Today's high gas prices have many roots

[highnote]

Very interesting and informative article on oil pricing.


http://news.yahoo.com/news?tmpl=story&u=/krwashbureau/20050407/ts_krwashbureau/_bc_gasprices_wa_1

[PaceAdvantage]

There you go....anyone who ever again questions why oil is so high, this is the perfect introduction article....thanks for posting it....

Funny, none of the anti-Bush folks on here ever mention environmentalists as a reason why prices are higher these days...always gots to blames the Bushman....

[highnote]

Thanks. I know there are a lot of things that determine oil prices, but I didn't know what they were. This article points to some of the more important ones.

As far as environmentalists, it's a double-edged sword. They are partly to blame for the higher prices, but at the same time they are to be "blamed" for more fuel-efficient cars. Greater fuel-efficiency lowers the cost per mile of driving a car -- which might actually lower the cost of oil because it decreases demand.

On the other hand, it could actually increase demand for oil since fuel-efficiency results in a cost savings. If a factory owner or a driver feels they've achieved a cost savings they might actually use more fuel since their actual cost is lower.

Hard to say. I'll leave it to the economists to decide.

[Secretariat]

PA, there is a significant difference between environmentalists adding costs for better fuel consumption thus saving energy for the future, while helping to clean the air we breathe with this part below from the article:

"Big oil companies posted record profits last year and should grow even flusher this year. Oil companies will occupy three of the top 10 spots when Fortune magazine releases its ranking of the top 500 publicly traded companies Monday.

Exxon Mobil Corp. ranks second, behind only Wal-Mart. Exxon posted sales nearing $221 billion in 2004, a figure roughly equivalent to the economy of Greece. Fortune ranked it the most profitable company on its list, with $21.5 billion in profits, a staggering figure larger than the economies of Madagascar and Iceland combined.

ChevronTexaco Corp. and ConocoPhillips ranked 7th and 8th, respectively. ChevronTexaco saw its net income - or profit - jump to $13.3 billion in 2004, almost twice its 2003 take."

[PaceAdvantage]

"Big oil companies posted record profits last year and should grow even flusher this year. Oil companies will occupy three of the top 10 spots when Fortune magazine releases its ranking of the top 500 publicly traded companies Monday.

What does record oil company profits have to do with ANYTHING? Seriously? Our economic system is BASED on companies MAKING AS MUCH PROFIT AS POSSIBLE.

Are you suggesting these oil companies somehow be penalized because they are making TOO MUCH money at the present time? Should we have subsidized them when oil was $12 a barrel?

Sometimes I wonder if folks realize we practice something called CAPITALISM in the United States.

[ljb]

What does record oil company profits have to do with ANYTHING? Seriously? Our economic system is BASED on companies MAKING AS MUCH PROFIT AS POSSIBLE.

Are you suggesting these oil companies somehow be penalized because they are making TOO MUCH money at the present time? Should we have subsidized them when oil was $12 a barrel?

Sometimes I wonder if folks realize we practice something called CAPITALISM in the United States.
It's really easy PA,
The oil companies are taking advantage of the situation by gouging the public. They are using the price of crude as a scapegoat.

[Secretariat]

What does record oil company profits have to do with ANYTHING? Seriously? Our economic system is BASED on companies MAKING AS MUCH PROFIT AS POSSIBLE.

Are you suggesting these oil companies somehow be penalized because they are making TOO MUCH money at the present time? Should we have subsidized them when oil was $12 a barrel?

Sometimes I wonder if folks realize we practice something called CAPITALISM in the United States.

PA,

A simple question. Why now when consumers are paying the highest prices ever, and Goldman Sachs is predicting a super spike down the road, why now? Why at this time would the EXXON Mobils be showing record profits now? After all, this is a commodity. Something that all working people "need" to get to work. I could see if their profits were in line with other years, but to make record profits at a time that consumers are suffering. To ask Joe Consumer to pay gouged prices so Exxon Mobil execs can eat well, is repugnant.

[Tom]

Sec never met a rich guy he didn't want to rape.:eek:

Success is so distasteful to libs because it only emphasizes thier failures.

[PaceAdvantage]

The oil companies are taking advantage of the situation by gouging the public. They are using the price of crude as a scapegoat.

The cost of crude oil is the biggest factor affecting gas prices at the pump. Last time I looked, traders at the NYMEX set the price of crude oil, not the big oil companies.

Big oil companies DO set the WHOLESALE price of gasoline, but supply and demand, along with the price of crude on the exchanges are the BIGGEST factors that affect price.

Thus, your "big oil in the crosshair" outlook is off target, in my opinion.

[PaceAdvantage]

A simple question. Why now when consumers are paying the highest prices ever, and Goldman Sachs is predicting a super spike down the road, why now? Why at this time would the EXXON Mobils be showing record profits now? After all, this is a commodity.

I don't understand you. Read my reply to LJB. What do you want the oil companies to do? Supply and demand, along with the price of a barrel of crude on NYMEX are the two major players on "price at the pump"

If the price "is what it is," what are the oil companies supposed to do? All of these big oil companies are publicly traded companies. Do you think the stockholders would be very happy if all of a sudden the oil companies started giving away their oil for free in order to make you happy?

