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Those Bloodsucking Oil Merchants
Posted by: Dale Franks on Tuesday, May 09, 2006

Quite a lot of political energy has been generated by politicians railing against the oil companies, their greed, their excessive profits, yadda, yadda, yadda. Oil companies are a popular whipping boy, of course, but just how hard are they squeezing us? How far are they willing to go to throttle us, and our economy?

As an interesting intellectual exercise, I thought I would do a little investigating. Why are gas prices so high? With all the politicians railing about things, maybe the most reasonable explanation is that the oil executives are boning us.

This so confused and concerned me that I went over to the Department of Energy's web site, and pulled down this little Excel file. After doing so, I whipped up a chart to compare the real price of Crude Oil and gasoline every month from 1980 until today. Here's my little chart (click to enlarge; Price label shown is for Crude):

For some inexplicable reason, the real price of gasoline at the pump seems to closely mirror the price of crude oil. What obscure phenomenon could exist that could possibly explain this close association between raw materials and finished goods prices? Look at how closely the prices correlate with each other! I mean, it's almost as if these tandem price changes were governed by a...a...law or something!

UPDATE: A reader asks:
Why should their profits be spiking with rising prices?
For exactly that reason, Mr. Russert.

*sigh*

How can I simplify this so it can be easily understood, but not be so simple as to be wrong, at least in part...

Look at it this way. Last quarter, you purchased commodity X for $3 per unit and you sell it for 4$. Now, when you buy this quarter's supply, it's gonna cost $5 per unit. Your future cost has risen. So, even though you bought this quarter's supply at $3, you have to raise the price to sell it to the consumer at a price somewhere north of $5. If you don't, you won't be able to purchase that next contract, and replenish your supply. You won't have enough future cash to make the purchase. So, now, you're selling your $3 wholesale commodity at $6.50, making obscene profits!

At least, obscene until you buy that next commodity purchase, when all that extra cash gets sucked up by the replacement cost of your wholesale goods, which have doubled.

When buying a commodity, you must sell it at a price that is high enough to cover the commodity's future replacement cost.

If the price falls, of course, the process works in reverse. Your replacement cost is reduced, so you have to lower the retail price, selling high-priced wholesale goods at a lower retail price. Profits are reduced thereby. (This also explains why, since oil prices are expected to decline some over the next year or so, Exxon's profits, as reflected in earnings, are expected to shrink by 2.5%.)

And, of course, there's also this to think about:
If we simply divide Exxon Mobil's net income by sales, we discover that the company reported a 10.7% profit margin in the quarter. That's probably a bit above the U.S. industrial average, but it is hardly remarkable.

For instance, the nation's moist prominent critic of "oil profiteering" - Fox News personality Bill O'Reilly — works for a company (News Corp.) that reported a 10.2% profit in the fourth quarter.

If you're after big earners, check out Yahoo (a 45.5% profit margin), Citigroup (33.4%), Intel (24%) or Apple (22.7%).

Returns on invested capital over a longer time frame are even more telling. Analysts at Goldman Sachs found that returns on investment capital in the oil and gas sector from 1970-2003 were less than the U.S. industrial average over that same period. The oil industry would have to earn record profits for some time before it would produce above-average returns for its long-term investors.
But, please, don't let any pesky facts get in your way as you take out the pitchforks and light the bonfires for the horrible oil executives.

Meanwhile, back to the commenter:
It’s disingenuous to pretend that this set of lines proves anything about price gouging. All that proves is that the oil industry is able to manipulate both sets of prices in unison.
*sigh*

*sigh*

Crude oil prices are set in a global market which consists of commodities spot markets all over the world. Most gas stations contract with their suppliers to buy gasoline wholesale at a cost equivalent to the price in the nearest spot market, plus the cost of transportation.

Apparently, you have no concept of what that implies about the risibility of your argument. I suggest an undergraduate economics course as an instructive way to spend a couple of hours a week for the next few months.
Higher taxes on higher profits is a great way to encourage a better use of that money - in keeping prices lower.
Sure. It might do that. Or, it might create an incentive to lower profits by reducing production, leading to an artificial shortage of oil, and much higher prices at the pump for consumers...when they can get it. But, you know, whatever.

As long as those oil guys aren't making money, I guess it's for the best, huh?

Seriously, the econ class at a local community college. It's cheap. You should look into it. Really.
 
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Previous Comments to this Post 

Comments
Not only that, but you can buy gasoline in the futures market, or the current market, and actually take delivery. Imagine that, a real auction market in a real commodity.
 
Written By: Tee Jay
URL: http://
Wait a sec, there’s a couple of spots where I can see daylight between the crude and gasoline lines! Gouging!

