Do gas prices really reflect the profits of oil companies?

[Blahness]

http://money.cnn.com/2005/10/27/news/fortune500/exxon.reut/

October 27, 2005: 2:51 PM EDT
Record profits for Big Oil at a time when consumers are paying sky-high prices for gasoline have brought calls for a windfall profits tax or other penalties on oil companies.

So, oil companies make record profits, and gas prices hit record highs. Coincidence?

And for reference, how many people have seen prices go down more then 20 cents in the past month?

 

[russ_watters]

So, oil companies make record profits, and gas prices hit record highs. Coincidence?

Of course it isn't a coincidence, it's economics 101 - but why are you saying that should be a reason to distrust oil companies?

edit: let me explain the math of that:

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.

And for reference, how many people have seen prices go down more then 20 cents in the past month?

Gas prices in my area are down something like 90 cents from their post-Katrina peak and below (due to seasonal forces) what they were right before Katrina.


http://www.fuelgaugereport.com/" is the national average for the past year. A year ago the average was at $1.95, just before Katrina, it was $2.47, the post-Katrina peak was $3.06, and now the average is $2.20.

 

[Blahness]

Meh, that sucks.

Then again, taking advantage of peoples' fear of a natural disaster is perfectly legal, so... yea.

 

[Astronuc]

So, oil companies make record profits, and gas prices hit record highs. Coincidence?

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.

And for reference, how many people have seen prices go down more then 20 cents in the past month?

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.

 

[russ_watters]

Meh, that sucks.

Then again, taking advantage of peoples' fear of a natural disaster is perfectly legal, so... yea.

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.

 

[russ_watters]

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.

It's always been that way, but I'm not sure what the cause is. For Katrina, specifically, however, the rate at which oil rigs and refineries came back online after the storm had a big impact on the rate at which prices declined.

 

[Astronuc]

It's always been that way, but I'm not sure what the cause is. For Katrina, specifically, however, the rate at which oil rigs and refineries came back online after the storm had a big impact on the rate at which prices declined.

I think it is the money. Similarly, when heating oil prices rise, we get a delivery AFTER the price increase. We have run out of oil waiting for a delivery.

Sellers are eager to raise prices, and not so eager to lower prices. And I know that's how a market works.

 

[Art]

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.

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?

 

[Blahness]

Besides, wasn't oil production only reduced on the likes of 5%? (expounding on Art's post) (Not sure about exact percent, but it wasn't too high)

 

[SOS2008]

It's always been that way, but I'm not sure what the cause is. For Katrina, specifically, however, the rate at which oil rigs and refineries came back online after the storm had a big impact on the rate at which prices declined.

I question limited refineries in the first place. Many believe it is on purpose to keep supplies precarious--though as Astronuc posted, this time there were no lines or gas stations closed due to lack of supply. Very mysterious, and when questioned by Congress, the oil company attitudes were very disturbing, no?

 

[russ_watters]

Asked:

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?

Answered:

Besides, wasn't oil production only reduced on the likes of 5%? (expounding on Art's post)

Thanks! I'm sure either of you can do the math if you want (assume that 5% is correct), and confirm my point numerically.

But descriptively, that's called demand inelasticity: since people need gas and their needs don't change easily, a small reduction in supply results in a larger increase in price and a net increase in profit, even at lower production.

 

[russ_watters]

I question limited refineries in the first place. Many believe it is on purpose to keep supplies precarious--

I think it is largely political - similar to why we are having an electricity supply crunch. That's mostly NIMBYism.

...though as Astronuc posted, this time there were no lines or gas stations closed due to lack of supply.

? There were lines and hoarding pretty much everywhere! The first example I found:

[from August 31]Chance Pitts, owner of a filling station in Peachtree City, one of Atlanta's southern suburbs, said he limited sales at his Shell station to 10 gallons per customer after lines began to form Tuesday.

http://www.cnn.com/2005/WEATHER/08/31/katrina.gas.prices/index.html

Very mysterious, and when questioned by Congress, the oil company attitudes were very disturbing, no?

What disturbs me is that this was only 3 months ago and already people are remaking the history the way they want to remember it.

