as 4 months.
-XT
You might want to take note of the fact that others in this thread are capable of having a civil discussion without seeking out negative attention. You might do well to try to emulate them.
Gas has gone from $2.10/gal. back in January to about $3.00/gal. now, a 43% bump. That’s a big enough increase that if its distribution is lopsided, it can alter the underlying pie chart substantially.
Now take your pie chart. Taxes, it says, are 20% of the cost of gasoline in the U.S. Let’s say that’s assuming $2.50/gallon gasoline, which would mean an average of 50¢/gallon in taxes. Since the taxes are fixed while prices fluctuate, that means taxes would go from 24% of $2.10 gas, to 17% of $3 gas.
And look at the price of crude, which is about $61/barrel currently for light crude. My Googling hasn’t turned up any week-by-week tracker of that price, so I don’t know how low it got this winter, but I don’t believe it dropped below $50/barrel. (Let me know if I’m wrong.) Again, let’s assume $2.50 gasoline is the benchmark for your pie chart, which has crude at 59% of the pie. Let’s further assume that that percentage was based on $55/barrel crude.
At $50/barrel and $2.10/gallon, that would become 64% of the cost of a gallon. But at $61/barrel and $3/gallon, it’s down to 55% of the cost.
So crude and taxes apparently went from 88% of the cost at $2.10/barrel, to 72% at $3/barrel. The total share of everything else - refining, distribution, and marketing - presumably went from 12% of $2.10/gallon to 28% of $3/gallon, a difference of nearly 60¢/gallon. If my assumptions and arithmetic are correct, that’s a pretty serious swing.
My main point here is that that pie chart is, at best, an average, but that you can and probably do get a very different pie chart at different times of the year. There’s a lot of gallons of gasoline sold in the U.S. each year. And the changes in the pie chart show who stands to rake in the bucks, and who doesn’t, when the price goes up. Whether it’s a conspiracy or just a seasonal windfall, the first step in figuring out whether a conspiracy even makes sense is to determine who the winners and losers are.
I notice that in the paper today it says that the refineries are “struggling” to keep up with the “increased demand” and that is the reason why the prices are spiking. OK, so if that is true, why is it that there are no signs reading “No Gas” anywhere to be seen? The only changes in the signage are the twice daily (upward) price changes.
Not really. During that same time the price of crude oil has risen from something like $55-56 (I think it actually dipped below this mark but I can’t see the actual price) a barrel to something like $64 barrel (I’m getting this from Wiki…I don’t trade in oil futures myself so I don’t keep track). Since oil is traded in futures, the price we are seeing isn’t necessarily the price the oil buyers bought it at either.
I agree…the chart most likely IS an average taken over a year. I’m sure within that period there will be some fluxuation. To make things more complicated, oil isn’t bought for a fixed price…its speculated on in futures. So, the final price we see for a month isn’t necessarily the price paid by the refineries. Also, the cost of transportation is going to fluxuate with the rising and lowering price of oil (as well as fluxuations due to problem spots in the world effecting, say, insurance and such). Then there is the actual cost of refining which is going to vary with the price of energy…since energy itself is fluxuating. Finally there is the final distribution of the end product, which again will vary with the cost of energy for transport.
The chart was just one of those little ‘how-to’ thingies to show (very roughly) an aproximation of how the price we pay at the pump is broken down. I never said it was a definitive guide…just something easy to understand and follow. You have to admit, this is a VERY complex subject…which is probably why its so little understood.
While I was looking for figures I found this Wiki article that talks a bit about the fluxuations in price for crude oil for the last few years. It might be helpful to some and since I already have the link I’ll just post it.
-XT