Do gas prices really reflect the profits of oil companies?

[SOS2008]

When the energy bill came out, you were complaining that so much of it subsidized oil companies. Now that they're agreeing with you that they don't need the subsidies, you criticize them for that, too? Not to say I'm the biggest fan of the local big oil company, but come on.

I was and am still against tax payers subsidizing companies that are profitable (highly), and that the so-called incentives "to do the right thing" (because they wouldn’t do the right thing on their own?) and build refineries for more stable supplies, or R&D for alternative energy, etc. have been rejected by these companies is no surprise. Because they are doing just fine (actually very well) milking the world for as long as they can.

It doesn't matter if the scale was lower than previously - it still happened and saying it didn't happen is wrong. And check the link I gave - it was from Atlanta and they had lines and rationing (my word) even though they increased prices.

How do you determine severity of shortages if you don't make comparisons over time? And I didn't say there were no shortages, just that the shortages were very localized (e.g., Atlanta) and short term.

I believe there is consensus with the OP that the oil companies exist for profit—not some idealistic reasons like improving quality of life for humankind, etc. I suspect anyone who argues otherwise is debating for the sake of debate, and personally I don’t have the time or interest in such exercises.

 

[russ_watters]

How do you determine severity of shortages if you don't make comparisons over time?

You weren't trying to compare shortages, you simply said there weren't any. If you had tried to make a comparison, that would have been fine.

And I didn't say there were no shortages, just that the shortages were very localized (e.g., Atlanta) and short term.

No, actually you said:

...there were no lines or gas stations closed due to lack of supply.

Quite exactly the opposite of what you are now saying you said. Nothing there about localized or short term, just no lines and no shortages.

What are you trying to pull? Did you already forget by post 16 what you said in post 10?

I believe there is consensus with the OP that the oil companies exist for profit—not some idealistic reasons like improving quality of life for humankind, etc. I suspect anyone who argues otherwise is debating for the sake of debate, and personally I don’t have the time or interest in such exercises.

Who suggested anywhere that oil companies are not for profit? Now you're trying to put words in my mouth too?

 

[Art]

In fact, I'll even help you, Blahness, since I want you to see that you are being duped. Art's original question was: So using numbers from/derived from this thread:
Original supply: 10 gallons (arbitrary number)
Original price: $2.47 per gallon (from my link)
After Katrina drop in supply: 5% (your estimate - looked good to me)
After Katrina price: $3.06 per gallon (from my link)
Fixed profit margin per dollar of income: 20% (arbitrary - probably high, but doesn't matter)
Calculate the net profit before Katrina and after (hint: calculate the after Katrina supply first) and you tell me if Art is right. Ie, if the profit before is higher than the profit after, Art is right. If the profit after is higher than the profit before, Art is wrong.
After you do that little problem and answer that simple question, then we can move on to discussing the why of demand elasticity.
[edit: ok, so maybe I am giving an economics lesson...]

Yet another ad-hominem attack by this so called supermentor which carefully avoids responding to any of the points I made. .
Still I'll rise to it. I'm sure you know that the point of my first post was to show that the extra profits being made by the oil companies is due to pure price gouging. In case it genuinely eluded you my point was that if the price increases were truly due to simple market forces then the oil companies would not be reaping the huge windfall profits they've now been raking in for the past few years. Your argument above is totally circular i.e. first presume the oil companies are not exploiting us - then look at the increase in price a small decrease in supply causes and use the answer to that to prove the oil companies are not exploiting us.
If you really believe world oil prices are a direct result of free market supply and demand then I guess you probably believe in Santa Claus too and have obviously never heard of OPEC. As part of furthering your economic knowledge I suggest you look up 'inelastic' demand it will help you understand how the oil companies get away with what they do.
As you are probably aware for markets to work properly information is key; Here's a comment from the UK chancellor regarding the imperfect information available re oil

A lack of transparency in oil markets and poor quality information contributes to volatility and uncertainties. There must be renewed co-operation between oil producers, consumers and market participants to ensure oil market decisions are based on timely, reliable and transparent information.” (UK Chancellor Gordon Brown, IMF statement to G7 finance ministers October 2, 2004)

BTW I am perfectly willing to discuss this subject but if you persist with ad-hominem attacks against all who disagree with you from your safe position as a supermentor then I for one will simply disregard all of your posts and would suggest others do the same. It was commented upon the other day how sensible and polite the posts have been in this forum over the past weekend. You might have missed it because coincidentally you weren't around at the time.

