The gas companies say they are not price gouging and recent studies bear the claim out. So where do the huge profits the oil companies have been announcing lately come from?
To put it more clearly, do the oil companies get a fixed amount of cash per gallon of gasoline sold? Or is it a percentage?
It seems that if it were a fixed amount, the companies’ profits should be the same. For instance, an oil company gets $0.50 for each gallon of gas sold. I don’t think the demand has grown so drastically that they are able to get such huge profits. Or has it? I don’t know for sure. I’m sure that demand has gone up, but to such a degree?
Now if the oil companies have their profit tied to the end price of a gallon of gas, then the astronomical profits are a bit more easy to understand.
I’m not against a company getting profits, but when it seems the rich just keep getting richer, I would like a bit of an explanation.
::sigh:: How come no one knows what a corporation is? The “corporation” isn’t making the money; its stockholders are, and you’re not necessarily rich to be a stockholder. In fact the poorest of investors probably have a higher-than-average amount of oils in their portfolios, namely, America’s old who adhere to the traditions of owning energy stocks and utilities stocks. What have you got against granny?
I beleive they make a fixed percentage per gallon. But because gas is so critical to the US economy, they just can’t raise it willy-nilly, as after a point, they will start to devalue the currency, so they will make more dollars but they will be worth less.
At least one person here doesn’t know what one is This is not true unless the Board of directors vote to declare a dividend, they could very well just fridder it away on CEO bonuses and the like.
The Shareholders own a piece of the company, and they vote for the board of directors, but the board of directors make the decisions as how to waste the obsene windfall profits.
No need for the sigh. It’s a simple question. To paraphrase: Most people understand that the revenues of oil companies rise as the price of oil rises. But how do you explain the higher PROFITS of these companies. The oil companies claim that it costs more for them to obtain the oil, and have to pass these costs onto the consumers. But this shouldn’t affect how much money they make in profit.
Profit Margins
You want to talk about Profit Margins.
IIRC the Gas companies are clearing $.10 or less profit on every dollar earned.
The oil companies are owned by stockholders, who for obvious reasons want the company to make a profit. With such a large volume of product (gallons of gas) they can afford to make only 9 to 10 cents on the dollar.
Many companies out there have much higher margins.
There is a related thread somewhere over in great debates… I shall try and dig it up for you
In the upstream (exploring for and producing crude) Oil companies evaluate projects at prices WAY below $70 a barrel. This is partly as a safety net in a darned risky industry, and partly because the exploration started years ago when oil was cheaper. So, if the engineers and economists think this project is going to pay out at $25 crude, you can imagine how the project looks at $70.
Downstream (refining) is a little different. Refiners want a high spread between crude and products. Both of these prices are determined by the market.
This is a fairly simple explanation, do you need more specifics?
Are you talking about the companies that make the gas, or the companies that sell the gas? The producers who make gas from oil they pumped themselves are making large profits because the price it is selling for rose much more than their cost to produce it. On the other hand, if a gas retailer or middleman buys gas from a producer, his costs go up with the market, and he only makes a thin margin, dictated by market forces.
Make no mistake about it: the big investors in all major corporations (not just oil) are big institutional investors. Small investors only make up a small percentage of their stockholders.
Is this a whoosh? Who do you think these “Big Institutional Investors” are? Sure, there are a lot of fat cats in the equity markets, but you don’t have to be a J.P. Morgan to have a stake in a mutual fund, retirement fund, insurance company, or bank, especially if the last two are in turn publicly traded entities.
Lets look at the “obsene” windfall profits and what they mean.
First off: Normal Profit is: the amount needed to keep a business resources in their current usage for the long run. Normal profits are a cost of business (they payment to shareholders/ equity owners)
Windfall profits are profits in excess of normal profits and above what is needed to keep business resources in their current usage.
When a gas station owner buys 1000 gallons of gas for $1 he can sell it for $1.15 making $1150 and $150 in profit. Which goes toward paying the lease, clerk and electricity.
Now, When the owner checks and finds out his next gas shipment is going to cost him $1.10 cents a gallon the next time he fills his tanks. He promptly raises the prices to $1.25 a gallon. making $1250 for the 1000 gallons.
$250 dollar profit. Until he has to restock his tanks, which then drops him back down to $150 dollars in profit.
The store owner had a larger than normal profit of $100 dollars. He will continue to have larger profits as long as he continues to raise his prices to reflect his future expense for rising gas.
The store owner has made more than normal on his 1000 gallons of gas, yet he has not in truth received more in profit once he restock his gas tanks.
Now, Those who refine the gas are dealing in hundred of thousands of Barrels of oil.
A big oil company, let’s say Exxon, probably has 3 (at least) seperate business units. A unit that drills, pumps and barrells oil; a unit that refines the oil; and a unit that sells gasoline to you and me.
Let’s also say that the business unit that pumps the oil can get the oil into a barrel for $25 (this includes insurance, workers’ salary, and other business expenses). Where they really make their profit is when they sell it on the open market (even to the refinery that they own) at market value, currently around $70 for a profit of around $45 per barrel.
Since they’ve been doing this for so long, they had to get their pumping operation as efficient as possible to get the cost of barrelling oil to $25. That cost has remained the relatively constant for the past decade or so. When oil was selling for $40 per barrel, they were still making a decent profit.
But now demand has increased (this is simplified, I know there has been flucuations of supply because of storms, war and what not) so that has driven up the cost (to the refiners) of a barrel on the open market and they pass that cost on to the gas station on your corner who passes that cost on to us.
