News Do gas prices really reflect the profits of oil companies?

[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.

 

[russ_watters]

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.

It is, admittedly, an oversimplification. But that particular issue (where profit margins come from) doesn't have a whole lot to do with the issue here since the price increase was so large compared to the supply decrease. Plus, profit margin likely increases with such a large price increase, so that only strengthens my point (market forces can cause higher profits even with lower supply). I did see that problem when I first posted the two cases, but since it was a point in my favor, but impossible to pin down how much, I didn't think it was necessary or helpful to go into it.

Ie, if oil companies have a fixed cost per gallon, profit margin increases as price increases - so a price increase equal to a supply decrease would actually still result in higher total profit.

 

[Art]

It is interesting to see how the increase in the price of crude oil has translated into the price for the refined product.

At 42 gallons per barrel and at $28 per barrel the cost of the raw material used to be $0.67 per gallon now at $60 per barrel the cost per gallon of crude oil is $1.42 a difference of $0.75 per gallon.

I don't know the exact figures but I suspect the price of a gallon of fuel at the pumps has risen by a hell of a lot more than $0.75 per gallon as oil has transitioned from $28 to $60 per barrel.

Given that shipping, refining and distribution costs are unaffected by the cost of the raw material they process it would appear companies involved in this business are raking in huge profits through pure price gouging and airily defend them as being due to high oil prices.

 

[russ_watters]

Given that shipping, refining and distribution costs are unaffected by the cost of the raw material they process it would appear companies involved in this business are raking in huge profits through pure price gouging.

That conclusion would be correct if your given were really a given. It isn't. If nothing else, the cost of oil impacts it's own shipping, refining, and distribution costs.

 

[Art]

That conclusion would be correct if your given were really a given. It isn't. If nothing else, the cost of oil impacts it's own shipping, refining, and distribution costs.

It would be nice if you were to explain your statements rather than just leave them hanging.

Apart from perhaps a small increase in insurance costs which would add a miniscule amount to the bottom line in what way does the price of the raw material impact it's shipping, processing and distribution costs.

 

[edward]

On the national level (wholesale) Both mergers of oil companies and mergers of refineries, have muddied the waters of just who is responsible for oil prices. The multitude of mergers in recent years have decreased the level of competition in the energy industry.

What happened a few years ago in California is now pretty much a matter of record. Energy prices were manipulated, and Enron was caught red handed cutting supply supply. ( I am presuming that most of you saw the video of an Enron exec calling a power plant and telling them to shut down production.)

The oil refineries had the same California type of opportunity to control gasoline prices on a national level. With the merger of so may refineries, and those refineries not expanding production for reasons they wish not to disclose, we were on our way to drastically increased gasoline prices before the hurricanes ever hit.

http://www.gao.gov/highlights/d04982thigh.pdf.

http://quote.bloomberg.com/apps/news?pid=10000103&sid=aI43GNSYkDDQ&refer=news_index

On the local level:

Who sets the price at the pump depends on who owns the station. At stations owned by big oil companies, prices are based on local supply and demand and what the companies think customers will be willing to pay.

http://www.washingtonpost.com/wp-dyn/content/article/2005/09/24/AR2005092400253_2.html

 

[Art]

Here's some actual figs. based on prices in California

...April 04 - April 05
crude oil $0.797 - $1.112
dist... $0.162 - $0.211
refining.. $0.420 - $0.470
taxes ... $0.437 - $0.445

total per gln $1.798 - $2.243

http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2005/house050905/house050905.html

Note these figures are based on average prices and do not include short term profiteering due to bad weather, Pluto and Jupiter being in alignment etc...

As is obvious from the above a lot of the increase is not due directly to the cost of crude oil but is due to the other players in the process taking advantage of the crude oil situation to grab a larger slice for themselves.

 

[Polly]

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. : www.chinathetimes.com

Just so you guys know I qualify for the new board, I must say I have actually posted in bold enlarged typeface "go **** yourself!" on another board .

That's great news, you guys are geniuses!

"Stand up, all those of you who do not want to be slaves,
and use our hot blood to build the new Great Wall..."

 

[TheStatutoryApe]

On the local level:

Who sets the price at the pump depends on who owns the station. At stations owned by big oil companies, prices are based on local supply and demand and what the companies think customers will be willing to pay.

Another thing to add to this is that the stations owned by the big boys likely sell cheaper than most other stations to compete for business. When wholesale prices are high the little guys rarely make any money.

 

[Mercator]

Another thing to add to this is that the stations owned by the big boys likely sell cheaper than most other stations to compete for business. When wholesale prices are high the little guys rarely make any money.

Don't know about the US, but in Europe it's usually the other way around.and I suspect it's the same in the US The "independents" are cheaper than the majors. Several reasons: brand recognition makes the "majors" think they can charge more, sales organization and promotion is more rigid. After all the consumers don't realize their products come from the same refineries and so this policy often works. Independents have much leaner and more focused organizations than the integrated majors resulting in much lower overheads. Amazingly, sales policies at "major" owned refineries sometimes allow for lower prices ex-refinery for big, independent buyers, than for their own distributors. The thing is that, even though the majors set up their own distribution network, these have to compete with the independents and though some forces in the majors will favor their own brand, others think that they should just sell to the best reseller.
But the "clou" in this story is that the money in retail is not in the oil products. It is in the convenience stores besides the pumps. REFINERIES make money with selling oil products. Gas outlets make money with anything they sell besides petrol. The layout of new gas stations revolves around the store, not the gas pump.