 

[kcballer21]

wow. price elasticity of demand huh? it's funny that when discussing an issue as economically complex as gas prices that we use freshman year economics to justify huge price increases. What's more is that gas prices are largely determined by politics, the ultimate impedance against the free mkt economics that a lot of these arguments are based on. Well, here's your justice:
http://www.forbes.com/cms/template/lists/results.jhtml?passListId=12&passYear=2005&passListType=Person&searchParameter1=9Str%7C%7CPat%7C%7COil+%26+Gas+Operations&resultsStart=1&resultsHowMany=25&resultsSortProperties=%2Bnumberfield1%2C%2Bstringfield1&resultsSortCategoryName=Industry&category1=Industry&category2=category"
as long as we're discussing econ 101, the opportunity cost of an average american filling their tank would probably be comparable to one of these guys buying a house. if you can't find the relevance, you need to take a step back.

 

[russ_watters]

Art, please complete the math problem I posted, which answers the what of your initial post. Then we can discuss the why after that.

 

[SOS2008]

You weren't trying to compare shortages, you simply said there weren't any. If you had tried to make a comparison, that would have been fine. No, actually you said: Quite exactly the opposite of what you are now saying you said. Nothing there about localized or short term, just no lines and no shortages.
What are you trying to pull? Did you already forget by post 16 what you said in post 10? Who suggested anywhere that oil companies are not for profit? Now you're trying to put words in my mouth too?

In the majority of the country, there were no shortages. After reading other member's posts, I then reflected that there were some shortages, but only in certain areas and for brief amounts of time. The last comment in my last post was a separate paragraph for purpose of generalization.

I think most would agree that discussing the issue rather than wasting BTUs on these kinds of posts would make the thread more enjoyable and informative.

So moving on...

 

[russ_watters]

Simply admitting you were wrong would probably have been less painful than arguing it and pointing a big arrow at it.

 

[SOS2008]

BTW I am perfectly willing to discuss this subject but if you persist with ad-hominem attacks against all who disagree with you from your safe position as a supermentor then I for one will simply disregard all of your posts and would suggest others do the same. It was commented upon the other day how sensible and polite the posts have been in this forum over the past weekend. You might have missed it because coincidentally you weren't around at the time.

Good suggestion. It was enjoyable for a while there.

 

[Blahness]

Well now, what's this?

Profit is higher after then before.

 

[russ_watters]

Well now, what's this?

Profit is higher after then before.

Yes, it really is a simple/straightforward phenomena. Now, would you like to get into the why of price [in]elasticity and how it's used/abused (ie, how OPEC works)?

 

[russ_watters]

I'm sure you know that the point of my first post was to show that the extra profits being made by the oil companies is due to pure price gouging.

Yes, I know. And in an effort to show that, you made an error.

...which carefully avoids responding to any of the points I made.

I simply highlighted the error and ignored your later posts because you can't move past an error until the error is fixed/addressed. That should be obvious - your later posts (and responses by others) were based largely on the erroneous belief that your first post was correct. Since the first post wasn't correct, moving on before addressing that leads us in the wrong direction - it just makes the line of reasoning more wrong. We can certainly move on to discussing your subsequent posts if you simply admit your initial error. It really is up to you.

Besides, Art, need I point out how many of my points you responded to? Pot/kettle.

 

[Art]

Yes, I know. And in an effort to show that, you made an error. I simply highlighted the error and ignored your later posts because you can't move past an error until the error is fixed/addressed. That should be obvious - your later posts (and responses by others) were based largely on the erroneous belief that your first post was correct. Since the first post wasn't correct, moving on before addressing that leads us in the wrong direction - it just makes the line of reasoning more wrong. We can certainly move on to discussing your subsequent posts if you simply admit your initial error. It really is up to you.
Besides, Art, need I point out how many of my points you responded to? Pot/kettle.

Russ, I thought I had explained my argument very simply and so it is hard to believe your failure to understand is anything but deliberate however rather than let you get away with rewriting history I'll recap for you.
Here's your original post -

If you have a fixed profit margin of 20% and you sell gas for $1 a gallon, your profit is $0.20 per gallon. If prices rise, for whatever reason, to $2 a gallon, then your net profit is $0.40 - double what it was before.