 
Written By: Unknown
URL: http://
It’s disingenuous to pretend that this set of lines proves anything about price gouging. All that proves is that the oil industry is able to manipulate both sets of prices in unison. Sure, there’s a market, and sure spiking demand and diminishing capacity expansion potential plays a role in the price rises, but are or are not Exxon Mobil’s profit margins spiking? Why should their profits be spiking with rising prices? Given all the suffering of the American consumer, this is when your margins should be dropping, because to avoid losing market share to - hmm - competition that DOESN’t let rising costs equal rising prices.

That’s not happening. Thus, competition (and the market) has failed. Higher taxes on higher profits is a great way to encourage a better use of that money - in keeping prices lower.
 
Written By: glasnost
URL: http://
competition that DOESN’t let rising costs equal rising prices.
Except that with almost any commodity you can name, when the cost of that commodity rises, the existing inventory has to be sold at replacement cost...otherwise, the seller can’t replenish his supply.
 
Written By: Steverino
URL: http://steverino.jounalspace.com/
Higher taxes on higher profits is a great way to encourage a better use of that money - in keeping prices lower.
That does not follow.
 
Written By: Mark A. Flacy
URL: http://
I haven’t been reading here for very long, so forgive my ignorance; based on correlations on graphs you’ve accepted global warming as a human-driven phenomenon, right?
 
Written By: Snook
URL: http://dpressure.blogspot.com
Corporations always pass on the costs imposed by taxation somehow — either by buying lower-cost inputs (is there any scenario of this kind that results in better quality delivered to the consumer?) or by raising prices or by cutting back future operations/investment (e.g., oil exploration and refineries).

If you tax domestic oil companies, all you’re doing is make them less competitive with foreign firms (e.g., those run by the governments of Venezuela, Iran, and Saudi Arabia). They’ll have less money to reinvest into infrastructure and oil exploration, which doesn’t help you at all in the long run — in fact, it harms you. You become more dependent on foreign oil and jack up their profits in the meantime — hooray!

Disincentivizing profit is discouraging production, no two ways about it. And guess what happens when supply rises even slower than it already has been.
 
Written By: OrneryWP
URL: http://
Except that with almost any commodity you can name, when the cost of that commodity rises, the existing inventory has to be sold at replacement cost...otherwise, the seller can’t replenish his supply.
While often true, I’m not sure that this — Dale’s premise — really explains the rising oil company profits.

The oil companies aren’t just middle-men. They’re also, in many cases, owners of the commodity. Their profits are not coming from the temporary higher prices they’re asking in order to pay for their next commodity purchase. They’re coming from two places...

1) The higher prices they’re getting from speculators, who are purchasing futures contracts for delivery at inflated prices.

2) The increase in demand relative to supply for scarce supplies of oil.

The 2nd point is the important one. Bringing one barrel of oil to market doesn’t cost Exxon-Mobil substantially more today than it did a few years ago. But they’re getting higher prices for that same barrel of oil, because the price has been bid up as demand increases.

So, while they mave have spent $95 to bring oil to market that they could previously sell for $100, they can now spend that same $95, but get $110. They’re making higher profits because the commodity price has increased, not in anticipation of it.
 
Written By: Jon Henke
URL: http://www.QandO.net
Hmmmm, so when we get rising steel prices, but my company eats some or all of the increased cost because US chain stores won’t allow us to raise our prices I am violating some economic principle?

I can’t wait to explain that to them...

(actually, I probably trust you guys that this rule exists...just seems strange.)
 
Written By: Harun
URL: http://
Jon. I believe that in most cases the oil companies do not own the oil, but rather, they own the rights to the oil. And those rights are not covered by a one time payment.

You are on to something about demand though. With rising demand there is more units sold, thus increasing profits. Over time this increase in demand will usually lower price and allow the producer to maintain their profit level, but with oil being of limited supply, well...
 
Written By: Wilky
URL: http://
based on correlations on graphs you’ve accepted global warming as a human-driven phenomenon, right?

Off topic, but very nice. However, the graphs look rather cyclical and CO2 comes from non-human sources. The point would have been much sharper had it explained the human-driven aspect in any way.
 
Written By: Wulf
URL: http://www.atlasblogged.com
based on correlations on graphs you’ve accepted global warming as a human-driven phenomenon, right?
It must be. Who else would make the graphs?
 
Written By: Mark A. Flacy
URL: http://
Hey Snook,

Since Mars and Jupiter (I don’t know if the other planets have been looked at) are all also warming at about the same rate as the Earth +/- 25% of the same degree of increase, do you accept that our eevvillll CO2 polution is magically being transported to these other planets to cause that warming?

Do you accept that? Huh!

Human activities cannot yet be shown to correlate to the changes seen in some measures of the Earth’s temperature over the last handful of decades.

Full stop.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
Well, I appreciate the attempt at a substantive response, if not the obnoxiousness, McQ. I have plenty of economics background, thank you, although there are plenty of things I don’t know.

