Oil companies nix expansion plans -- is your bullshit meter pegged yet?

In My Humble Opinion
41

[QUOTE=lowbrass]
But the argument assumes its own conclusion. You’re saying there cannot be collusion because the competition would jump in and thwart any market manipulation. But this assumes there is no collusion in the first place. If anyone were going to undercut the competition, now would be a good time, since record-high prices AND record-high profits exist. So where’s that chartered tanker from Rotterdam?
[/QUOTE]

That’s what I was trying to ask. And I am asking I freely admit that my knowledge is very limited in this area.

What I don’t understand is if Exxon had record profits, did the other O&G companies also? If they didn’t, then it wouldn’t it have been smarter for Exxon to lower their prices on gas, to drive their competitors out of business, or at least hurt them? I guess I just don’t understand how it can be supply and demand when all the gas in a local area is usually the same price. If somone could cut their prices and gain more customers, wouldn’t they? But none of them do. They’re all the same.

42

[QUOTE=Atrael]
That’s what I was trying to ask. And I am asking I freely admit that my knowledge is very limited in this area.

What I don’t understand is if Exxon had record profits, did the other O&G companies also? If they didn’t, then it wouldn’t it have been smarter for Exxon to lower their prices on gas, to drive their competitors out of business, or at least hurt them? I guess I just don’t understand how it can be supply and demand when all the gas in a local area is usually the same price. If somone could cut their prices and gain more customers, wouldn’t they? But none of them do. They’re all the same.
[/QUOTE]

Not if their supplies are maxed out. If they literally can’t supply any more gasoline, cutting prices doesn’t do anything for them.

Also you have to consider that while by cutting prices they might sell more gasoline, they’re also losing revenue that they would have made on the gasoline they already were going to sell. For cutting prices to be profitable, the increase in sales has to make up for the decrease in revenue per litre sold.

43

No, that’s not what I mean…I’m probably not asking this very well.

Ok, so I’m Exxon…made $5billion last year or something. I see that Aamco over there barely made $2billion last year. Now knowing that we have the same refining capabilities (they can’t make any more than they are right now, and neither can I) wouldn’t it make more sense for me to lower my price? I’m going to either a) take customers away from them, so they’ll make less money even if they earn more per gallon. or b) force them to lower their price in which case they’ll make less money anyway.

Since I obviously have a greater reserve than they do, I can afford to take a loss in the short term because it will have a greater impact on them long-term. Maybe force them to sell off assets…something.

But that doesn’t happen…nobody is actually trying to undercut their competitors…they’re all…every single one of them…happy to sit back and make those record profits…and nobody is making a move to try and take advantage of it to weaken their compitition. Isn’t that what capitalism is supposed to be about? This seems more like a co-op or something.

44

[QUOTE=lowbrass]
snip >>So where’s that chartered tanker from Rotterdam?
[/QUOTE]

Back in Nov through Mar the US was importing approx 800Kbbl/day of refined gasoline. This was during a period when the price was running at a bargain 2.25 (+/- 10c)
Since March the price has risen to 3.20 and imports have risen to 1500 Kbbl/day with a spike at 1600Kbbl/day*

I’ll bet 1/2 of Sunrazors key lime pie that at least some of that came in on a boat from Rotterdam, or Liverpool or anywhere or Rome. The global price of gasoline is rising, so the people buying those tanker loads are in competition with global gasoline markets.

I think I was trying to say ‘holding production down in a rising market would be a dumb idea because the competition would gain and you would lose’, rather than ’ it cannot be collusion because the competition would jump in and thwart any market manipulation’. I think collusion would be a dumb idea, not impossible, but dumb, partly because competition jumping in would spoil your party by supplying the capacity you took offline.

If you can sufficiently restrict a market to outside sources (or operate in market that is restricted for other reasons) who are not party to the supply fixing, and can get a dominant position within that market through either being the major player or collusion, then yes you could restrict supply and drive up prices.

