It is very complicated. For instance, Wal-Mart can afford to use gas as a loss leader to get people into their stores. It doesn’t hurt them to do this because they make it up everywhere else. Gas card programs are even better, because they get money up front in sales and something even more important: information.
This doesn’t necessarily distort the local price of gas, though, because there is overall uniformity in gas prices due to the principle of oligopoly pricing, where inelastic demand destroys the incentive to reduce prices-you’ll still sell the same amount, you just won’t make as much money. It’s not exactly price fixing, it’s more of an understanding between the parties involved. At that level, the gas companies don’t have much to do with it, really. That is more on the heads of the station owners, because they want a profit too, and they often sell the same gas as their competitors. A convenience store like Sheetz, a local chain for me, buys the cheapest gas they can find from whomever they can get it from. One week it might be ExxonMobil, the next week it might be Royal Dutch Shell. Since they’re all selling the same gas, the price to them is the same, so that helps to further account for the uniformity in price.
You can see why people don’t cut their prices to the levels that you’re looking for. It would make no sense for them to do so.
…to do, when the oil runs out? I am not a shareholder in any of them, but if oil is as finite a resource as we think, they must have plans to stay around, when the oil is gone.
I would like to know how the oil compnies think-do we have 12-20-or 50 years left?
You are still thinking about this too narrowly. Keep in mind also that your grocery store can purchase and resell whatever brand of milk he wants, presumably based on price, quality, and demand from his customers. There are many milk producers and competition among them can be vigorous. A canny retailer will make his purchasing decisions accordingly.
The relationship between wholesaler and retainer is completely distorted in gasoline. The branded retailer cannot choose among competing products, he cannot bargain with his wholesaler, and he cannot take advantage of market distortions to make a buck. In fact, at any time, a zone manager can decide that the retailer’s margin is too fat and can increase his price.
Gas wholesalers are very, very few in number since there are high barriers of entry to the marketplace. And since there are few good complementary goods to gasoline for most people, these companies simply don’t have to compete on price. They would suffer margin shrinkage on both sides because with lower prices people buy more gas. Increasing marginal costs to refine combined with thinner revenue margins make serious price competition among gas wholesalers extremely unlikely. There is no shortage of people who are making very serious cases for anticompetitive practices among gas giants. This is not how a competitive market should behave. When markets do not behave competitively, they do not yield the optimal outcomes we all know and love.
I think I was missing a vital piece, here, which is the relationship between gasoline wholesalers & retailers. Aren’t they all part of the same big oil companies?
Yes and no. There are branded retailers (usually called distributors) and unbranded. The branded retailers are franchisees of the oil companies but they own their own properties. The jobbers are not employees of the big oil companies, and their P&Ls are not big oil’s P&Ls. They are contractually committed to buying gasoline at the price set for them by their franchisors. If the price of gas increases or if by efficiency the retailer is able to thicken his margin, the oil company will just raise the rate he has to pay and send him back to square one.
Unbranded distributors have an even tougher position. Although they can buy from a new dealer every week, big oil tends to punish these guys mercilessly. In zones characterized by a lot of unbrander retailers, big oil just leaves the zone price in the toilet for a few months, forcing the unbranded distributors to eat huge losses. Even a giant like Costco got punished by Arco for actually trying to be competitive.
What it comes down to is that big oil can essentially set the zone price at whatever it wants to. Price differentials between neighborhoods are not set based on the cost of delivering the good or on the quality of the good, and as such, there is very little competition over this price. There are few wholesale suppliers of gasoline, and they are not price takers. It is not the fact that they have high profits that is disturbing so much as their anticompetitive practices.
Nothing scary about that number, in fact it is good news.
I don’t have the numbers, time or ability to dig up the amount of corporate subsidies (Corporate Welfare) that goes to the Oil Industry, I just feel it is a good time to re-evaluate if they should get that money.
The US has a lot of needs right now, what with giving tax cuts while fighting two wars. It is worth reviewing what the Oil Industry gets as tax breaks and credits and determining if it better suits the need of the country to use that money else where.
I don’t think there are too many PSAs in OPEC countries, as the national oil company usually handles things. There aren’t any Westerns in Saudi Arabia these days, and no big companies in Iran that I know of. Venezuela pretty much told outsiders to go piss up a rope recently. It’s too early to see what will happen in Iraq. Nigeria and Indonesia have Western companies, but they are producing well below thier quotas anyway.