I believe John Henke has written a substantive fleshing-out of the exact same point that I was making. Whether the speculative futures market is sucking cash for no consumer benefit, or whether it’s the oil companies themselves, is only a question of culpability, not a denial of the basic problem.

I don’t care about the $3 to $5 to $4 replacement cost argument, when prices rise, margins should decline, period. Anything else indicates a lack of competition. If that makes you temporarily unprofitable, make it back up with market volume, or cut wasteful costs.

I also don’t care if Exxon Mobil’s profit is under that of Goldman Sachs. The financial industry is entirely parasitic, whereas we expect results from companies that actually produce things.

The only substantive argument so far is that argument that decreased margins will diminish incentives to increase supply, but I could argue the exact opposite effect, that increasing margins decrease incentives to increase supply.

You have, at best, a draw. I say they’re gouging.

 
Written By: glasnost
URL: http://
Y’know, even a recent Bush administration report concluded that global warming is happening and that human activity is a significant contributor. Scientific consensus doesn’t make a position right, but sometimes that consensus comes about because it is, in fact, right.
 
Written By: Jon Henke
URL: http://www.QandO.net
You have, at best, a draw. I say they’re gouging.
I agree! If not for their bloodsucking gouging, we could get our oil for $1 per gallon..
 
Written By: shark
URL: http://
If we’re pointing fingers, let’s not also forget dealer protection statutes and the role they play. Remember, when you go to your local Exxon station, you aren’t buying from Exxon, you’re usually buying from an independent company that has signed an agreement with Exxon to use their signage and trade dress. My state has a statute that bars dealer-owned stations from being operated within a certain number of miles of distributor-owned stations; a neighboring state has a statute that bars distributors from owning stations at all. Because I practice law in the area, I know where the distributor-owned station is located, and its a good thing — gas there is regularly 10-15 cents a gallon cheaper than it is at the dealer-owned stations. Just another way that the cost of "protective" statutes get taken out on consumers.
 
Written By: Sean
URL: http://www.myelectionanalysis.com
"when prices rise, margins should decline, period"

This is a complete pile of crap! Margins are not bound by any such ’law’. Perhaps this is your opinion of the way it should be. Let me guess, you don’t, or never have, run a business - not a profitable one anyway.

Margins may go up, down, or stay the same no matter what the price does. This depends on several factors, including the buyer’s willingness to pay the higher price. If the price of my product doubles, I may sell less, and make less absolute profit, but my margin could easily remain the same, though I may take less in order to keep sales higher too.

 
Written By: Unknown
URL: http://
"Y’know, even a recent Bush administration report concluded that global warming is happening and that human activity is a significant contributor."
Which also doesn’t prove or mean, squat.

 
Written By: Unknown
URL: http://
Glasnost,

You said

"I don’t care about the $3 to $5 to $4 replacement cost argument, when prices rise, margins should decline, period."

Unfortunately your argument completely ignores the fact that oil companies produce "oil". So when crude prices rise oil company revenue and marrgin both get bigger.

It is interesting how many people don’t know or simply ignore the fact that oil companies produce "oil" and crude price and production levels have a massive impact on oil company profits.

How people can claim to detect gouging when they don’t even understand this fundamental fact about the oil business is a mystery to me.



 
Written By: TJIT
URL: http://
I’m an economist, not a businessman. I think about the health of the nation, Mr. Unknown. You think about your pocketbook. Congradulations. I’m perfectly aware that sometimes prices and profit margins rise simultaneously. We call this, here in America, "price gouging", unless there are specific business reasons why the survivial of the company in the immediate future depends on said rise in margins. You can color me skeptical that this applies here.

The law I’m reffering to is a principle of a market economy subject to perfect (or reasonably good, anyway) competition. Said principles are why the market economy remains both efficient and flexible. The nation, and you, disregard them at your peril.

When prices rise, margins should not be rising. This is a sign of an industry where too much power has concentrated in the hands of sellers, a sign of a dysfunctional market, a sign of systemic decline. It begs to be fixed. I say, by the government. Libertarians would say that new competition would fix it by itself, but I’m no libertarian.
 
Written By: glasnost
URL: http://
My sister bought a house in the fairfax, va area for $400,000 a couple years ago. She is now thinking of trying to sell it for $500,000. Here I thought that she was engaging in smart business, but I guess that she’s a dirty price gouger. Who knew?
 
Written By: Sean
URL: http://www.myelectionanalysis.com
TIJT, I understand that scenario is fine. That scenario is not in America’s interest, or the interest of our consumers. Price rises should be tied to the rise in cost to bring the oil to market. Decreasing supply will at some point for those costs to rise. If prices rise then, fine. That would be a case where oil companies *must race prices, or risk going out of business.