 

[kat]

The C.N. Brown corp in Maine actually ran out of Gasoline the first night that gas increased so rapidly. Mainly because they gambled and took a chance that it would be more profitable keeping their gas relatively low, expecting others to at least remain competitive. Unfortunate for them..they gambled and lost as their competitors raised their prices considerably and as they stayed that way for some period of time they were then able to sell it at a much higher price.

 

[edward]

I can't think of any other industry where there can be production facilities damaged and closed for any period of time, and then end up making record high profits as a direct result of that period of production shut down.

 

[wasteofo2]

-though as Astronuc posted, this time there were no lines or gas stations closed due to lack of supply.

There's one particular Mobil station near me which kept its prices about 10 cents below everyone else after Katrina. It regularly ran out of regular during September. There weren't massive shortages, but supply wasn't unlimited, especially if you made sure to keep your price noticably low.

Of course, you can count on most any company or industry to do whatever they can to make the most money possible. If people buy it, then the price is justified. However, U.S. demand for gasoline dropped by about 500 million barrels a day from August to September, so the oil companies realized that the dramatic price spikes really weren't profitable to keep up, and prices went back down.

 

[SOS2008]

I think it is largely political - similar to why we are having an electricity supply crunch. That's mostly NIMBYism. ? There were lines and hoarding pretty much everywhere! The first example I found: http://www.cnn.com/2005/WEATHER/08/31/katrina.gas.prices/index.html What disturbs me is that this was only 3 months ago and already people are remaking the history the way they want to remember it.

Historically this was nothing compared to other times of shortages and lines (have people forgotten?), and from the posts in this thread it appears that shortages were associated with particular stations that kept prices lower (obviously), and the shortages were brief. As for oil company attitudes, here's a memory refresher:

On Profit and Pump Prices
Oil Executives Make Their Case Before Senators

By Justin Blum and Jeffrey H. Birnbaum
Washington Post Staff Writers
Thursday, November 10, 2005; Page D01

Five top oil company executives appeared at a Senate hearing yesterday to defend their high profits and spikes in gasoline prices and to beat back calls for punitive action.

...In addition to a profits tax, some lawmakers have called for rescinding tax breaks for oil companies and putting in place a federal law preventing gouging.

Under questioning from Sen. Ron Wyden (D-Ore.), the oil executives said their companies would be little affected if tax breaks for oil and natural gas in a recent energy bill were repealed. "When you add it all up, that energy legislation is zero in terms of how it affects Exxon Mobil," said Lee R. Raymond, the company's chief executive.

http://www.washingtonpost.com/wp-dyn/content/article/2005/11/09/AR2005110900754.html

The gratitude to the American people is overwhelming.

 

[TheStatutoryApe]

The gratitude to the American people is overwhelming.

Yeah they really ought to be grateful to us after we dragged them in front of a Senate commitee to try taking the money we gave them back. If you treat them like an enemy then they'll invariably act like one.

 

[wasteofo2]

Making a windfall tax just for the current situation would be rather ridiculous (and of course, won't happen), but what's so extreme about at least repealing their tax breaks? If anyone needs tax breaks in America, it's small business owners, not multi-billion dollar corporations. Lowering tax rates uniformly is one thing, but giving already powerful industries tax breaks does nothing but encourage an oligopoly in which new competition has next to no chance of arising.

 

[TheStatutoryApe]

Making a windfall tax just for the current situation would be rather ridiculous (and of course, won't happen), but what's so extreme about at least repealing their tax breaks? If anyone needs tax breaks in America, it's small business owners, not multi-billion dollar corporations. Lowering tax rates uniformly is one thing, but giving already powerful industries tax breaks does nothing but encourage an oligopoly in which new competition has next to no chance of arising.

I think that tax breaks should only be given as a reward for doing something that works towards the common good. Say if an oil company invests in alternative energy sources or makes their fuel burn cleaner or something like that. I don't think that they should necessarily get tax breaks just because they are the ones that control a vital resource. At the same time I don't think that they should be penalized for being the ones in control of that vital resource. When the executive quoted above by SOS said that repealing those tax breaks won't hurt the oil companies he was right. The taxs any business pays is simply a cost of business and when the cost of business increases the businesses cut other costs and increase prices. Ultimately the consumer and the worker are the ones that pay for the tax increases.