 

[TheStatutoryApe]

Don't know about the US, but in Europe it's usually the other way around.and I suspect it's the same in the US The "independents" are cheaper than the majors. Several reasons: brand recognition makes the "majors" think they can charge more, sales organization and promotion is more rigid. After all the consumers don't realize their products come from the same refineries and so this policy often works. Independents have much leaner and more focused organizations than the integrated majors resulting in much lower overheads. Amazingly, sales policies at "major" owned refineries sometimes allow for lower prices ex-refinery for big, independent buyers, than for their own distributors. The thing is that, even though the majors set up their own distribution network, these have to compete with the independents and though some forces in the majors will favor their own brand, others think that they should just sell to the best reseller.
But the "clou" in this story is that the money in retail is not in the oil products. It is in the convenience stores besides the pumps. REFINERIES make money with selling oil products. Gas outlets make money with anything they sell besides petrol. The layout of new gas stations revolves around the store, not the gas pump.

http://www.newrules.org/retail/gas.html

http://www.enquirer.com/editions/2001/07/29/loc_price_wars_fierce_at.html

Mr. Lusby, the independent Sunoco dealer, says he's not being crunched, he's being crushed. He relies on gasoline sales for 40 percent of his revenue but hasn't made a profit in nearly three years, he says.

“You can only pack so much stuff inside your store,” Mr. Lusby says. “You've got to make money on gas if you want to make it. And for a lot of us, that just isn't happening right now.”

http://www.slate.com/id/2100546/

Rising gas prices hurt profits inside the convenience store as well as at the pump. When drivers spend more on gas, they're likely to spend less on Twinkies and Marlboro Lights. That's bad news for store owners, because the real money lies in junk food and coffee. Convenience stores owners mark up gas by an average of 8.8 percent, but the margins on potato chips, beef jerky, and those awful cheese-filled hot dogs is 30.8 percent. For the $337 billion convenience store industry, as NACS reported, fuel accounted for 65.5 percent of total sales last year but just 35.2 percent of gross margin. In other words, gas accounts for two-thirds of the sales but only one-third of the profits.

http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_motorfuels.htm

http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_ecoimpact.htm

It seems that in the end it all about balances out. If a retailer is trying to remain competitive they can lose money on gas sales which will need to be made up for by taking out of the convenience store sales. If they don't remain competitive they'll simply lose money all around. No one will being buying from their convenience stores if no one is there buying gas.

Whole sale prices for nonfranchise stations shouldn't be much different from franchise if at all. They all get their gas from the same refineries. I'm not sure how it works exactly with gas stations but usually when you run a franchise you pay the company to use their name and logo. The cost of running franchise as opposed to independant may be one of the contributing factors in name brand stations having higher prices. Otherwise their profit margins should stay about the same as far as I can tell.

 

[edward]

The small independent owners definitely did not gain from the high prices at the pump.

Think your local gas station is making a killing off today's $3-plus-per-gallon prices? Wrong.

The soaring demand and supply disruptions that have pushed oil prices above $70 a barrel and produced record profits for oil companies and refiners has been bad news for the businesses that actually sell gasoline to motorists, which are paying higher wholesale prices and absorbing some of the increase themselves. Some experts say considerably higher oil prices could push mom-and-pop gasoline retailers out of business altogether.

http://www.wsjclassroomedition.com/archive/05oct/bigb_gasstation.htm

And from what I have read the big oil companies don't like the retail end of the business. I think we will be seeing a lot of big mega pump independants in the future. Walmart, Sams Club, and Costco already have established the trend.

Edit: I just read the rest of the link above and found this: oops

While independent gas-station owners are under pressure, sales and profits are looking better for another category of gas retailers: big-box retailers, supermarkets and large megachains that also sell gasoline on the street. These high-volume stores, such as Wal-Mart Stores and Costco Wholesale, tend to sell gasoline for about three to seven cents a gallon less than regular gas stations. Big-box discounters and grocers such as Kroger and Randalls are expanding their market share at a rate of about 20% a year, according to one estimate.

 

[Mercator]

http://www.newrules.org/retail/gas.html
http://www.enquirer.com/editions/2001/07/29/loc_price_wars_fierce_at.html
http://www.slate.com/id/2100546/
http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_motorfuels.htm
http://www.nacsonline.com/NACS/Resource/PRToolkit/FactSheets/prtk_fact_ecoimpact.htm
It seems that in the end it all about balances out. If a retailer is trying to remain competitive they can lose money on gas sales which will need to be made up for by taking out of the convenience store sales. If they don't remain competitive they'll simply lose money all around. No one will being buying from their convenience stores if no one is there buying gas.
Whole sale prices for nonfranchise stations shouldn't be much different from franchise if at all. They all get their gas from the same refineries. I'm not sure how it works exactly with gas stations but usually when you run a franchise you pay the company to use their name and logo. The cost of running franchise as opposed to independant may be one of the contributing factors in name brand stations having higher prices. Otherwise their profit margins should stay about the same as far as I can tell.

Right. Only I prefer to speak of "majors and independents" in the gas retail sector. Majors being the outlets carrying the name of a major petroleum products producer, while independents can be small local companies, but also bigger organizations that own or franchise hundreds of gas stations. So the "independents" as well as the "majors" can have franchises, and then the competitive advantages of both probably level out. The loosers are the real small independents with sometimes one or a few stations and no links to big retail organizations. And the winners seem to be more and more the big retailers, attracting customers to their warehouses by means of cheap petrol. The public gets more aware of the fact that it all comes from the same refineries. (However, this does not mean all the product is the same, in Europe, some refineries will have additives in their products, only for their own brand name stations. Some independents sell then without additives, or buy their own, different ones. And to make the situation completely chaotic, some major brand name stations ALSO buy from smaller non-major refineries! And I could tell you about the interference of storage in this process, but then we discuss about product quality and that's a different issue).
Just trying to make things clear, so people here can actually know what they discuss about.