Airman, you don’t seem to understand the business relationship between the oil companies and the oil-producing countries. As Greg Palast explained in Armed Madhouse:
To be honest, I’m not so much worried about the direct costs of higher gas prices.
It’s the indirect costs that worry me.
A lot of base level groceries are going up in price, simply to account for the increase in transportation costs.
Just for a couple of examples:
locally baked bread in my supermarket has gone up from $2.50 a loaf, to $3.00, a
20% increase.
store brand mac & cheese has gone up from $0.33 to $0.45, a nearly 33% increase.
dry pinto beans have gone up 20% last time I looked at them.
Smaller, but similar jumps are showing up in the produce sections.
It is literally impossible to avoid being affected by the increase in gas prices. You can minimize the impact to your budget, but it’s the lowest margin items that are rising. i.e. the cheapest products are the ones that are showing the large percentage jumps. Which means that the effects of the increase in fuel costs are going to be felt more by people in the lowest income brackets.
And I have to admit to being one of those. I’m not hurting, not yet. But I’ve had to change some of my spending patterns, and there’s not a lot of slack in my budget.
Snip mine. Produce here has gone up over 100% in the last 6 months in central florida. Bread has gone up 60% or so. It blows my mind when I see imported california citrus instead of local produce in our market. We’ve planted a subsistence garden out back to get around it, but it will be a few months yet before we can start harvesting with any regularity. We bake bread at home and buy our flour in bulk from costco.
On the one hand, I’m for the gas companies reducing their margins a couple of percent as a gesture of goodwill.
On the other hand, I recognize that that will save mere pennies per gallon. So whatever.
Can you tell me why I should be angry at this? I know you’re posting it to rile me up and get me outraged that corporations have the gall to actually make a profit, but I’m not seeing it. My outrage coefficient at big business has not been sufficiently stimulated, please elaborate so I can be properly incensed.
That’s kind of an inane statistic. That’s like saying that the value of my brother’s farm has been boosted by a couple million dollars when the price of wheat jumps, based on the future production potential. But lord only knows what that future production will cost, or if it will even be viable. ExxonMobil has a certain amount of oil they know they can get at, and that they know they could extract for a certain cost/bbl if they were extracting it today, but the fact remains that the vast majority of that oil is in the ground and won’t be coming out of the ground at the same cost when they do get around to extracting it. Of course, that’s not to say that ExxonMobil doesn’t make out very well when the Saudis keep the price of oil high by not cranking every last tap open, or someone bombs a major pipeline in Iraq, but do we really need to use a useless at best and misleading at worst statistic like that to make the point?
The point is that the OP seems to assume, as most people assume, that the oil companies are “simply passive resellers of OPEC production” – in which case they would want to buy the oil for the lowest possible price – you know, buy cheap, sell dear; or else pass the savings along to the consumer and sell even more gas at the pump. But it doesn’t quite work that way. With their PSAs, the oil majors take a profit on both ends, and the higher the price of crude, the higher their profit.
While I appreciate the spirit of this pitting, this paragraph is pretty funny. The oil companies have no desire to build any new refineries, and are doing all they can to keep from having to. They had several more not too long ago, before they decided to upgrade certain facilities & close down others.
Also, your assertion that “anything that old is expensive to maintain” needs to be backed up in some way.
The matter is much more complicated.
For a well-conceived oil industry P&L in the state of California, check this out. These details are neither particularly challenging to understand nor to accept. I’d even accept the power of OPEC given the peculiar nature of oil extraction. A cartel makes sense and is pretty much inevitable.
The more troubling side of gasoline economics for me is zone pricing. If you are a branded gas station, you pay your franchisor the price per gallon set by the local property manager. You cannot shop around for cheaper gas since you are bound to purchase it from your contracted refiner. There can be a significant difference in the price different jobbers pay for the exact same product that is not driven by market forces. The oil industry has been punished for this before by the Supreme Court in 1990 (Texaco v Hastrouck). Zone pricing practices are extremely mysterious, and I am very skeptical that they represent actual demands of the market since by and large, Big Oil is not a price taker.
Production Sharing Agreement, not profit sharing agreement. Never been called profit sharing agreements as far as I know. Hopefully production is related to profit, but there is no need to change the name is there?
Incidentally minor nit pick but OPEC can only raise or lower production quotas that respective countries can try and meet (saudi) or hopelessly fail to meet (Venezula). The price is raised or lowered by the various markets where OPEC production is an important, but one of many, factors built into the local prices.
Non-oil companies do not get to make higher profits just because the cost of their operations increases. A good example is Starbucks, who suffered particularly badly from a dairy wholesale price increase. They would have committed economic suicide had they raised the prices of their milk-based drinks at the same rate that milk prices increased. Starbucks did indeed pass the increasing cost of milk on to the customers by raising drink prices, but in an absolute way, NOT in a way that preserved a particular profit margin. If milk cost them an extra 12 cents a drink, the price of that drink went up 12 cents.