This is clearly not the case, as has been discussed earlier in the thread. Crude prices are rising based on speculative activity, activity that is inefficient to the nation and its consumers. The oil companies have set the system up this way, and their rising margins are proof that they are exploiting it. If they were responsible, they would be lowering their margins, both to counteract the speculation-based price rise, and to compete with each other for market share.

There’s not nearly enough of that happening. Every gas station in my local town is within $.03 of each other. It’s collusion. And no one is taking action.

When increased costs to consumers lead to a cutback in spending and our economy tanks even further, the political future of the republican party will decline even further.

Ornery, a form of taxation that increased with higher profit margins should in fact result in price cuts. Your margins decline (I’m not saying to zero), the taxes dissapear, the lowered price gains you more market share, your absolute profit might even increase.

So the doomsday scenarios don’t apply in this case. Moreover, lower-cost inputs can be a great thing. Sometimes they aren’t. That’s a case-by-case discussion. You’re smart enough to know it.

 
Written By: glasnost
URL: http://
glasnost - sounds like you had a hand in the CCCP economic handbook that worked out so well from the 30’s to the 80’s....
 
Written By: meagain
URL: http://
Crude prices are rising based on speculative activity, activity that is inefficient to the nation and its consumers.
If you think speculation is harmful, you probably don’t understand the benefits of speculation. Speculators, as Paul Heyne wrote in The Economic Way of Thinking, “even out the flow of commodities into consumption and diminish price fluctuations over time.” By bidding up the price of tomorrow’s barrel of oil, speculators ensure that we don’t overconsume today and face shortages tomorrow. Or vice versa.
Every gas station in my local town is within $.03 of each other. It’s collusion. And no one is taking action.
It’s not collusion. Gas stations themselves have very, very small profit margins on the sale of gasoline, if they have any profit margin at all. They’re all within a few cents of their wholesale costs.

In any event, how do you propose oil companies cut their margins on a global commodity? They are price-takers, not price searchers. Like sellers of wheat, they could theoretically undercut their competitors prices, but they would simply sell completely out and leave money on the table. And once they’re sold out, that takes a competitor out of the market, leaving absolutely no incentive for other companies to lower their price.
 
Written By: Jon Henke
URL: http://www.qando.net/
I certainly agree that the run-up in gas prices is primarily due to the increase in crude prices. The higher input price of the crude is simply passed on to the consumer, so it should not be surprising that gasoline and crude prices move in tandem. If the oil companies are able to make an economic profit, as opposed to a normal one, it is due to the fact that the price that they are getting for their crude has gone from $30 per barrel to over $70 per barrel. Economics 101 would tell us that when a company is making economic profits, other companies and capital will enter the marketplace until supply is increased and the economic profit is brought back down to a normal profit. So, ask yourself why more Companies do not get into the oil business. Aside from the fact that the profit margin cited would probably not be considered to be much higher than a normal profit margin (hence the profit motive may not be there), could it be that it is next to impossible to drill a new oil well anywhere in the country due to govt restrictions? If you are an existing oil company with proven reserves that are being tapped, you benefit mightily from the govt imposed barriers to entry for new firms that might want to develop new oil reserves. As you pointed out, the profit margin is not obsessive, however, the absolute profit number looks large. In other words 10% profit earned on $100M in capital investment is more than 10% profit on $10M of capital investment. If more supply is not allowed to come to the marketplace, the price mechanism will ultimately force consumers to re-think their energy usage. I am amazed by people who demand that consumers conserve but at the same time cry when prices go up. The best way to encourage conservation is thru higher prices.
 
Written By: Greg Abbott
URL: http://
I find it hilarious that people who complain about speculators (like our leftward friend) accept so much money from people like George Soros who singlehandedly wiped out wealth all against Asia in the 90s. But I guess there are different rules for the the left that the rest of us.
 
Written By: capt joe
URL: http://
. "Anything else indicates a lack of competition."

Not if they are all paying the same costs for crude.

"If that makes you temporarily unprofitable, make it back up with market volume,"

I heard that joke! Something about two businessmen talking about their businesses, one says he has been selling his products at a loss for 20 years, the other one asks how he stays in business if he is losing money, the reply is "I make it up in volume".

." The financial industry is entirely parasitic, whereas we expect results from companies that actually produce things"...
"but I could argue the exact opposite effect, that increasing margins decrease incentives to increase supply"

So much for the claim of "plenty of economics background". You have to pass the class in order to get the credit. Or did you get a degree from Moscow State U.?

. "It’s collusion"

Once again, not when all their input costs are the same.
 
Written By: timactual
URL: http://
I don’t see why you’re bothering, Glastnost wants to believe there’s price gouging going on, he see price gouging lurking behind everything, no amount of proof or logic will convince him otherwise.

In that at least, he’s like (too) much of America..
 