If you are in a market where no one else can provide, then yes, cutting back will drive up the price, and the competition cannot take advantage (they are maxed out). However you have to be pretty certain that the rise in price will offset your sale loss. Assuming your profits are not coming on a mark up on the raw product price, you now have to account for the capital and operating costs (which may not drop significantly for lower production)) made over less volume, and still replace your profit over the same smaller volume. Meanwhile your completion in the market just sits back and rakes in extra cash for no loss. Your CEO then has to explain to the investors why company X is so much more profitable than yours, the investors take their money and the chairman looks for a new CEO. All in all a risky proposition and again you have to be certain someone else cannot import into your market.

My points are

  1. I don’t believe the general US gasoline market is closed off to outside sources, hence the Rotterdam comment. (Boutique blends aside)

  2. I don’t believe the US oil cos are in a position to gain the dominance required whereby they can influence the raw commodity price sufficiently or gain more by a price drive up than they loose by restricting supply in the current market and not benefit the competition.

There was massive over capacity in the refinery business, like any market with over capacity the producers cut back capacity to improve the profitability (reduction in costs by not having idle refineries). Utilization rose from 70% to the mid 90s. Post closures crude processing capacity has continued to rise year on year through refinery enhancements.

The situation now is that current percentage of refineries on line is at a low (85 ish), which is ONE of the factors driving up the prices on the exchanges of gasoline hence the price at the pump. I would wager the other half of Sunrazors pie that every manager of a down plant has a burning ear from the unholy shit the are getting from on high to get the plants back up and running. (ok we are not in GD so no cite for that).
Capacity is being added, people are trying to produce and sell more into a rising demand market so increasing capacity makes sense. What they do not want to do is excessively outstrip demand with capacity. It does not take collusion to plan this.
I doubt they were ever planning to aim to meet 100% of the US requirements. (better to keep your plants at 100% of what you can and import the extra stuff, that way if supply dips you just stop import rather than have idle capacity). As the bio fuels may replace some of that capacity they will not expand as much as planned.

Cheers
NBC

*Source EIA
http://tonto.eia.doe.gov/dnav/pet/pet_move_wkly_dc_NUS-Z00_mbblpd_w.htm
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html

Ok so how the hell do i make those links appear in a nice fashion where the top link would read ‘US imports’ and the second would read ‘US gasoline retail price’

45

[QUOTE=Atrael]
No, that’s not what I mean…I’m probably not asking this very well.

Ok, so I’m Exxon…made $5billion last year or something. I see that Aamco over there barely made $2billion last year. Now knowing that we have the same refining capabilities (they can’t make any more than they are right now, and neither can I) wouldn’t it make more sense for me to lower my price? I’m going to either a) take customers away from them, so they’ll make less money even if they earn more per gallon. or b) force them to lower their price in which case they’ll make less money anyway.

Since I obviously have a greater reserve than they do, I can afford to take a loss in the short term because it will have a greater impact on them long-term. Maybe force them to sell off assets…something.

But that doesn’t happen…nobody is actually trying to undercut their competitors…they’re all…every single one of them…happy to sit back and make those record profits…and nobody is making a move to try and take advantage of it to weaken their compitition. Isn’t that what capitalism is supposed to be about? This seems more like a co-op or something.
[/QUOTE]

This was a common method of Mr Rockerfeller with Standard oil - the technique known as ‘giving a good sweating’. This would involve glutting a local market where a competitor was operating, sucking up the hit by having huge reserves of cash and the other guy would fold as their profits evaporated. In those days the refineries were very closely related to the stations that sold the gasoline.
I am pretty sure that extreme technique is frowned upon by the powers that be these days.

Now the methods of dropping price and capturing market share do go on at the retail end, the 4 stations each on a corner of a 4 way intersection all with different prices is an example of that. The underlying price is set by how much their distributor buys from the refinery.

The refineries are selling to the distributors (who may be the same company, may be a competitor or may be a franchise) at aprice which is pretty much set by the futures and comodoties markets and tied to the bench mark products.

