# Why doesn't competition keep the price of oil down? **URL:** \ **Category:** Great Debates\ **Created:** [April 21, 2006, 9:14pm UTC](https://boards.straightdope.com/t/why-doesnt-competition-keep-the-price-of-oil-down/353691 "2006-04-21T21:14:26Z")\ **Posts on this page:** 5\ **Page:** 2
**Author:** ![Gorsnak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gorsnak/32/7587_2.png) [@Gorsnak](https://boards.straightdope.com/u/Gorsnak)\ **Post date:** [April 23, 2006, 5:25pm UTC](https://boards.straightdope.com/t/why-doesnt-competition-keep-the-price-of-oil-down/353691/21 "2006-04-23T17:25:13Z")
> [@jshore](#): > > **Why are profits for the oil companies disproportionately large when gas prices are high compared to when they are low.** How is this a mystery? It’s no different from any other commodity. Most of the costs of commodity production are relatively fixed, so the profit margin swings wildly with commodity prices. If a gold mine breaks even at $200/oz, for example, then when the price of gold goes over $200/oz, every penny of that goes straight to profits (except what gets dished out to the CEO’s bonus, etc). If a farmer breaks even on soybeans at $3/bu, then if the price is $2.50 he loses money, if it’s at $4 he gets by, just, and if it’s $8 he has a banner year. Oil, actually, is the one commodity which sees this effect the _least_, since there are usually significant energy costs in oil production, so when oil prices are high production costs rise to an extent, cutting into the extra profit somewhat. ---
**Author:** ![The\_Flying\_Dutchman](https://avatars.discourse-cdn.com/v4/letter/t/9fc348/32.png) [@The\_Flying\_Dutchman](https://boards.straightdope.com/u/The_Flying_Dutchman)\ **Post date:** [April 23, 2006, 9:35pm UTC](https://boards.straightdope.com/t/why-doesnt-competition-keep-the-price-of-oil-down/353691/22 "2006-04-23T21:35:54Z")
> [@Bill Door](#): > > The oil we have in the ground is like money in the bank, and it only appreciates in value. If we’d drilled for it the first time it was suggested, it would have sold for less than $30 a barrel. I just want to acknowledged that your point impacted on me. You just changed my attititude on the issue. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [April 23, 2006, 9:48pm UTC](https://boards.straightdope.com/t/why-doesnt-competition-keep-the-price-of-oil-down/353691/23 "2006-04-23T21:48:16Z")
> [@The Flying Dutchman](#): > > I just want to acknowledged that your point impacted on me. You just changed my attititude on the issue. It’s also been my opinion on the issue for a while. I’d think of it as a large strategic petroleum reserve. ---
**Author:** ![T\_SQUARE](https://avatars.discourse-cdn.com/v4/letter/t/9de053/32.png) [@T\_SQUARE](https://boards.straightdope.com/u/T_SQUARE)\ **Post date:** [April 23, 2006, 10:05pm UTC](https://boards.straightdope.com/t/why-doesnt-competition-keep-the-price-of-oil-down/353691/24 "2006-04-23T22:05:45Z")
> [@Bill Door](#): > > The oil we have in the ground is like money in the bank, and it only appreciates in value. . Nitpick: This is usually not true. Historically, most commodities, including oil, have grown less valuable in real terms over time (yes oil has appreciated significantly in the past few years, but it is too early to tell if this is an anomaly or the new order of things). Considering time value of money however, commodities in the ground don’t really become more valuable, and the optimal time to extract is often yesterday. Granted, one could argue that a “strategic reserve” of oil has some inherent value, but that is highly debatable. So, to sum up, you can perhaps say that waiting to extract in Alaska paid off over the last few years, but to assume oil in the ground will always appreciate would be shortsighted. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [April 23, 2006, 11:42pm UTC](https://boards.straightdope.com/t/why-doesnt-competition-keep-the-price-of-oil-down/353691/25 "2006-04-23T23:42:38Z")
> [@Gorsnak](#): > > How is this a mystery? It’s no different from any other commodity. Most of the costs of commodity production are relatively fixed, so the profit margin swings wildly with commodity prices. Okay…I guess the point here is that it is not easy to rapidly adjust the supply. I.e., market economics would suggest that if the price started to rise and large profits were starting to be made then more oil would be produced until it dropped down again. > [@T\_SQUARE](#): > > Considering time value of money however, commodities in the ground don’t really become more valuable, and the optimal time to extract is often yesterday. It seems unlikely that this will happen to a finite resource like oil, as we are nearing the peak of the curve with demand growing rapidly. Of course, if we wait long enough, other cleaner energy sources might replace the oil and reduce the demand, making it uneconomical to extract. But then, I would argue that in that case it is also good that we didn’t extract it and use it to worsen global warming and so forth. So, regardless of the reasoning, it is not a good idea to drill for oil in ANWR. [Previous page](https://boards.straightdope.com/t/why-doesnt-competition-keep-the-price-of-oil-down/353691.md?page=1)