You then posted -

You do understand that oil production was actually disrupted by Katrina, right? It wasn't just about fear? And even if it had been just about fear, fear changes people's buying habits - fear causes shortages as well.

To which I responded -

You do understand this contradicts your earlier post, right? If supply constraint is the reason for high oil prices then the oil companies would not make extra profit as they would be selling less, right?

As I stated your first post is contradicted by your second. Your first assumes the oil companies are selling the same amount of oil at the higher price as at the lower price (you even set the parameters by stating 'if the price goes up for whatever reason' which obviously must include shortages). Your second post claims the higher price is due to supply problems.

If they aren't selling it then they aren't getting money for it at any price and so your first post was wrong. The extra profit you said would be made would not happen when there is supply constraint. i.e. When there is supply constraint a doubling of price does not lead to a doubling of profits as you claimed in your economics 101 lesson.

Or if you prefer it in mathematical terms;

If you have a 100 gallons of gas to sell and 'If you have a fixed profit margin of 20% and you sell gas for $1 a gallon, your profit is $0.20 per gallon. If prices rise to $2 a gallon' and you have 95 gallons to sell does your nett profit on the sale of your available oil double as you claimed?

Hopefully now that I have again explained your error you will be able to acknowledge it and 'you' will now be able to 'move on' as you suggested.

p.s. Seeing as how you requested this response I presume my pointing out your error isn't going to lead to warning points against me as happened previously when I pointed out that I had corrected you on 3 matters of fact?

 

[TheStatutoryApe]

The oil company does not own the gas stations and is not making profits off of the price of gasoline at the pump. By the time the refined petrol is being sold at the pump the oil companies have already made their money. To see where the profits come from don't we need to look to the commodities market? As a commodity oil prices can vary quite a bit due to disruption of supply or even the perceived disruption of potential supply. These changes are supposed to be out of the hands of the oil companies. I understand that they can effect these changes, which I believe is illegal to do intentionally, but ofcourse any changes due to Katrina are well out of their hands unless you propose that there is a conspiracy of some sort.
Please let me know if I'm off base with the commodities reference. I've never quite grasped how exactly the commodities market works and my searches for information so far have not enlightened me very considerably.

 

[loseyourname]

How does ownership of gas stations work? Some of them carry the same name as major oil companies. Are they franchises?

 

[Art]

How does ownership of gas stations work? Some of them carry the same name as major oil companies. Are they franchises?

Yes, in the UK and Ireland anyway some of the ones which carry an oil company's name are franchises though some are owned direct by oil companies and are run by managers.

Edit Seems to be the same in the US according to this article.

Shell has a joint venture with Saudi-owned Motiva whereby
significant amounts of Saudi crude are imported to the U.S. and
sold through jointly owned, Shell branded, stations. While Shell’s
wholly owned stations procure only 32% of their crude oil from Hall
of Shame countries, when the weighted average of stations operating
under the Shell brand as a whole is taken into acount the proportion
of Hall of Shame crude oil increases.

.

 

[TheStatutoryApe]

Yes, in the UK and Ireland anyway some of the ones which carry an oil company's name are franchises though some are owned direct by oil companies and are run by managers.
Edit Seems to be the same in the US according to this article.
.

Hmmm... sorry from what I have read before I had believed that gas stations tend to be owned by individuals.

 

[loseyourname]

Hmmm... sorry from what I have read before I had believed that gas stations tend to be owned by individuals.

If they're franchised, they are owned by individuals. The question then becomes: Is the franchise fee a flat rate or is it a percentage of revenue or profit?

 

[TheStatutoryApe]

From what I have been reading about one in ten gas stations are owned by the companies themselves and the rest are franchise or independent.

I haven't found any very specific info. The franchise people buy their gasoline from the refineries at market whole sale price. When prices go up the gas stations tend to make little if any profit. They then drop their prices slowly when the price goes back down so as to try recouping their losses.

 

[russ_watters]

Russ, I thought I had explained my argument very simply and so it is hard to believe your failure to understand is anything but deliberate however rather than let you get away with rewriting history I'll recap for you.

Do the math problem, Art. It is you who is making a simple mistake appear intentional.

