mkl654321
mkl654321
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March 28th, 2011 at 11:28:57 AM permalink
Like every American who drives a car, I've been outraged by the latest pretext used by the oil companies to jack up prices and rape all of us YET AGAIN. Of COURSE the disruption of Libyan oil supplies is but a tiny hiccup on the market; Libya provides roughly 1% of the world's oil, and virtually none of it winds up here. A temporary reduction in supply of 1% has resulted in a 40% price increase. This actually might have had some basis in reality if existing worldwide production was at full capacity, but it's not--not even close. If this were a simple supply-demand problem, some sheik would simply twist a dial a little bit to the right and the world supply would be the same as it was before. So this is simple non-free-market manipulation, and just like a couple of years ago, the oil companies are testing the waters to see just how much they can twist our arms before we stop buying their products.

The question I've had is, just what is the COST of gasoline? From the purchase of crude, to shipment costs, to refining and distribution costs, to the retailer's markup, what does a gallon of gas cost Arco, Shell, Chevron, etc. to produce and sell? There seems to be no way to untangle the labyrinthine accounting in the companies' annual reports, and the only readily obtainable figure is the wholesale cost of the product, which of course means nothing: they could be making two cents, twenty cents, or two dollars/gallon. I would imagine that when the price of a gallon of gas skyrockets from $2.69 to $3.78 in two weeks (as it has here), somebody is making out like a bandit. The oil companies blame the increases on the volatility of crude oil prices, but that dog don't hunt. The price of crude is only about 25% of the cost of producing a gallon of gasoline. So we are being asked to believe that a 1% reduction in the supply of a material that factors into 25% of the cost of production results in a 40% increase in the cost of the end product. Horseshit.

Does anyone know of any source that would give a strict and accurate accounting of just how much profit margin the oil companies are making on the sale of gasoline since their latest price gouge move? And what about that information in general--aren't they, as publicly traded companies, obligated to provide detailed and accurate accounting information? But all I've seen in their annual reports is impenetrable muck.
The fact that a believer is happier than a skeptic is no more to the point than the fact that a drunken man is happier than a sober one. The happiness of credulity is a cheap and dangerous quality.---George Bernard Shaw
crazyiam
crazyiam
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March 28th, 2011 at 11:47:12 AM permalink
The cost of a given gallon doesn't matter. What usually matters is the marginal cost of producing the last barrel being consumed. So low cost producers make more as prices rise and marginal producers add production as it becomes profitable. Also, of note is the oil is a globally traded commodity so it doesn't matter where our oil comes from any supply change will impact our prices.

Right now there is something else at play. Namely demand for oil isn't very elastic. Most people need a certain amount to run their car, heat homes or whatever they do with it. So it takes large price swings to impact short term demand. There is more if you're interested.
AZDuffman
AZDuffman
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March 28th, 2011 at 12:00:16 PM permalink
Quote: crazyiam

The cost of a given gallon doesn't matter. What usually matters is the marginal cost of producing the last barrel being consumed. So low cost producers make more as prices rise and marginal producers add production as it becomes profitable. Also, of note is the oil is a globally traded commodity so it doesn't matter where our oil comes from any supply change will impact our prices.

Right now there is something else at play. Namely demand for oil isn't very elastic. Most people need a certain amount to run their car, heat homes or whatever they do with it. So it takes large price swings to impact short term demand. There is more if you're interested.



What matters most is demand, same as any product. In the 1970s the price of gasoline was set by the governmnet and was based on cost. Guess whsat happened---long gas lines as consumers snapped up artificially low priced gasoline and at the same time producers refused to produce since there was not enough profit to be made. On day 1 of his administration Reagan removed controls on the price of oil. That was in 1981. By 1982 there was an oil glut. By 1986 the nominal price fell to the same level as 1978.

