Better put out the lights too - that electricity either runs on petroleum or uses a fuel that has a price component directly connected to petroleum via mining and transportation.
And for the record, Ive confessed that I’m a stumbling widget-logic cripple but it appears to me that Treis isn’t getting the beat down as much as AD and Koxinga are pretending to administer.
I’ve been waiting for the punch line in all of this and it seems like JohnT may have delivered it. The political attention getters that usually go on about this stuff never seem to address the windfall tax component that so closely follows the windfall profit issue.
I don’t know that there is a level that I might consider excessive.
Yes.
If the increase in profits comes from market forces, I don’t know that there is a level too high. For example, if the price of a barrel of oil had stayed at $30, where it was a few years ago, and ExxonMobil had unilaterally decided to raise profit margins to where they were making 30%, I think that there would be a certain amount of justification for people to be angry over that. On the other hand, the manufactured dislocation due to oil prices being high as a result would have accomplished the same thing as a tax increase, which would have reduced usage, the only difference being that the money would have gone to ExxonMobil and not the government in the form of tax dollars. There are pros and cons to each.
But none of that is particularly relevant. Given that ExxonMobil has not increased their profit margins, who am I to begrudge their income? Envy isn’t very becoming.
I don’t believe that it is possible to earn “excessive levels of profit”. The very concept is absurd. Am I in business to help you, or to help me?
This came up because, without exaggeration, every time I go to fill my tank somebody is telling me how they’re getting ripped off, and I have neither the time nor the inclination to explain why that’s not true to a bunch of people that have no understanding of why things are the way they are. Economics know no morals or ethics. Economics is numbers-driven. The rest is political considerations, and while I do not discount them, I think that the calls for regulation are misplaced, especially when prices are having the net effect of doing what they are theoretically supposed to be doing-reducing usage. Since we as Americans cannot self-regulate our usage, the prices are doing it for us, just as they are supposed to.
It isn’t so much that I want treis to whimper in the corner. I want to value his opinion. But when that opinion is purely emotional after two pages of people arguing from at least a rudimentary understanding of numbers (me, for example), it’s like someone standing up in math class and saying that the answer to the square root of two is purple, because they hate pink.
I always thought that price gouging was exploiting dire need in extraordinary circumstances - selling potable water for outrageous prices in the aftermath of an earthquake, say, or things along those lines. The price of oil is high because of ordinary circumstances, not extraordinary ones.
It’s not about phouka, it’s about all of us. This is economics 101. Both the supply and demand for gas are inelastic right now. The producers can’t ramp up production because they’re already at 90% capacity. Consumers still drive just as much, because our lifestyles are centered around driving the car everywhere. Any little blip in supply or demand is going to cause a big swing in price.
Have you ever noticed how much prices go up in the summer, when people start taking long driving trips? Then the price goes back down in winter when they start staying home. It hasn’t always been this way, to this degree, but we’ve generally had more headspace in our supply.
If we cut our driving by 10%, the price of gas would drop 20% within a month. Only, we won’t cut our driving, we’ll just bitch about the high price of everything.
AIUI, a larger factor for that price jump is not the increase in consumption, but the increased demand on the production facilities as they work to make the various summer blend gasolines.
Huh? This is nonsensical. Ever try to pour crude oil into the gas tank of your car or into your home furnace?
The very process of refinement turns a barrel of Brent sweet into a value-added product. Crude oil is the commodity, gasoline is the value-added product. It is on gasoline sales that big oil makes its thick margin. Did you look at the P&L I linked above? The refiner margin is the wholesale price of gas less the cost of crude.
The only difference between oil refiners and bakers is that the refiners also control the supply of the input. A baker has a plethora of options for buying grain, all of which compete to sell to him on the open market.
There is qualitative differentiation in gasoline about to the extent that there is in meat. Some people like high octane, some people like 21 day aged organic steaks. The great mass of people just buy whatever is on sale.