Written By: shark
URL: http://
Tom Perkins,

Show me the link. I have serious doubts that Jupiter and Mars have shown an exponential increase in global temperature in the past 100 years. And I think you meant to say "causation," because correlation between human activity and temperature increase has been established, as I showed with the link in my last comment. Correlation’s the easy part, and doesn’t leave much of any room for debate; cuasation, on the other hand, is pretty easy to disbelieve, even after all the world’s scientists have long since agreed and moved on to the problem of fixing it.
 
Written By: Snook
URL: http://dpressure.blogspot.com
Snook,

Show me a link. I have serious doubts that Earth has shown an exponential increase in global temperature in the past 100 years.
 
Written By: anomdebus
URL: http://
Snook,

Your link actually shows a correlations between CO2 and temperature, not human activity. Given that it goes back 400K+ years, that should be fairly obvious.
 
Written By: Sean
URL: http://www.myelectionanalysis.com
Snook - "Exponential increase in global temperature" does not grok.
I think I know what you mean to say, and it’s based on the shape of the curve and speed of temperature increases. But "global temperature" itself has not been increasing exponentially, unless I’m missing something big. I don’t think I am.
-=-=-=-=-=-=-
glasnost -
Ornery, a form of taxation that increased with higher profit margins should in fact result in price cuts. Your margins decline (I’m not saying to zero), the taxes dissapear, the lowered price gains you more market share, your absolute profit might even increase.
If you can’t secure extra supply — for all the reasons we already know, as well as because you have less profits to reinvest into your operations — how are you going to gain all that market share? You’ll just have shortages.
What you’re guaranteeing is that prices will stay exactly at supply-and-demand equilibrium, but that money will be siphoned off from profits and fed directly to the government. Domestic companies will suffer, foreign companies will not.
So the doomsday scenarios don’t apply in this case. Moreover, lower-cost inputs can be a great thing. Sometimes they aren’t. That’s a case-by-case discussion. You’re smart enough to know it.
I’m smart enough to know that forcing a company to seek lower-cost inputs that it otherwise wouldn’t onsider leads to a decrease in quality of the product delivered. It means you have to cut corners somewhere. Any economically sound lower-priced inputs would already be in use.
 
Written By: OrneryWP
URL: http://
John,

"By bidding up the price of tomorrow’s barrel of oil, speculators ensure that we don’t overconsume today and face shortages tomorrow. Or vice versa."

That would be a wonderful way in which to logically justify the speculation, but personally, I don’t agree. There’s a fallacy there that because something exists, it has to be good for the system. For example, we are overconsuming today, and we do face shortages tomorrow. So, the speculators are clearly failing at that imaginary role. I don’t think that you’re ready to prove that the price curve on oil would be *less* volatile without our current speculative bubble. Or are you? I think that’s a little ridiculous. our decrease in supply relative to demand and increasing associated costs is a much gentler curve than when you double the costs for speculation and then, maybe, send them through the floor again, based on CNN.

So, we’re left with the argument that the artificial additional costs and volatility is good for our economy. I tell you what, if we’re going to have artificial additional costs, let them be rational and predictable ones, and let the money be intelligently redistributed by the government. Speculative activity is, as far as I know, the least macroeconomically helpful force in the universe. Now, we’re out of economics and into politics, but you’re arguing that the increased economic pain for consumers is good for us, and I think it will break the back of consumer spending left unchecked. Care to make a wager?

As for decreasing their margins, it’s very simple, sell crude and refined gasoline for less money than currently. Why should they sell completely out? Is available inventory so drastically limited? Do they really dissapear completely from the market permanently, never to have any more oil available to sell or do they create an effect where consumers flock to them and leave the competition unable to move their inventory, therefore being forced to lower their prices, thus creating the beneficial effect I discussed?

But either way, this is a red herring, because it wouldn’t be an individual firm trying to cut the margins - the whole industry would have the incentive, due to the changed taxation structure. So they’d all be moving in rough unison.

Joe, I have never accepted money from George Soros, please try again.

Ornery, why should domestic companies suffer and foreign companies not? If the taxes are to margins on sales to the US, they’ll all be hit equally.

-Any economically sound lower-priced inputs would already be in use -

that’s an assumption wide enough to drive a truck through.

Besides, ornery, your description of the effect basically validates my argument. Prices at supply/demand equilibrium is the basic goal and promise of economics. The domestic companies suffering angle reflects our inability to evenly apply incentives globally. That’s a failure of our political institutions, not of the solution to the problem of economic inefficiency and market failure.
 
Written By: glasnost
URL: http://
"I’m perfectly aware that sometimes prices and profit margins rise simultaneously. We call this, here in America, "price gouging", unless there are specific business reasons why the survivial of the company in the immediate future depends on said rise in margins."