The guys in the markets are trading contracts back and forth which are backed up by a physical delivery of some benchmark product somewhere, however generally have no interest in taking delivery of 1gallon of gasoline. Their feelings on global supply of crude, demand locally and globally, supply of gasoline globally and locally, the weather, what they had for breakfast and stock levels will set that price. They care not weather BP Exxon or Shell is supplying the product.
Alongside this there are people trading batchs from individual refineries through to distributors. (the same for crude, you have the benchmarks, but a whole heap of people linking up real supplies with real refinaries)
These prices are negotiated based on availability, what the competitor is selling, delivery dates etc but always linked back to the benchmark price. So certainly the oil cos will be in competition for market share at that level, but not as closly to te sale at the pump as it used to be.

So yes Exxon could undercut BP to capture market share, but a significant element of the price fluctuation is being set on markets that really don’t care who the gasoline comes from.

gasoline retail is a volume business, any increase in volume and market share helps to offset the huge manufacturing / purchase costs and hurts the competition, but as Rysto pointed out, if you are already maxed out, there is little point.

cheers
NBC

46

[QUOTE=NaturalBlondChap]

I think I was trying to say ‘holding production down in a rising market would be a dumb idea because the competition would gain and you would lose’, rather than ’ it cannot be collusion because the competition would jump in and thwart any market manipulation’.

[/quote]

My point was that your argument already makes the assumption that the companies are in free competition, and not in collusion. Therefore, it is not an argument that goes toward disproving the possibility that the companies are in collusion. Yes, if the companies are freely competing, then one company would gain if the other company deliberately held back supply. But whether they are freely competing is precisely what is at issue.

I don’t understand this argument. I thought the definition of “collusion” was that you have agreed not to jump in and undercut your competitor.

47

I don’t understand this argument. I thought the definition of “collusion” was that you have agreed not to jump in and undercut your competitor.
[/QUOTE]

Yes, it does not make much sense as written. I was assuming that there was still some external competition. I did not consider 100% of all parties were in on the game as I considered it very unlikely hence external competition still exists.

[QUOTE=lowbrass]
My point was that your argument already makes the assumption that the companies are in free competition, and not in collusion. Therefore, it is not an argument that goes toward disproving the possibility that the companies are in collusion. Yes, if the companies are freely competing, then one company would gain if the other company deliberately held back supply. But whether they are freely competing is precisely what is at issue.

I would agree my argument does not disprove collusion, I am not sure how one would disprove it. The same can be said for collusion, unless the smoking gun memo turns up with the agreement on it as per Enron, how would you prove collusion without presupposing collusion?

48

[QUOTE=NaturalBlondChap]

Yes, it does not make much sense as written. I was assuming that there was still some external competition. I did not consider 100% of all parties were in on the game as I considered it very unlikely hence external competition still exists.

[/quote]

There aren’t all that many “parties”, are there? After mergers, there are only a few big oil companies left. What external competition are you referring to?

[QUOTE=lowbrass]
The same can be said for collusion, unless the smoking gun memo turns up with the agreement on it as per Enron, how would you prove collusion without presupposing collusion?
[/QUOTE]

I agree. It would be hard to prove.

49

[QUOTE=lowbrass]
There aren’t all that many “parties”, are there? After mergers, there are only a few big oil companies left. What external competition are you referring to?
I agree. It would be hard to prove.
[/QUOTE]

Apologies I messed up the quotes in my last post.
in 2006 I can find 139 refineries in the US
Class, -number of refineries, -number of players in class, -total crude capacity

Major - 50 - 10 - 9,601 Kbbl/day
Refiners - 25 - 4 - 3,575 Kbbl/day
Independents - 64 - 49 - 4,161 Kbbl/day

That is to say the majors own about 1/3 of the refineries and have 60% of the processing capacity split between 10 companies (this may be fewer I need to check who Sunoco, Sinclair and Suncor changed name to and who brought them)

The Refiners (the likes of valero) are the big refiners who do not get involved in Exploration and production and tend to own large refinery complexes but do have a link to a retail outlet (diamond Shamrock, Citgo etc) or sell unbranded

The independents are the smaller independent refineries who probably do not have a retail outlet.

