Riddle me this......Oil and Profits

Factual Questions
21

True there is that, but the biggest part of the cost of production is still probably amortizing the capital cost of equipment and infrastructure. All that stuff that keeps all but the biggest players out of the game.

And the fuel to drill the wells currently in production was purchased at the old price…of course they have to keep drilling.

If they are vertically integrated enough, then they can mostly supply themselves with fuel which stays at a fixed cost to them. No? Of course that is fuel they can’t sell at the new high market price, but since they were using it anyway, the current market doesn’t change what it costs them.

22

I think you’re missing a fundamental point.

Big oil generally OWN the oil wells. When prices go up, they make even more money. It would be as if your furniture maker owned the forest and cut their own lumber.

Yes, there are offsets - running equipment costs more, the energy burned to operate the refineries cost more, delivery (trucks or pumps) costs more, the state gets more in royalties for the production - but like personal income after taxes, the more money you make the more you take home for yourself.

Yes, they buy some of their oil from producers like the Saudis (Aramco?) but the tiny profit they make on that is more than offset by the profits from weels they own; or they are in a joint partnership with a country’s naional oil company- for a share of the profits when the wells produce, they provide engineering and geological expertise, the technology to drill the wells, etc. One way or another, they make money.

Plus, there’s the general problem that it seems that when oil prices go up, products like gasoline go up pretty fast; but when the oil price drops, market prices for finished products take their time going down because there is still all that expensive product “in the pipeline”.

23

thank you… that brings closure mostly to my quest… and makes sense…
In regards to your 2nd ppg…I would like to see a study on the change in oil vs the change in prices we pay at the pump…and also on the downside too…

does anyone know if such information exists?

24

Here is a long government report on gasoline pricing that may help you with your question(s). For example, on page 17 is a graph relating prices of crude and gasoline. (On page 32 is a curious graph I hope someone explains to me: is West Coast gasoline more profitable than that of other U.S. regions? :dubious: )

25

Frome the paragraph above the graph:

26

Wolfram alpha is quite good for this sort of thing

That should show a ration of Brent Crude to premium gasoline
(For some reason WTI price would calculate off the latest)

Anyway this shows a general downward trend in the cost per bbl crude / cost per gallon of premium. This indicates either the crude price is rising faster than the gasoline price, or or the gasoline price is falling faster than the crude price is falling.

In fact we are close to the lowest it has been. There was a spike in 09 when the crude price fell but the gasoline price did not come down as fast.

Now with this graph one has to be careful as the gasoline price includes the fuel duties, which don’t change with oil or gasoline price. With that tax overhead when oil and gasoline prices are low the tax overhead will increase the ratio. When crude and gasoline prices are high, that overhead has less of an impact on the ratio.

Either way Wolfram Alpha is entertaining.

27

It is not so much product in the pipeline that causes the slow decline in retail prices.

When the wholesale price increases at any step, the “store” (could be the refinery) is highly motivated to increase their selling price so as to avoid losing money on each sale.

When the price from the supplier drops, the only motivation for lowering prices is to capture sales from competitors, so each seller sort of “feels” their way down in price, each trying to stay at the highest price the market will bear to maximize profit. They only drop another notch when they start losing sales to competitors, who are all playing the same game.

28

What’s not clearly stated amidst the details is the most basic economic principal of supply and demand.

The supplier – the oil companies – has cost and production. We can safely ignore the cost of production in this simply explanation (e.g., if they produce 100 barrels today, it will still cost the same to produce 100 barrels tomorrow).

Production is what’s available to the market. Some oil companies produce the maximum that they possibly can. Some produce what they’re allowed to by their cartel. In general, if they’re only capable of producing 100 barrels today, they’ll only be capable of producing 100 barrels tomorrow.

On the demand side, yesterday there was demand for 99 barrels of oil. This keeps the price pretty constant. If they increased the price, they’d probably sell less oil, and it might be low enough quantity that they actually make less money. If they decrease the price, the most they could possibly sell is 1 additional barrel of oil, and so they’d probably also make less money. So, it’s kind of stable.

Today, though, demand is exactly 100 barrels. Price could be stable. Some smart people would bet, though, that demand demand will change tomorrow. They can either bet against or for increased demand (or supply — it doesn’t matter which).

Tomorrow arrives, and total demand is now 110 barrels at yesterday’s price. Because only 100 barrels are available, many buyers will start offering more in order to ensure that they’re in the group that gets a part of that 100 barrels (that’s why demand drives the price). Because the price goes up, there are a very few that will decide that they don’t need gas at the increased price. The price will keep going up, and more and more will decide not to purchase gas until an equilibrium is reached, and the result will be that the 100 barrels will sell for the price that enough people are willing to pay against the number of people who don’t want to pay.

Gasoline is the type of commodity (unlike imported Gruyere cheese) that people really, really need. This is why when demand goes up relatively little (e.g., economic growth) or supply goes down (revolution in a major supplier country), the price can go up significantly. In the case of imported Swiss, though, people can just stop buying. Prices will drop fast. (This is actually leads to one of the cases that people make for agricultural subsidies: price stabilization and predictability.)

Now it’s pretty easy to see that (a) the market really, really did set the price, and (b) the supplier (with no increased expense) would realize significantly higher profits.

This is a cool site which is easy to follow and explains basic economics in easily digestible terms.