Speak for yourself. "We" don’t all call this price gouging. You, and your socialist buddies, may. It can also be called greater demand combined with higher production efficiency, for example. I’m sure you think there is some morally acceptable level of profit that no company should be allowed to exceed, but here in America, most of us prefer to let the many individual members of the buying market determine what price should be paid for a product or service through their own individual decisions. Sorry bud, you missed the statist boat. It’s sailed and sunk.

 
Written By: Unknown
URL: http://
Tim, the entire point of this conversation is that the price rise is not related to costs, but to speculative activity and ****increasing profit margins***. If the price rise was related to costs, the margins would be ***neutral****. I don’t know the extent to which oil companies directly control the price of crude, rather than just the price of refined gasoline. I don’t know the interrelationship between the futures market, the third-party speculators, and the companies. I don’t even know where the margins of the oil companies are coming from. I’m no industry expert. I just know bull**** when I see it.

It is not collusion on the part of the gas stations themselves, this is correct. But tell me: since oil costs different amounts to get out of the ground, different amounts to ship depending on where it’s coming from, how the heck come all the prices of the wholesale gasoline arriving at the stations in the US are essentially the same for a given local area? The "input costs" for the gas stations = the prices at which they’re being sold refined gasoline. Hmm, all those **final prices** set by the oil companies are essentially the same. Are their final costs all the same? Really? Or do they, in fact, collude, and soak up the higher profit margins?


And do you really think that increasing margins does not, in fact, offer an incentive to keep supply lagging nicely well behind demand, when that’s what allowed those margins to get to this point in the first place? Ever heard of something called "market failure"? And you’re questioning *my* theoretical background? Keep the gratuitous communist cheap shots to yourself, m***********.
 
Written By: glasnost
URL: http://
"America, most of us prefer to let the many individual members of the buying market determine what price should be paid for a product or service through their own individual decisions."

Sure, of course. Here in America, where antitrust law doesn’t exist. Because corporations can charge any profit margin they darn well want, even if it leads to macroeconomic catastrophe and societally disasterous outcomes, and government never gets involved in the market to ensure beneficial outcomes for its constituents, as well as social justice.

You want to see your unfettered market paradise come true... hmmm, I can’t think of a country on this planet where it exists. Darn. Wonder why that might be. Maybe it’s because President Bush would have to take your explanation to the voters, buddy. I don’t think he’s really up for that. Have you noticed?


<>

Matter of fact, it’s the level where price increases on highly inelastic goods leads to a collapse in consumer spending and reccession. Taking care of it is the government’s job. If you disagree, that’s fairly irrelevant, because that is in fact how the government and the public see it. I’m not the one who has lost this debate. Buddy.
 
Written By: glasnost
URL: http://
This is insanity. Oil is not a cost to oil companies. Oil companies produce crude. The explore for deposits of it and the pump it out of the ground. Last year Exxon, for example, made three quarters of their money from this crude producing activity, which they call "upstream", and one quarter from their refining and supply, "downstream". The price of crude is up of course because the loon in charge of our country is making everyone in the market jumpy about supply by suggesting that he might just want to start another war in the middle east to go so that he could have a matched pair. Tehy may not be price gouging but they have certainly reaped a wind fall from Bush’s presidency.
 
Written By: Retief
URL: http://
"I don’t know the interrelationship between the futures market, the third-party speculators, and the companies. I don’t even know where the margins of the oil companies are coming from. I’m no industry expert. I just know bull**** when I see it"

Yeah, I recognize it too.
 
Written By: timactual
URL: http://
Ah social justice. The ever nebulous replacement for social contract theory.

It sure would be nice if people like you would go create your socialist paradise somewhere else and stop trying to drag those of us who prefer freedom, responsibility, and thinking for ourselves into your schemes. But of course you can’t have your paradise without those of us who actually produce. Of course you never, ever stop to consider all the value that would be gone from your world if you could impose your idea of ’social justice’ and naturally you can’t possible fathom a world where people like you aren’t ’protecting’ the so-called marginal members of society. The arrogance is incredible. Who elected you to speak for them?

The difference between your ideal view of the world and mine is that I don’t require anyone’s servitude. You do.

 
Written By: Unknown
URL: http://
Hey Snook,

I found this blog post in 5 minutes. It’s full of links.

The people who believe it is a demonstrated scientific fact that human production of CO2 is causing any provable—or even likely—degree of global warming, these people are deluded or lying.

Also, the increase in Earth’s (and these other celestial bodies) temperatures has been linear to an increase in the sun’s output. Not exponential.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
Retief, take an economics class please. Crude oil costs oil companies money, they don’t get it out of the ground for free.

"The price of crude is up of course because the loon in charge of our country is making everyone in the market jumpy about supply by suggesting that he might just want to start another war in the middle east to go so that he could have a matched pair."