To which I responded - As I stated your first post is contradicted by your second. Your first assumes the oil companies are selling the same amount of oil at the higher price as at the lower price (you even set the parameters by stating 'if the price goes up for whatever reason' which obviously must include shortages).

The first post is a simplification - simply, a statement about profit per gallon (did you miss that part?) - it does not address what happens to total profit when supply drops, so it doesn't apply to your erroneous assertion about profit dropping if supply drops. I had hoped people would fill in the blanks there and realize that such a large increase in per gallon profit would require a similarly large decrease in supply for the total profit for the gas companies to drop. People didn't, so I needed to give the second problem that combined the two.

Your second post claims the higher price is due to supply problems.

Yes - that's an explanation of the phenomena of elasticity, but again, that doesn't tell you what the math is going to show. Do the math problem, Art.

If they aren't selling it then they aren't getting money for it at any price and so your first post was wrong.

You are wrong here. Do the math problem, Art. [edit: and you may also be trying to set up another attempt at deception] You appear to be saying here that supply drops to zero. That isn't the issue at all. The issue is simply if the profit can increase even with a drop in supply. And it can as you can plainly see in the simple math problem that you refuse to do. Perhaps you meant to word it differently, but as you worded it, it is straightforwardly wrong.

The extra profit you said would be made would not happen when there is supply constraint. i.e. When there is supply constraint a doubling of price does not lead to a doubling of profits as you claimed in your economics 101 lesson.

The first problem is a sipmlification of the issue - the second is more realistic. But in both cases, there is more profit, which is all you were arguing against anyway.

If you have a 100 gallons of gas to sell and 'If you have a fixed profit margin of 20% and you sell gas for $1 a gallon, your profit is $0.20 per gallon. If prices rise to $2 a gallon' and you have 95 gallons to sell does your nett profit on the sale of your available oil double as you claimed?

You do the math problem and tell me what the answer is! You have so far refused to, and now you are changing the issue to be about whether or not it doubled - before you simply said it wouldn't increase. It doesn't need to double - it may or may not depending on the scenario. But either way, it does increase.

edit: by the way, I do see how you are going to try to manipulate the problem there. I'm not going to point out how until you do it though. Again, you aren't fooling anyone, so doing it will only make you seem dishonest. I encourage you to stop this and start arguing honestly.

Seeing as how you requested this response I presume my pointing out your error isn't going to lead to warning points against me as happened previously when I pointed out that I had corrected you on 3 matters of fact?

When you make things up as you go along, you appear to not be arguing honestly, Art. That leads to warnings. You're still doing it, too. I don't know if you think you are being clever or what, but you made a clear statement that is straightforwardly wrong in both threads (no, I will not re-argue the previous, but you can PM me about it if you want). You aren't fooling anyone and we're no longer inclined to let you try.

 

[kat]

A little info on how the Branded and un-Branded stations work:

Refined gasoline is transported by pipeline from the refinery to gasoline terminals. Wholesalers sell refined gasoline from terminals to retail gasoline stations. Retail gasoline stations may be either unbranded or branded. Unbranded retail gasoline stations do not display the brand of a wholesaler and do not sell branded gasoline. In contrast, branded retail gasoline stations display the brand of the wholesaler, such as “Amoco” or “Texaco,” and sell the wholesaler’s brand of gasoline, which is refined gasoline plus proprietary additives.

Among branded retail gasoline stations, there are various types of ownership and operation arrangements. The wholesaler may itself own and operate the retail gasoline station (a “company station”). The wholesaler may own the retail gasoline station but lease the station pursuant to an agreement that requires the operator (a “lessee/dealer”) to purchase branded gasoline from the wholesaler. The wholesaler may have franchisees (“open dealers”) who sell branded gasoline pursuant to a franchise agreement. Finally, the wholesaler may sell branded gasoline to independent firms known as “jobbers” that distribute the branded gasoline to retail gasoline stations (which are sometimes owned by the jobber).

http://www.ftc.gov/os/1998/12/9810345os.htm

 

[russ_watters]

Also, something I'm not sure I pointed out before, but the two points you have a problem with, Art, are not addressing the same issue. So it isn't even logically possible for them to contradict each other, even if one, the other, or both are wrong.