To see how it works, watch "Pawn Stars":

Rick: What do you want for it?
Customer: I paid $1,000 so say $1,100
Rick: What you paid doesn't matter to me, what matters is what I can sell it for. I'll give you $75.
All animals are equal, but some are more equal than others
crazyiam
crazyiam
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March 28th, 2011 at 12:06:42 PM permalink
Quote: AZDuffman

What matters most is demand, same as any product. In the 1970s the price of gasoline was set by the governmnet and was based on cost. Guess whsat happened---long gas lines as consumers snapped up artificially low priced gasoline and at the same time producers refused to produce since there was not enough profit to be made. On day 1 of his administration Reagan removed controls on the price of oil. That was in 1981. By 1982 there was an oil glut. By 1986 the nominal price fell to the same level as 1978.

To see how it works, watch "Pawn Stars":

Rick: What do you want for it?
Customer: I paid $1,000 so say $1,100
Rick: What you paid doesn't matter to me, what matters is what I can sell it for. I'll give you $75.



What matters is a balance of supply and demand. If there is more demand than supply at a given price the price moves up. If there is less demand than supply it moves down.

The rest of what you said is irrelevant since it only applies to a market that's artificially constrained. That's not the case for oil in the US.
AZDuffman
AZDuffman
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March 28th, 2011 at 12:11:54 PM permalink
Quote: crazyiam

What matters is a balance of supply and demand. If there is more demand than supply at a given price the price moves up. If there is less demand than supply it moves down.

The rest of what you said is irrelevant since it only applies to a market that's artificially constrained. That's not the case for oil in the US.



It is relevant in showing how demand, not cost, is all that matters in the price of gasoline. There is a large portion of the USA who is ignorant of this and wants some kind of price control because they feel they are being "gouged."
All animals are equal, but some are more equal than others
mkl654321
mkl654321
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March 28th, 2011 at 5:20:27 PM permalink
Quote: AZDuffman

It is relevant in showing how demand, not cost, is all that matters in the price of gasoline. There is a large portion of the USA who is ignorant of this and wants some kind of price control because they feel they are being "gouged."



If it were true that demand is what drives the price of gasoline, then there must have been a huge increase in demand during the last three weeks when the price of gasoline increased by 40%. I guess everyone started driving around in circles or something. In any case, demand never exists in a vacuum, unless supply is unlimited.

It's a fiction that the market for petroleum products operates according the the rules of the free market. It's a tightly controlled UNfree market, where neither demand NOR supply have much influence on the price.

And cost does, and should, matter in the price of gasoline. It's silly to say otherwise.
The fact that a believer is happier than a skeptic is no more to the point than the fact that a drunken man is happier than a sober one. The happiness of credulity is a cheap and dangerous quality.---George Bernard Shaw
crazyiam
crazyiam
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March 28th, 2011 at 6:03:43 PM permalink
Quote: mkl654321

If it were true that demand is what drives the price of gasoline, then there must have been a huge increase in demand during the last three weeks when the price of gasoline increased by 40%. I guess everyone started driving around in circles or something. In any case, demand never exists in a vacuum, unless supply is unlimited.

It's a fiction that the market for petroleum products operates according the the rules of the free market. It's a tightly controlled UNfree market, where neither demand NOR supply have much influence on the price.

And cost does, and should, matter in the price of gasoline. It's silly to say otherwise.



There is a slow increase in demand, but most of the price rise is supply decrease and maybe a fear premium. Its hard to add supply to the oil market and takes a long time. The only producer with spare capacity is Saudi Arabia and they don't play by the market. So if we reduce supply by 1% prices have to rise to reduce demand by 1% or enough that it makes sense for someone else to replace the oil with new supplies.

Oil demand is not very elastic short term. People still need to get to work, farm ect. Also in rich countries its a small share of our incomes that we spend on it and replacing our cars takes a long time. In many poor countries oil is subsidized and its even hard to impact demand. So prices rise alot to account for a small drop in supply.

Another factor is the oil from Libya is among the highest quality. So even if replacement oil is found not all refineries can use the replacement.
AZDuffman
AZDuffman
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March 28th, 2011 at 7:42:58 PM permalink
Quote: crazyiam

There is a slow increase in demand, but most of the price rise is supply decrease and maybe a fear premium. Its hard to add supply to the oil market and takes a long time. The only producer with spare capacity is Saudi Arabia and they don't play by the market. So if we reduce supply by 1% prices have to rise to reduce demand by 1% or enough that it makes sense for someone else to replace the oil with new supplies.