Geologists have been telling us for years…the cheap , easy-to-find oil is ALL GONE! The reason oil companies are pouring money into off-shore drilling is: there is NO MORE on-shore oil (except in places like Alaska, locked up by those brilliant Bozos in the US Government).
Yet, Detroit kept pushing out monster SUVs-who is going to buy a Hummer now?
How about this: a national tax credy for scrapping your V-8 engined car, and replacing it with a US built, 4-cyliner model? Impose massive use tax on engines above 3.0 liter displacements.
The scrapped cars would be junked. this would do two things;
-lower gasoline usage
-remove the threst 9to the drivers of small cars0 that the monster SUVs posed
The problem with this comes on two fronts. First in producing oil there is a basic cost of business which has increased dramatically so oil companies have to a certain extent eaten these costs. An easy way to look at this is that oil prices are not adjusted up during contract negations between service and oil companies. Secondly Oil companies have multiple buyers for their product one of which is their downstream manufacturers. Not all oil companies have a downstream branch and those that don’t tend to have higher profit margins. This is because the downstream facilities work similar to your coffee shop example.
If major oil companies were split into upstream and downstream companies you would see that downstream does decrease their profit margin. The price of oil in 2001 was $23/barrel while gas prices were nationally about $1.235/gal. As of yesterday oil prices were $113/barrel which should equate with $6.067/gal which obviously hasn’t happened. This is an absorbed cost of business on the downstream side.
Now the upstream side is completely different from the coffee shop example they are selling a commodity just like any farmer. Both of their business models involve selling to the highest bidder. Now with an increase in corn based ethanol the price of corn has gone up because there is more demand, which is lucky for the farmer. I don’t see how this is any different from China using more oil and increasing the price of oil, which is lucky for the upstream producer. Both are reaping a windfall but I’m not sure either is inherently wrong.
Nope, nor have I ever put raw milk into my coffee nor freshly-picked green coffee beans into my coffee machine. Perhaps I misspoke a bit, but just because something has had value added at some point (pasteurization, drying & roasting, refining) that doesn’t prevent it from being a commodity. All gasoline has been refined from crude oil, but the gasoline I get from a Shell station is the same stuff as I get from an Exxon station, Techron notwithstanding.
But my point was that unlike bakers and restaurants, gasoline merchants provide a relatively price inelastic commodities. If Starbucks jacks up the price of cappuccino to $7, people will stop buying it. But people will still buy gas at $3 per gallon and keep driving pretty much the same way as before when they only paid $2 per gallon. You might curse the oil companies for not eating the margin, but what’s their incentive to do so when people aren’t changing their habits?
I think you’re contradicting yourself a bit–don’t you mean that a baker doesn’t have the choice (i.e., control) that an oil company does? AFAIK, grain is a pretty commoditized product, to the extent that both buyer and seller can reference spot market prices on the Chicago Merchantile Exchange–not leaving them much room for deviation to make a deal. (At least that’s my guess.)
Regardless of whether or not something is a commodity, this is partly true. For a product that is price inelastic, life gets hard when prices go up.
Wide margins can be a sign that you are just an efficiently run business with low fixed and variable costs. There is nothing inherently wrong with this. But think about it this way: oil company margins do not contract during an increase in the price of the commodity because there are very few companies that can provide this commodity, and this business has staggering barriers to entry. They don’t really have to compete furiously with each other on price at the pump because they all know that people are clearly willing to keep paying high prices, and that there is almost no chance any new firm will enter the marketplace who can beat them.
This is not at all true, nor am I contradicting myself
A baker has tremendous choice. To clarify, he has to buy flour, not grain. Millers may purchase futures contracts for flour on the NYMEX or the CHIMEX, but they will buy these futures and refine the wheat at various times in their production cycles. In any given week, the baker can buy from one of a number of millers who bought the flour at different prices and all have their own costs to refine the flour. He can choose to buy from the miller whose good price of grain and lower operating costs would be reflected in the sale price of the flour.
