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

[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]

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[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.