So its not because the companies are greedy, its that their costs have remained constant while they are able to sell the same product for more money. The worst that could be said about the oil companies is that they have failed to increase their supply. Though what incentives do they have?
I omitted your details because they aren’t that relevant in this discussion. The gist of idea is what I left above in the quote. I had a post in this thread explaining the detail more generally, but the hamsters must’ve ate it (3x’s this week). As to your last question, there is a GD thread about that. I think it was T_Square or tim314 (one of these is an actual economist), who explained that keeping anything out of the market to appreciate in value is generally not a good thing, it’s a pretty recent thread. Oil, for some reason, does not generally behave according to that rule, but I gather, it will eventually (because price is artifically high, due in part to taxes, but that’s another story).
As the price of oil rises and demand decreases. Additionally, alternative fuel sources start to become competitive. With decreases in demand and especially combined with the increase supply of alternative fuels, the price of oil will drop. Therefore, there is no reason to keep the oil in the ground. However, the anaylsis in the GD thread is much better than my college econ background which is now hitting 10 years old.
They can’t raise the price willy-nilly because the price of oil is set by the market. Oil is as commoditized a product as they come.
I’m not sure what you mean here. The value of any currency is more than just the price of oil.
Oh, and back the OP, as Osip points out, there is what, at best 10% gain over operating expenditures? My 401(k) got 18% last quarter with absolutely no effort on my part. It is the profit percentage that people should be worry about, and even then, there are a lot more to look at to be concerned.
It’s basic economics. As marginal prices rise, marginal costs and profits will do the same. If XOM’s operations are set to make a 10% margin at price X, then the margin should be 10%+ when the price is X+.
Excluding extraordinary gains, discontinued operations, and other one-time charges/additions, XOM’s profit margin was as follows:
The candy bar salesman analogy helps to explain (though not entirely accurate).
Candy bar salesman buys his bars for a $1.00 each and marks them up 10% selling them at $1.10 each, for a profit of 10c per bar.
Suddenly the price of cocoa skyrockets, causing his cost per bar to be $2.00 with a ten percent markup they are now $2.20 per bar a net profit of 20c per.
This increase can cause an actual loss in profit because even though the candy bar guy is making 20c per bar he is selling far fewer bars.
But our candy bar guy is in luck, his primary customers are serious chocoholics who will buy the same amount of candy as before.
His biggest problem is money to buy candy, he needs twice as much so he has to hit up a couple of friends all of whom want money back on their investment. When he tells them he can give them back $1.08 for each buck, many of them laugh at him and give their money to the guy who sells coffee for $3.00 a cup.
Probably not all that helpfull.
My earlier post in this thread was simply to point out that the OP’s question was valid. I didn’t have the time to get into the various factors involved in the business. But I disagree with your premise that revenues and expenses are tied together in this manner. I think that T-Square’s initial post is actually the correct answer. Companies invest in oil exploration projects by using conservative assumptions on the price of oil. Each project strives to achieve a return on investment (ROI) at least as high as the company’s cost of capital. When the price of oil is higher than the assumptions used in the initial analysis, much larger ROI’s are reached, which lead to much higher profits. Understood.
But we’re talking about the gas sellers. While they may be the same company, that segment of the business is also making higher profits. This doesn’t make sense. If the demand for gas is higher, then we would expect more volume of gas sold, and higher profits. But higher gas prices, ceteris paribus, shouldn’t yield higher profits.
The problem to the consumer is that there seems to be very little appetite for competition in the market. And this smacks of collusion. If I drive outside the Holland Tunnel, I’ll see rows of “competing” gas stations. And invariably, they will all show the same price for a gallon of unleaded. How is this possible? If I’m BP, and I see that that my neighbor Exxon is selling gas for $3.00 ( and getting half of the customers), why wouldn’t I drop my price by a couple of pennies? This would get me more customers. But it’s not happening, at least in a widespread way.
This has to be a form of collusion, even if it’s done in a hush-hush wink-wink way. It’s made possible by the inelasticity of demand of gasoline.
If I drop my price by a couple pennies, the operator of the neighboring station sees it and quickly drops his price by a couple pennies more. Now both of us are making less per gallon. So I drop mine a couple pennies again, and as soon as my neighbor sees this, he does the same. Where does it end?
The ‘collusion’, if you want to call it that, is that anyone in the retail end of the industry recognizes that price wars are of no benefit as at best they increase sales (and, therefore, overhead) without necessarily increasing revenues.
Now, the fact is, you will find stations that have lower prices than others, even if they don’t happen to be adjacent to each other. If you want the lowest prices, do what you would do for any other product and shop around.
JohnT’s premise is true to a point, then the law of diminishing returns kicks in.
Don’t forget that each company can differentiate themselves in the market based on their marketing and not just their finance skills (or as my banker friends refer to it skillz – though they all would unamiously choose a business plan based on cold hard numbers then soft and fluffy feel good marketing). So, for an oil company to let their consumers know that their gas stations are a better place to shop and to pick other things as well as get gas, and the consumers believing such a message, translates to additional profits for that oil company.
I agree with everything you’ve said regarding price wars, and their negative impact on all companies. But the subject of this thread is that higher oil prices are leading to higher profits for gas sellers. And my point is that with competition, and with no significant change in the volume of gas sold, profits for gas sellers should remain consistent irrespective of the price of oil.
This is not true unless the Board of directors vote to declare a dividend, they could very well just fridder it away on CEO bonuses and the like.