Let’s be clear what we are talking about. Legally speaking, price gouging (in the US) can only happen during some sort of declared emergency. If I hurricane hits NOLA and someone starts selling drinking water for $20/liter, that is price gouging.
Any other use of the term simply means: the guy is charging more than I personally think is “fair”. Other terms like “excessive profits” really don’t make sense if we are going to opt for a market economy. It’s one thing for the government to impose regulations and safety standards, but quite another to restrict company profits, especially if that restriction is targeted only at one certain industry. And especially when there are other industries (like many in the high tech business) whose profits (measured as a %) blow doors off anything the oil industry produces.
I’d be more interested in how you define profit. The Free Dictionary defines profit as:
prof·it (prft)
n.
An advantageous gain or return; benefit.
The return received on a business undertaking after all operating expenses have been met.
Now it seems to me, and perhaps simplisticly so, that a buisness such as, say Exxon, would build into their operating and capital expenses all of the necessaries such as exploration, maintenance, transportation, workers’ salaries and all of the various and sundry items required to facilitate their operations.
What is left after these, should be profit. The percentage, while in line with what is standard on Wall Street, does not reveal the issue at hand. Oil and it’s byproducts are, as mentioned previously, essential commodities. The world, for the time being, cannot work without oil. It is indeed what lubes the economic engines of the western world. The facts are though, that when a company makes, using the # 2 dictionary definition above, a profit of 39.5 billion dollars on the $377.6 in revenues, that is both economically and psychologically significant to the person who cannot afford to fill their tank. That means they cannot go places and do things, which means they cannot spend more money on the stuff they both want and need, which effects every single aspect of our economy. Still, I agree that ‘gouging’ is a strong word, but not altogether inappropriate for not only the oil companies, but the commodities traders as well. Chickenshit fear of uproar in some oil producing 3rd world hole in the wall can be used as an excuse to drive the price of a barrel of oil to artificially high levels, and the only ones that feel the pinch are the people using the product, which, as it happens is everybody.
The fact remains however if we as a country don’t have the spine to 1) Explore for more oil in places. 2) Build new more efficient refineries while at the same time; 3) Develop alternative energy strategies to wean our dependence from first foreign oil, then oil altogether, we deserve what we get.
Fair enough, and I bow to your analysis of the baker’s business. But what I don’t get is . . .
. . . why is there anything inherently wrong with this either? Sounds like it’s nice to be in the oil biz. And yet . . .
[Koxinga pauses, takes a sideways glance at Maeglin. Hmmm . . . this is no treis we’re dealing with here . . . :dubious: ]
. . . let’s step back yet a bit further and think of it in terms of the market’s “five forces”. Yes, with power over consumers, power over purchasers, low competition within the industry, high barriers to entry: in the current environment oil companies have it pretty sweet.
But the fifth force is availability of substitutes, which I think is the trillion dollar question here. I don’t think you can deny that there are significant substitutes, both high and low tech, but consumers as yet aren’t turning to them. Why aren’t people walking to work or taking the bus? Why aren’t they turning to solar power, buying hybrid vehicles, riding a bicycle, carpooling, telecommuting, buying a manual lawn mower instead of a gas-powered one?
The answer, I think, is that people are still willing to pay for the convenience of the internal combustion engine. There may come a point where consumers truly can’t take it and start to give alternatives a greater share of their wallets, but until that happens they’ll keep paying and probably keep complaining.
It looks to me like the oil industry is subject to the same forces as any other, and for the moment most of those forces are aligned in their favor. And it’s easy to see why they are, given the economies of scale, supplier relationships, and distribution arrangements that are necessary to be in this business. Tomorrow could be a different story. So what are they doing wrong?
Many of us are. But for more people, these are not viable alternatives without a significant external investment in infrastructure. I live in a major metropolitan area with the most comphrehensive public transportation system in the world, and right now, I am telecommuting. But my damn building requires oil to heat it (inefficiently), as does almost every other building in this city. I am on my building’s board, and we briefly investigated installing solar panels on our roof.