When the cost of oil goes up a dollar a barrel, people are expected to pay an extra $1.10 for the finished product that barrel of oil produced (numbers here are not accurate, as they change depending on the % of the increase) in order to maintain the oil company’s profit margin. How in the world does it make sense that oil companies are justified in raising their prices more than what the cost of operations increased?
I have no problem with companies trying to maintain a profit margin, but oil is no different from other (more regulated) necessities, like electricity, natural gas, and water. If the electric company were as unregulated as oil companies are, they could theoretically charge five times their current rates, because no matter what the price is, we have to pay it. The oil companies are in the same position, but they understand that they have to have some way to explain record profits amid higher “cost of operations”. Maintaining a particular profit margin is a brilliant way to explain this, even though they’re in an industry in which they have absolutely NO RISK AT ALL to operate in most places, and are actually discouraged from innovation and efficiency increases because the more it costs them to develop and ship, the more money they make.
Free market economics is fine for stuff like Starbucks where consumers are actually free to choose whether they will buy the product or not, but there’s no excuse for applying free market economic standards to an industry in which consumers have no such choice.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/02/BU6AUQMT9.DTL
With all those terrible things holding these poor companies back, I wonder how they make anything at all. How they make profits bigger than any corps ever did must be a miracle of god. And those poor executives with incredible salaries and bonuses. Where does that come from. ? It has to be the work of a deity.
Taking a quick look at Chevron 2007 report we see the following
2007 2003
Sales
Funny thing is that you DO have choice. You can choose to go to the lower price (non name brand) gas station. You can choose to car pool, or find some other way to get to and from the places you need to go.
I guarantee that Starbucks would fuck you ten ways from Sunday if the price of coffee beans went up, and they knew you’d buy just as many cups at $3 as you do at $2. Dunkin Donuts, McDonalds, and all the other big coffee guys would raise their prices just as high.
The problem is us, the consumer. We’re so attached to our cars that even when the price of gas goes up 50% in a year we don’t reduce usage. At best, we stop increasing usage year after year. These prices aren’t going to come down until we exercise our side of the Supply n’ Demand equation and quit buying so much gas.
I agree that the free market should still work if there’s competition, even if the product is a necessity. For instance, there are 3 brands of milk at my grocery store, and the price last week ranged from $1.99/gal to over $4/gal. From my observation of the stock, the $1.99 gallons were moving by far the fastest. So, even considering that gas usage doesn’t fluctuate that much, I have to think that if it was possible for one of the gas companies to TRULY undercut their competition (like, more than a few cents per gallon), that one of them would use that business model, the way Wal-Mart does. If I could get, say, 10 or 15 cents a gallon less at a particular station, you can bet I would seek it out whenever possible, and I’m sure a lot of other people would, too. For a couple cents a gallon, it’s not worth it.
I’m terrible at economics. I have to “widget” everything out to make sense to me.
Here’s my widget process -
I buy Widgets for $9. I polish them up for a cost to me of $1. I sell them at a 10% profit - I make $1.
But my supply price went up.
I buy widgets for $99. I polish them up for close to the same price $1. I sell them at a 10% profit - I make $10.
I haven’t done more work. My capital needs are greater but the risk factor doesn’t eat up the extra $9 in profit.
Woo-Hoo record profits.
If gouging is an inappropriate term can we still use Riding the Gravy Train as a description of their actions?
But its a lot more complicated than that, as Maeglin has pointed out. There is the matter of competition- and information-distorting zone pricing. But there are also just basic economic problems. The information cost of gasoline shopping is quite high (you either sit at home on the internet for a while hoping to get current prices, or you burn more gas driving around to different places). It is fundamentally different from choosing a different gallon of milk.
Oh, I know it’s different, but it’s not as complicated as you make it sound, for many people. For example, I drive the same route to work each day, and I know where all the gas stations are, and generally what their prices are. I know which ones are a few cents cheaper, and I know that if I buy in the county where I work, rather than the one where I live, the taxes are lower. I can make a quick assessment as to where it’s at least a little cheaper. If I knew one was going to save me a lot, I would make a point of always stopping there. Little things that normally might affect my decision (like what side of the street the station is on), will be less important in my decision-making process than they are now.
Airman Doors, USAF, I agree with your overall point. Big Oil is doing what businesses do, maximizing their profit.
Well put.
The fact that an n-hundred billion corporation pays tens of billions in taxes isn’t shocking to me, although it explains their weighted influence on our government. If they were being taxed out of existence, I would be concerned but I don’t think that is in danger of occurring just now.
When oil companies receive US tax breaks, the US government is subsidizing the price of gas at the pump. We the citizens pay for it elsewhere, in accrued government debt, increased income taxes, or reduced government services. I prefer to scuttle the subsidies and pay the full price at the pump.
I thought the question here was why your hypothetical doesn’t happen. We have the hypothesis that there aren’t bigger price differences because the margin at the pump is so slim. But the alternative hypothesis is that various economic forces (zone pricing, poor information markets, etc.) reduce competition.