The price of crude is up because more and more people want it and can afford it at even this price. American who burn 15 gallons twice a week are competing for gas with Indians and Chinese who burn that in a moped in one month—but they still fill their tanks at that rate at these prices. The price of oil won’t decline until we either find a lot more of it (and invest the capital to bring it to market) or people don’t want it anymore.

Please go hold your breath ’til either happens.

The idea that not wanting Tehran to do something they’ve sworn to do for 2 decades or more (get nukes) is a bad thing is also a very interesting take on how to handle Islamist extremists when they are in charge of a country...I think Chamberlain tried it last with another totalitarian.

Yours, TDP, ml, msl, & pfpp


PS. "temperatures has been linear" should be "temperatures has more nearly been linear"
 
Written By: Tom Perkins
URL: http://
Joe, I have never accepted money from George Soros, please try again.
You should ask for your share of the rebate from Move On and Media Matters. They certainly have no problem with the source of funds. They carry water for the same arguments that you do.

 
Written By: capt joe
URL: http://
Oil is not a cost to oil companies. Oil companies produce crude.
That’s exactly right, Retief. When supply/demand factors increase the price of a commodity, then the suppliers of the commodity will get more profit without necessarily increasing their input costs.

They do not, as Perkins writes, "get it out of the ground for free", but they also need not increase their input costs in order to extract the same amount of crude.
 
Written By: Jon Henke
URL: http://www.QandO.net
For example, we are overconsuming today, and we do face shortages tomorrow. So, the speculators are clearly failing at that imaginary role.
Failing? Speculators are bidding up the price of oil today, forcing us to ration more carefully. Which will ensure the supply lasts longer. This is basic Economics stuff. It’s not really a matter of opinion. That’s the effect they have.
Speculative activity is, as far as I know, the least macroeconomically helpful force in the universe.
You ask me if I’d care to wager on this. But I’m the wrong one to ask. You ought to ask the speculators. Not only are they willing to wager on it, they DO wager on it. They accept risk and profit (or lose) on the outcome of that risk. It’s nothing more than spreading risk and investment over time. They provide information to the market.
As for decreasing their margins, it’s very simple, sell crude and refined gasoline for less money than currently. Why should they sell completely out? Is available inventory so drastically limited?
Yes. In case you haven’t noticed, just about everybody is pumping as fast as they can.

Please, I’m begging you, read a good economics textbook. This is not some "ideological theory" we’re writing about here. It’s basic economics. Debating this is akin to debating evolution. You may have "faith" that leads you to believe otherwise, but the science is settled.

I highly recommend this book. Chapter 7 deals extensively with this topic.
 
Written By: Jon Henke
URL: http://www.QandO.net
Jon, faith is not an issue here. Not only are you insulting me, you’re failing badly to defend your arguments.

I wouldn’t ask the speculators to wager on whether their activity is macroecomically helpful: they don’t give a f***. It’s personally beneficial to them. Apples and oranges: way to sidestep that.

"Failing? Speculators are bidding up the price of oil today, forcing us to ration more carefully."

Or you could argue that they’re causing unneccesary and irrational econonmic pain and distorting the actual market for oil, ensuring that the final price swings wildly away from input costs. You’ve made that argument yourself and it doesn’t disagree with any of the data your statement builds on.

Is available inventory so drastically limited?

Yes. In case you haven’t noticed, just about everybody is pumping as fast as they can.

Again, wild sidestepping. I detailed alternative scenarios to an oil company "leaving money on the table", and you have failed to discuss them.
 
Written By: glasnost
URL: http://
Jon, faith is not an issue here. Not only are you insulting me, you’re failing badly to defend your arguments.
I don’t intend to insult; only to point out that this kind of thing is covered in a basic freshman/sophomore level economics course. It is true, though, that I’d rather not spend time and energy explaining basic economics.

I’ve no problem with people acting in an "altruistic" manner, but I don’t think the consequences will be what you think they will be. I also think you don’t grasp the economic value of information, middle-men and speculators.
 
Written By: Jon Henke
URL: http://www.QandO.net
Jon, reading comprehension.

I did not write that oil companies get oil out of the ground for free, I said the opposite. It is also not true that they can increase production for free from an established well, it is also not always true that they can increase production indefinitely, say over a months time, without damaging their ability to extract oil from that well in the future.

"When supply/demand factors increase the price of a commodity, then the suppliers of the commodity will get more profit without necessarily increasing their input costs."

That’s true, but it does not follow that oil is not a cost to companies that pump it out of the ground. Are you as confused as your writing is?

"Please, I’m begging you, read a good economics textbook."

Umm yeah, you do that Jon.

No, oil companies don’t get oil for free, it is a cost to them. You are confusing the relative assurance of a good ROI with a debit not being a debit.

Yours, TDP, ml, msl & pfpp
 
Written By: Tom Perkins
URL: http://
That’s true, but it does not follow that oil is not a cost to companies that pump it out of the ground.
At no point have I written that extracting oil from the ground costs the oil companies nothing. Read for comprehension.
 