But not only are the solar panels incredibly expensive, we would also need a new roof. Tough to sell this to the shareholders of my co-op, since the whole project would cost each of us in the ballpark of $10k.
This is sad but true. But there is a flip side. On the (second?) partition of Poland, Catherine the Great said she cried, but she kept on taking. I wonder, does any oilman even cry?
To be honest, I do not really care whether they are doing anything “right” or “wrong”. A competitive market economy is a good thing not because it or its agents or right, but because it creates maximal social welfare under certain conditions.
Those conditions do not currently bind major actors in the oil business. Even if they are not doing anything “wrong”, per se, their lack of competitiveness causes major distortions in the economy that they externalize. As such, the social welfare outcome is suboptimal.
I would not dream of suggesting that their profits need to be appropriated just because they are too high. My company has guaranteed a net income margin of 12-15% and has delivered on it almost every single quarter for the past decade. I would be horrified if someone thought that it was too high and took it away. I also work the consumer credit industry, perhaps one of the most hated industries in the US right now. I am not, in principle, anti-business. I own energy stock.
But I believe the fact remains that big oil is anti-competitive and fails to internalize the massive social costs it incurs. This is what drives its huge profits: other people subsidize them elsewhere. And this ought to be the grounds for intervention, if any.
Can you offer some evidence this anti-competitiveness and tell us what intervention you are suggesting? If I’m going to be offered a cure, I’d like to make sure I have a disease and that the cure isn’t going to be worse than the disease. The last time the government intervened, I had to wake up at 3AM whenever I needed gas to go park in a gas line, then I’d go back to bed and walk over at 7AM when they opened to get my allotment of gas. And I’d still be waiting for about an hour to get thru the line after that.
Sure. Will the evidence I can get from the internet be a slam-dunk case that will motivate the legislature and/or Supreme Court to action? No. Is it enough to prompt a reasonably thoughtful person to question seriously some of the business practices of big oil? Perhaps. It convinces me to take a deeper and more serious look, and I try at least to be reasonably thoughtful. I don’t have the smoking gun here. It is a spectacularly thorny issue, and it defies pat answers on either side of the debate.
Here is actually a decent summary of some of the issues of competitiveness. Though I do not doubt that political motivation drives this investigation, it is interesting to note the early date. This investigation took place in 1999. I was still in college then, and I could still pay for occasional car trips with my copy center job. It is a pdf, but it is very short.
This is particularly relevant:
This article on the Illinois state government site is also helpful. The FTC has investigated the impact of zone pricing, and according to this article, has found it “ambiguous”. I am not satisfied with this result, personally, and I believe zone pricing should be either implicated or exonerated.
From the congressional record, located here, reference is made to “studies”. Do I have copies of them I can link here? No.
This is some pretty strident testimony from the AG of the state of Connecticut. Again, note its early date. Gas was a thoroughly affordable $2 back then.
What would I do? Let franchisees buy gas from whomever they want. Let the wholesale price of gas be the same for everyone. Let franchisees assume the cost of gasoline transportation. Big oil, with its large logistics organization and high-tech supply chain management can insource this work competitively. Joe’s Gas can buy gas from BP this week if it wants to, but perhaps has a supply chain contract with Texaco for a year.
The devil is always in the details. But at a high level, decoupling the refining from the distribution and the promulgation of transparent, consistent, competitive pricing seem like damned good places to start.
Adam Smith when writing about corporate concentration “they distort the natural ability to establish a price with a fair return for land,labor and capital. to produce a satisfactory result for buyers and sellers and to optimally allocate societies resources”.
Note, the corporate jock sniffers on this board can not see that what they laud is anathema to the capitalistic system. Concentration of power and resources will result in incredible gouging. It has and is now. They must be minimally managed or perhaps broken up.