 

[SOS2008]

I think that tax breaks should only be given as a reward for doing something that works towards the common good. Say if an oil company invests in alternative energy sources or makes their fuel burn cleaner or something like that. I don't think that they should necessarily get tax breaks just because they are the ones that control a vital resource. At the same time I don't think that they should be penalized for being the ones in control of that vital resource. When the executive quoted above by SOS said that repealing those tax breaks won't hurt the oil companies he was right. The taxs any business pays is simply a cost of business and when the cost of business increases the businesses cut other costs and increase prices. Ultimately the consumer and the worker are the ones that pay for the tax increases.

I think energy should be nationalized and considered a matter of national security, as I believe all basic needs should be. Though these oil companies are private doesn't mean they aren't regulated, so Congress was completely in their right to investigate price gouging (or fixing, or as waste mentioned, anti-trust laws, etc.). True that companies pass costs on to the consumer, but in the Bush energy bill $16.2 billion in tax breaks go to oil, gas and coal companies, a generous amount to snub...unless your making record profits so don't give a ***t.

 

[TheStatutoryApe]

I think energy should be nationalized and considered a matter of national security, as I believe all basic needs should be. Though these oil companies are private doesn't mean they aren't regulated, so Congress was completely in their right to investigate price gouging (or fixing, or as waste mentioned, anti-trust laws, etc.). True that companies pass costs on to the consumer, but in the Bush energy bill $16.2 billion in tax breaks go to oil, gas and coal companies, a generous amount to snub...unless your making record profits so don't give a ***t.

I've definitely considered the idea that the role of oil companies should be taken over by the government. I'm quite wary though of what would happen to the industry if it were run by the government. I have the feeling we would just be trading one set of corrupt money grubbers for another who has even more liscence to screw with us.

 

[SOS2008]

I've definitely considered the idea that the role of oil companies should be taken over by the government. I'm quite wary though of what would happen to the industry if it were run by the government. I have the feeling we would just be trading one set of corrupt money grubbers for another who has even more liscence to screw with us.

With the current administration it is one and the same, and we are getting screwed.

I always think of the postal service here, or health service elsewhere, and the possible lack of quality service/product. But if energy had been nationalized, I suspect alternative energy would have been available long ago. The problem with the oil companies is there has been no incentive to innovate—incentive in capitalist systems being profit—because the profit has been in the status quo.

 

[loseyourname]

The gratitude to the American people is overwhelming.

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.

 

[russ_watters]

Historically this was nothing compared to other times of shortages and lines (have people forgotten?), and from the posts in this thread it appears that shortages were associated with particular stations that kept prices lower (obviously), and the shortages were brief. As for oil company attitudes, here's a memory refresher:

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.

 

[Art]

Asked: Answered: Thanks! I'm sure either of you can do the math if you want (assume that 5% is correct), and confirm my point numerically.
But descriptively, that's called demand inelasticity: since people need gas and their needs don't change easily, a small reduction in supply results in a larger increase in price and a net increase in profit, even at lower production.

Please elaborate. How does a small reduction in the supply of 'refined' oil in one market lead to a huge increase in the price of crude oil worldwide? The two have nothing to do with one another. In fact the initial increases at the pumps would mainly have been instigated by the petrol station owners as they would have been selling existing stock (bought at pre-hurricane prices) with a higher price tag. The refinaries then simply jumped on the bandwagon.

 

[Blahness]

I'm agreeing with Art here; how would small reductions in productivity yield huge profits without artificially inflating prices based on the "situation"?

 

[russ_watters]

Blahness, and Art, I'm not giving an economics lesson here: look up demand elasticity for yourself if you don't believe me. Better yet, calculate it from the numbers in this thread! If you aren't going to make even the slightest effort to understand the issue, I'm not going to bend over backwards trying to explain it to you.

 

[russ_watters]

Here's are a couple of googles for you two: http://www.google.com/search?source...005-44,GGLG:en&q=demand+elasticity+oil+prices

http://www.google.com/search?source...05-44,GGLG:en&q=opec+cartel+demand+elasticity

 

[russ_watters]

I'm agreeing with Art here...

Blahness, don't let Art trick you. His two posts there are not saying the same thing. He's changing his argument, I suspect, because he knows he was wrong.

 

[russ_watters]

In fact, I'll even help you, Blahness, since I want you to see that you are being duped. Art's original question was:

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?

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...]