 

[Art]

Also, something I'm not sure I pointed out before, but the two points you have a problem with, Art, are not addressing the same issue. So it isn't even logically possible for them to contradict each other, even if one, the other, or both are wrong.

As I said in my last post I have explained it to you as simply as I can. I suspect your lack of understanding is due to you either not reading what I wrote or making false assumptions on what you think I mean or more probably on what you would like me to mean.

Further discussion on this subject on an open forum is pointless not least because as you are a mentor you can and do say whatever you like whereas I have to choose my words carefully. If you wish to continue the discussion I suggest you PM me.

 

[Blahness]

If you have a fixed profit margin of 20% and you sell gas for $1 a gallon, your profit is $0.20 per gallon. If prices rise, for whatever reason, to $2 a gallon, then your net profit is $0.40 - double what it was before.

But what if they gouge it, and it rises to $2 for their profit? They get a profit of 1.40, not counting reduced sales due to less people affording it.

You're trying to keep the problem oversimplified. Gas price vs. Demand is not a straight line, but rather, a curve, with bumps as outside factors(Price Gouging, government regulations, hurricanes etc. etc.) affect it.

 

[Mercator]

Do the math problem, Art. It is you who is making a simple mistake appear intentional.
The first post is a simplification - simply, a statement about profit per gallon (did you miss that part?) - it does not address what happens to total profit when supply drops, so it doesn't apply to your erroneous assertion about profit dropping if supply drops. I had hoped people would fill in the blanks there and realize that such a large increase in per gallon profit would require a similarly large decrease in supply for the total profit for the gas companies to drop. People didn't, so I needed to give the second problem that combined the two. Yes - that's an explanation of the phenomena of elasticity, but again, that doesn't tell you what the math is going to show. Do the math problem, Art. You are wrong here. Do the math problem, Art. [edit: and you may also be trying to set up another attempt at deception] You appear to be saying here that supply drops to zero. That isn't the issue at all. The issue is simply if the profit can increase even with a drop in supply. And it can as you can plainly see in the simple math problem that you refuse to do. Perhaps you meant to word it differently, but as you worded it, it is straightforwardly wrong. The first problem is a sipmlification of the issue - the second is more realistic. But in both cases, there is more profit, which is all you were arguing against anyway. You do the math problem and tell me what the answer is! You have so far refused to, and now you are changing the issue to be about whether or not it doubled - before you simply said it wouldn't increase. It doesn't need to double - it may or may not depending on the scenario. But either way, it does increase.
edit: by the way, I do see how you are going to try to manipulate the problem there. I'm not going to point out how until you do it though. Again, you aren't fooling anyone, so doing it will only make you seem dishonest. I encourage you to stop this and start arguing honestly. When you make things up as you go along, you appear to not be arguing honestly, Art. That leads to warnings. You're still doing it, too. I don't know if you think you are being clever or what, but you made a clear statement that is straightforwardly wrong in both threads (no, I will not re-argue the previous, but you can PM me about it if you want). You aren't fooling anyone and we're no longer inclined to let you try.

I cannot believe how some people on this board can discuss weeks about a subject they obviously have no other knowledge about than what they can grasp from the net in a one-minute Google search. If people complain about the level of the discussions here, then looking at the above, I can only agree, but the problem is that the "Mentors" on this board are to blame for a big part of it. If the PF forum is going down the drain, then thank posts like this one, where a simple statement is picked up by a mentor and spun out endlessly only to have the highest word. And Mr. Watters is not the only one. If this board is reduced to become a forum for the mentors and anything they believe in only, then don't come complaining afterwards that we choose to move to a board where we can have a REAL discussion. I have observed this board the last few weeks and my assesment is that some really hot issues are not even tried to discuss here anymore because we all know that if it does not fit the mentor's agenda, the thread will be closed or worse, just dissapear. Is this a side effect of the patriot act or what?

 

[Mercator]

Actually, it has more to do with commodity traders in New York, Chicago and most other major cities around the world where contracts for commodities are bought and sold. The commodities traders work for the themselves and their companies, not the oil companies.
I have seen the prices of gasoline drop just below pre-Katrina levels. The prices are still $0.20-0.30 higher than this time last year. We did see locally prices hit about $3.59 for regular gasoline during the week following Katrina - way to high IMO since there was no shortage. That is still lower than ~$6.00 in the southeast US.
What irks me is that gasoline went from about $2.00/ gal to more than $3.50 in the course of several days - but it certainly has not dropped as quickly. In fact the rate of increase was probably an order of magnitude greater than the rate of decrease.