True, as prices rise because of OPEC action, all producers see more value; it’s nice to be in an industry with some Cartel power, yet be outside of the Cartel so you don’t have to worry about quotas, but what can you do about that?
You are right that the big boys of OPEC (Saudi, UAE, Iran Kuwait Venezuela and to some extent Algeria) have most of their production controlled by the National Oil Company NOC. The rest do have NOCs but have a significant International Oil Company (IOC) input under PSAs or straight up royalty arrangements.
The countries named account for most of the OPEC production but are reengaging the IOCs for some of the more risky and challenging reservoirs (ref Statoil comedy in Iran, Chevron Technical agreement with KOC etc)
The Chevron contract with Kuwait is a service deal with no equity stake right? What about Statoil in Iran? (I wish I could find my password to upstreamonline.com)
bolding mine. The company has the money and is ready to build a refinery, a project that will provide hundreds of initial construction jobs, not to mention the 600 permanent refinery jobs and tax revenue, but they had to run through almost $30 million in order to get the permits they need to satisfy the environmental groups. Environmental impact concerns have stymied the nuclear industry in the US as well. In this litigation-happy country, I don’t blame the oil companies for not wanting to build new plants. They might accidentally displace the rare purple-assed mosquito and heaven knows how important they are.
You can’t have it all ways. You want oil so you can drive? Then you have to put up with the expenses of exploration, production, refining and distribution, not to mention the pollution created by the cars and the refineries. You want alternative power sources? Then you have to deal with storing nuclear waste, noisy wind turbines dotting the landscape that might kill migrating birds, solar farms taking up acres of desert land and hydroelectric dams blocking waterways and interfering with fish migrations. And this doesn’t even get into the cost of producing the materials that make up these machines (which rely heavily on petroleum products, thank you very much). There is no such thing as a free lunch.
You want to go all green and “reduce your carbon footprint” completely? Great, there is lots of prime real estate in many third world countries where they don’t use electricity and they live off the land. But that means they also don’t have running water, proper sanitation or medical care and general are barely surviving.
Yes, that is my understanding, but they also are bidding to be the operator for some of kuwaits Northern zones and are the operator for some resources in the Partitioned Neutral Zone where they pay royalty and tax, so a fairly standard development model rather than a PSA.
Statoil in Iran is operator for the South Pars offshore gas and condensate field. My understanding is it is a standard partnership with royalties and tax. They are also engaged in exploration on land.
Whilst I think PSA are a useful method by which countries with minimal capital and good reserves can attract IOCs in, the country does not always get favorable conditions. However the rights and wrongs of PSAs and how IOCs may benefit from them pretty much have bugger all to do with the large producers from OPEC.
Year on year refinery capacity has risen in the US
in 1985 the total refining capacity was 15.6 million bbl/day however the utilization was 77%. A lot of refineries were closed, rightly so.
In 1990 the capacity remained at 15.6 but utilisation was at 87%
In 2008 total capacity has risen to 17.4 million bbl/day at 90% capacity.
It really does not mater if the capacity increase is due to refinery opening or upgrading , or if excess capacity is removed.
That said, it does appear that the 90% utilisation figure is pushing the system as unscheduled outages cause concern in the market and some spikes in the prices.
If you had a clue about economics, you’d know that in your example, Starbucks’ coffee is a price-sensitive item while oil is a relatively price-insensitive commodity, meaning that people will easily and readily find an alternative to the coffee if the price goes up, but can’t really do it for gasoline price changes as easily. But they can do it in most cases (we’re talking in terms of available alternatives, not that some single-mom somewhere can’t afford to switch).
Companies do exactly what Exxon is doing all the time- why is it wrong for them to aim at a roughly 10% profit margin? They’re not in this to help people, they’re in it to make money, the same as almost every other God-damned company in this country.
Is it better or worse to reprice to hit an arbitrary dollar amount profit?
Why should Exxon eat any kind of increase in costs in the first place? Because it makes the shit you need more expensive? What’s in it for them?
They don’t care, unless you buy less, in which case, if there are enough people who do that, they’ll have to drop the price or get used to making less profit because their volume goes down.
This galls me to hear people babble about how Exxon is so EEEVIL because they act like every other company out there, but happen to be extremely huge.
Not quite, unless you are including China and India into all of this, as their economic boom in the past ten years is what has driven up demand for oil in the first place.
America is no longer the only big boy on the block looking to buy massive amounts of fuel.
It is worth reviewing what the Oil Industry gets as tax breaks and credits and determining if it better suits the need of the country to use that money else where.