Oil demand is not very elastic short term. People still need to get to work, farm ect. Also in rich countries its a small share of our incomes that we spend on it and replacing our cars takes a long time. In many poor countries oil is subsidized and its even hard to impact demand. So prices rise alot to account for a small drop in supply.

Another factor is the oil from Libya is among the highest quality. So even if replacement oil is found not all refineries can use the replacement.



A 1% loss of supply can and does totally muck up the markets. Quality of oil is a biggie as you said, changing the refinery is not easy. Nor is shutting one for a few days. Paying several $ more per bbl can be cheaper than a shutdown. A small change in retail demand also does big things. Imagine gasoline goes to $4 again and every car uses 1 gallon less per week as people change habbits. Not hard to imagine. There are about 240 million cars in the USA. Some quick research shows we get just under 50% yeild on a 42 gallon barrel of oil, call it 21 gallons. 240/21 = 11.4 million less barrels of oil needed if this happened.

The USA is using about 19.5 bbl of oil a day. With a little rounding in simple terms a gallon saved per car drops demand by a half a day's oil per week.

The price won't drop right away, but after a few weeks at the refinery someone says, "Hey, boss, we need to slow production, nowhere to put the gasoline!"
All animals are equal, but some are more equal than others
nullzero00
nullzero00
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March 28th, 2011 at 8:10:24 PM permalink
we are also entering into the summer gas season, whenre they change the blend and increase the price a certain percentage.

it's not just libya. there are several countries in the middle east that are in conflict right now, and several more that could end up in civil war/revolts/etc. that could push other countries in the neighborhood to start taking action, from influencing revolts to funding/providing arms, to just invading. let's face it, the whole region is like the houses in a game of Angry Birds - one well-timed shot blows up the whole thing. THAT is what causes the price runups - the "in case shit happens" mentality of commodities traders who push around millions, if not billions, of dollars worth of contracts based on what-if scenarios and fear of the "oh shit".
mkl654321
mkl654321
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March 28th, 2011 at 8:22:33 PM permalink
Quote: nullzero00

we are also entering into the summer gas season, whenre they change the blend and increase the price a certain percentage.

it's not just libya. there are several countries in the middle east that are in conflict right now, and several more that could end up in civil war/revolts/etc. that could push other countries in the neighborhood to start taking action, from influencing revolts to funding/providing arms, to just invading. let's face it, the whole region is like the houses in a game of Angry Birds - one well-timed shot blows up the whole thing. THAT is what causes the price runups - the "in case shit happens" mentality of commodities traders who push around millions, if not billions, of dollars worth of contracts based on what-if scenarios and fear of the "oh shit".



I realize that's the pretext, but raising prices based on something that COULD happen is ridiculous, and irrational. Suppose the supply is not, as it turns out, disrupted in any major way over the coming months? Will the oil companies give their windfall profits back to the consumer? For don't forget, even though they've jacked up the price of gasoline by 40%, their costs haven't changed one iota--if anything, those costs have gone down--so the extra markup is pure, pure profit.

And that "blend" nonsense is just another pretext. They also jack up the price when they change to the "winter blend". There is no intrinsic reason (i.e., no additional cost component) why one seasonal blend of gasoline should cost more than another. The stuff may be DIFFERENT in the summer, but it's not any more expensive to make, not meaningfully so, anyway. It's just an excuse to screw over consumers who will naturally be driving more in the summer. One thing that they haven't yet thought of is jacking up the price by twenty cents or so on Friday afternoon because they're now selling "weekend blend", and I'll probably be kicking myself for mentioning that.
The fact that a believer is happier than a skeptic is no more to the point than the fact that a drunken man is happier than a sober one. The happiness of credulity is a cheap and dangerous quality.---George Bernard Shaw

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