Astro, the commodity traders only have an impact on the free part of the market. Many oil explorations are owned by the majors (the big integrated companies that explore, refine and distribute oil). They control the market. The independents ( refineries as well as ditributors) have very little influence on prices. Typically, they position themselves a bit under the retail prices of the majors because the majors have good margins anyway, and the independents have lower overhead costs. But in order to make a buck they have to be lower, to compensate the lack of branding (though their products may come form the same refineries, owned by the majors) The swings in price are still determined by the majors, which means that the majority of the oil on the market is NOT traded on the commodities markets.

 

[Mercator]

If you have a fixed profit margin of 20% and you sell gas for $1 a gallon, your profit is $0.20 per gallon. If prices rise, for whatever reason, to $2 a gallon, then your net profit is $0.40 - double what it was before.
.

What kind of reasoning is this? Can anybody show me an example of a company with a fixed profit margin? In the real world, profit margin is something you estimate when you do an investment evaluation and something you calculate and compare to the estimate at the end of the year (and most often is much lower than in the board case you presented...) Not even the oil majors are able to fix their profit margins.

 

[Polly]

If you guys are moving to another board, don't leave me out, PM me and tell me where you are heading, will you?

 

[Mercator]

As I said in my last post I have explained it to you as simply as I can. I suspect your lack of understanding is due to you either not reading what I wrote or making false assumptions on what you think I mean or more probably on what you would like me to mean.
Further discussion on this subject on an open forum is pointless not least because as you are a mentor you can and do say whatever you like whereas I have to choose my words carefully. If you wish to continue the discussion I suggest you PM me.

Art, I don't even know why you keep on "discussing" this. This is not a discussion, this is abuse. I see the same here in China every day, give a monkey a uniform (or a title) and he'll abuse it. What particularly angries me is that you, me an others sometimes contribute interesting views to a discussion, and then get carried away in a useless discussion which has nothing to do anymore with the topic. You are discussing with the mentor about what he thinks you have said on his reply on your comment on his post about the remark that you quoted out of the post you replied to what someone said. And just make one small mistake and you're out.Maybe you should let the mentor discuss with other mentors. If someone REALLY wants to discuss oil and the dirty world built on it, I'm all yours.

 

[Mercator]

If you guys are moving to another board, don't leave me out, PM me and tell me where you are heading, will you?

Polly, I can tell you that TSM is currently building a new site with the support of many others, including me. It will be focused on people living in China, but open for discussion on everything. Most of all, knowing TSM, it will be a site where you can say F*** if you need to, and no moderator will close a thread because he happens to think differently. I think your contributions will be more than welcome. I enjoyed your foto threads, but refrained from commenting because the comments you got where so typical for people who only know China fom National Geographic (at best!) that I did not want to mingle with them.

It will take a few more weeks: www.chinathetimes.com

 

[russ_watters]

But what if they gouge it, and it rises to $2 for their profit? They get a profit of 1.40, not counting reduced sales due to less people affording it.

"Price gouging" is defined as

The term price gouging refers to the phenomenon of sharply rising prices of items in (often temporary) high demand.

http://www.investordictionary.com/definition/price+gouging.aspx

The problem, as the link points out, is how do you separate price gouging from normal market forces? The answer is simply that the law calls "price gouging" whaver politicians want to call it. As the link says, many laws tie the definition to a fixed percentage increase in a fixed amount of time, ignoring the market forces that are actually happening.

You're trying to keep the problem oversimplified. Gas price vs. Demand is not a straight line, but rather, a curve, with bumps as outside factors(Price Gouging, government regulations, hurricanes etc. etc.) affect it.

That is true, but I only gave two points in that problem - that can be a curve or a line.

Regardless, the fact remains that you can make higher profit with lower sales due to supply/demand elasticity. It cannot be claimed (as Art was apparently getting at, though we never got to it) that an increase in profit in a time of reduced production must be due to price gouging.

http://www.gold-eagle.com/gold_digest_98/veneroso053098.html" is another example of an industry where small fluctuations in supply or demand yield large fluctuations in price.