Written By: Jon Henke
URL: http://www.QandO.net
Retief wrote:

"Oil is not a cost to oil companies. Oil companies produce crude."

And in response you wrote:

"That’s exactly right, Retief."

What is not a cost is free. Oil is is a cost. It is not a net cost, but it is a cost.

Conflating a good ROI with there being no need for the I—that is sloppy thinking. If it isn’t what you were thinking, it is what you wrote.

Read your own writing for comprehension, please.

Go and sin no more.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
"Oil is is a cost."

And that is sloppy typing. Heh. Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
Ah, I see where you got that idea. No, *extracting* oil is a cost to oil companies. I explicitly noted that several times. However, it is not an input cost in the sense that changes in the price of the commodity affect oil companies. (except in cases where they are middle-men, rather than extractors)

If I have 100 pounds of X in my backyard — selling at $2/lb — it may cost be $1/lb to extract the X and that is a cost to me. However, if the factors of supply and demand change such that X is now selling for $3/lb, my input costs have not changed. I now double my profit. The price change does not create an additional input cost to me.
 
Written By: Jon Henke
URL: http://www.QandO.net
"If I have 100 pounds of X in my backyard — selling at $2/lb — it may cost be $1/lb to extract the X and that is a cost to me. However, if the factors of supply and demand change such that X is now selling for $3/lb, my input costs have not changed. I now double my profit. The price change does not create an additional input cost to me."

I agree with that, however, I do not feel that is what what Retief was writing or what you were inadvertently agreeing to.

I agree with you that "Glanost" is being monumentally dense in not acknowledging the good that speculation in commodities does for the economy, in providing information as to likely future costs.

I wish I could have talked my wife into buying an ounce of gold a month way back when.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
I agree with that, however, I do not feel that is what what Retief was writing or what you were inadvertently agreeing to.
I believe it was what he intended. It’s how I read him.
 
Written By: Jon Henke
URL: http://www.QandO.net
Indian and Chinese oil demand is up and will continue to grow, Venezuela is unstable and driving out foreign oil producers, production from the Cantarell field in Mexico is declining, Bolivia has nationalized the Natural gas fields, Nigeria is highly unstable, Iran is looking for the bomb, lots of mideast oil is exported through the straits of hormuz which neighbors Iran, Iraq is unstable and its oil production is uncertain, there was significant hurricane damage to oil production and refining in the gulf coast region last year and forecasters are predicting another busy hurricane season this year.

There is some speculative run up in oil prices but given the conditions above and the apparent lack of any spare capacity in either refining or crude production it sure looks like there are some very good reasons to be concerned oil prices will be higher in the future.







 
Written By: TJIT
URL: http://
Glasnost,

I find your faith based economic comments entertaining. At least you are honest about your ignorance, admirably owning up to it in this comment you made.

"I don’t know the extent to which oil companies directly control the price of crude, rather than just the price of refined gasoline. I don’t know the interrelationship between the futures market, the third-party speculators, and the companies. I don’t even know where the margins of the oil companies are coming from. I’m no industry expert."


So you are honest about your ignorance, but even in the face of that admitted ignorance your faith based commentary allows you to spew gibberish at an impressive rate. Some of my personal favorites are.

"our decrease in supply relative to demand and increasing associated costs is a much gentler curve than when you double the costs for speculation and then, maybe, send them through the floor again, based on CNN."

"Given all the suffering of the American consumer, this is when your margins should be dropping, because to avoid losing market share to - hmm - competition that DOESN’t let rising costs equal rising prices."

"When prices rise, margins should not be rising."

Cheers, and thanks for providing the entertainment.

TJIT
 
Written By: TJIT
URL: http://
Tom Perkins, I’m sorry if I was less than clear. When I say that oil is not a cost to oil companies I mean that in the same way that cars are not a cost to Toyota or to Ford or to GM. Similarly, a box of cornflakes is not a cost to Kelloggs. These are the products that they sell, thus the appelation, oil company, car company, cereal company. All of these products have various costs required to produce them, none of which are usually confused with the product.

Now, some companies may be in multiple businesses. Exxon for example both produces crude oil and, in a seperate business, refines crude oil to produce gasoline and other distilates. As I mentioned, and not unexpectedly in these days of high crude prices, the bulk of Exxon’s profits came from selling crude, not gasoline. This is also where they spend the bulk of their capital investment budget. I think it may be fairly regarded as their core business.

So the only thing that the graph showing how tightly gasoline prices and crude prices track actually demonstrates is the bankruptcy of all the handwringing about refinery capacity and too many blends explanations for the price of gasoline.
 
Written By: Retief
URL: http://
OK, not the only thing. But one thing.
 
Written By: Retief
URL: http://

 
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