My take would be - yes a majority of crude refining capacity is held by the majors, but even then it is split across at least 8 groups. The rest is a significant amount of production across a lot of different companies.
On the the rest of it, well it is the weekend, I’ll see if a bottle of Malbec and a weighty chunk cow slow cooked over the parrilla prompts anything approximating to a moment of clarity.
Have a good one.
NBC

50

[QUOTE=Sunrazor]
From a practical standpoint, the fact that they don’t know how. The technology and the knowledge are owned by people already in the business, and they’re not going to help anyone compete with them.

I just had another thought: Anyone want to lay odds that Bush Inc. will back walk away from his commitment to biofuels sometime in the next 30 days – after which ExxonMobil will announce plans to expand their production capacity by 10 percent over the next five years?
[/QUOTE]

I wouldn’t expect any administration to “do it” by 2015. Hell, all you’re doing is subsidizing Archers-Daniels-Midland to the tune of .51/gallon of biofuels. Considering that the US uses 325 million gallons of gasoline a day, a .51/gallon subsidy comes to $33.15 million a day, $12.1 billion a year. That’s on top of the $3.00/gallon price the subsidy is used to support.

So the question is, are biofuels worth a $12 billion subsidy to ADM and co.? Will a mere $12 billion subsidy (or “investment”) be enough to capture 20% of the gasoline market, and if so, then why isn’t XOM or TX making it?

Because those numbers are assuming that 20% of the market will actually be biofuels in 2015, and I can’t think of any reason why it should be. Currently, ethanol has about 3.5% of the US market, meaning it has to more than quintuple in size in the next 7.5 years. The above subsidy is already in effect and, in fact, is less than what it used to be… and has thus far only earned 3.5% of the market.

However, this 3.5% of the market consumes 14% of US corn. Cite (PDF). To increase this to 20% would require the consumption of 80% of US corn production for the making of gasoline.

All subsidized an additional $.51 above pump price. To make America a net importer of corn. Isn’t that great?

I’d rather drill in Manhattan. :wink:

51

[QUOTE=JohnBckWLD]
The only needle that should be spiking is on the practical business sense meter. If you were at the helm of an energy company, and saw trend lines pointing away from your staple product, would you invest your firm’s (& your shareholder’s) assets in adding to the supply of that product - or investing in r & d to find a more competitive product?

Come to think of it, would you even bother working in an industry where your per gross profit is 6% while the federal government’s cut is almost 19 cents per gallon and New York State pulls in almost 50¢.
[/QUOTE]

Yep just scraping by by posting profits at levels never heard of for any business ever. New records every quarter. 25 bill a quarter is tough to take.

52

Thanks NBC for the summary. So if I’m understanding what you’re saying correctly, basically it’s not that a company controls the oil from the time it’s pumped off the tanker until it’s sold to me out of the gas pump. Because there are so many other hands involved in that process and it’s complexity, the likelyhood of a grand scheme to set the price so high by everyone involved is pretty slim.

I can accept that…something still seems off, but I can see your point.

53

In the paper today was a report that oil consumption is decreasing in California - not per capita consumption, but absolute consumption.

Yet prices continue to rise here, even relative to other states. Quite odd - but easily explained if production is being cut by some odd combination of circumstances.

54

[QUOTE=NaturalBlondChap]

My take would be - yes a majority of crude refining capacity is held by the majors, but even then it is split across at least 8 groups. The rest is a significant amount of production across a lot of different companies.

[/QUOTE]

A handful of giants control the industry. If small operations had the ability to undercut the big dogs, it seems to me that these supposed unforseen supply problems wouldn’t drive up prices, since these other companies would simply fill in what the giants are failing to supply. That obviously hasn’t happened.