What would you like them to do? They go out and drill this stuff out of the ground. They do all the hard work. The marketplace sees the supply, sees the demand, and SETS THE PRICE.

The oil companies then get to SELL their oil, that THEY HAVE INVESTED $$ TO GATHER, at the MARKET PRICE. Why shouldn't they and their shareholders enjoy the profits incurred by high market prices?

When market prices are LOW, do the oil companies come to Congress (like airlines do) and demand subsidization? I don't recall this ever happening.

Your post to me reads as if there is something publicly traded oil companies can do (that they are not now presently doing) to help Joe Public out at the pumps. They are a business, and like any other business, they look to maximize profits whenever they can.

In our economic system, Joe Public is free to find alternate means of transportation, or more fuel-efficient means of transportation. If enough of us did this, demand would decrease, supply would increase, and PRICES WOULD DROP. But, just take a look out your window, and see how many SUVs are out there right now. I guess Joe Public ain't hurting enough yet....

[ljb]

PA,
Just one question for you. Why did the oil refiners show a 30 to 40 percent increase in profits last year?

[lsbets]

Here is a serious question, lets see if anyone cares to post a serious answer. Most companies operate on a fixed percentage over cost for where they price their goods - ie, if an item costs a company $1.00 and they want to make a 10% profit, they charge $1.10. If the cost of the good to the company goes up to $2.00, they will then charge $2.20, and their profits will double, but in a competitive market place, they will be unable to maintain the $0.20 profit as the cost of the good decreases, so they will have to maintain the 10% margin and reduce their price to $1.10 as the cost to them goes down to $1.00. Very few companies operate on a fixed profit per item - i.e., if the good costs $1.00 and they want to make 10 cents, they sell it for $1.10 and as the cost goes up they maintain the 10 cent margin and sell it for $2.10 instead of $2.20 with a 10% margin. How do the oil companies operate? I would guess it is closer to the percentage model than the fixed profit model. In the simplified example, profits doubled as the cost of the good doubled because the company operates on a fixed percentage. If they reduce the percentage from 10 to 7, they will sell the good for $2.14, and still show a 40% increase in profit. Does anyone know the business model that the oil guys follow? My bet is they are not nearly as nefarious as some would like us to believe.

[ljb]

Here is a serious question, lets see if anyone cares to post a serious answer. Most companies operate on a fixed percentage over cost for where they price their goods - ie, if an item costs a company $1.00 and they want to make a 10% profit, they charge $1.10. If the cost of the good to the company goes up to $2.00, they will then charge $2.20, and their profits will double, but in a competitive market place, they will be unable to maintain the $0.20 profit as the cost of the good decreases, so they will have to maintain the 10% margin and reduce their price to $1.10 as the cost to them goes down to $1.00. Very few companies operate on a fixed profit per item - i.e., if the good costs $1.00 and they want to make 10 cents, they sell it for $1.10 and as the cost goes up they maintain the 10 cent margin and sell it for $2.10 instead of $2.20 with a 10% margin. How do the oil companies operate? I would guess it is closer to the percentage model than the fixed profit model. In the simplified example, profits doubled as the cost of the good doubled because the company operates on a fixed percentage. If they reduce the percentage from 10 to 7, they will sell the good for $2.14, and still show a 40% increase in profit. Does anyone know the business model that the oil guys follow? My bet is they are not nearly as nefarious as some would like us to believe.

ls,
Making 14 cents on $2.00 is not a 40 percent increase in profit versus making 10 cents on $1.00. Actually it is a 30 percent decrease. The lady on C-span said. "Usually we make 5 to 5 1/2 cents per 1 dollar's volume in sales. Last year was a good year and we made 7 cents per 1 dollars volume." This equates to an increase of 30 to 40 percent in profit. I ask anyone to tell me what efficiencies the oil industry implemented to increase their profits so much?

[Bobby]

Any businesses motive is profit maximazation.

However, when gas prices are increasing at such a fast rate and oil companies profits are at historic levels, it's called gouging the AMERICAN PUBLIC.

[highnote]

Don't forget to factor in the weak dollar. The American Oil companies are international companies, so with a weak dollar, their profits might need to be discounted a little bit.

[lsbets]

ljb - you are confusing profits with margins. If you make 14 cents profit where a year ago you made a 10 cent profit, that is a 40% increase in profit, even though it might be a 30 decrease in margins. If profits were $100,000 a year ago with a 10% margin, but are now $140,000 with a 7 percent margin, that is an increase in profit of 40% whie the margins decreased. There is a difference from a business persapective, and that is why looking at profit margins is often a much better indicator of a business health and pricing power than just looking at bottom line profit. I'd still like to see on what model the oil companies operate.

[ljb]

ls,
Ok I see where you are coming from. If I go to the track with 100 dollars are come home with 110 dollars I have made a 10 dollar profit. If I had gone with 200 dollars and went home with 220 I had made a 20 dollar profit which would be a 100 percent increase in profit. This increase can be attributed to an increase in investment. However in both cases I made a 10 percent profit.

But, The lady said; "Usually we make 5 to 5 1/2 cents per dollar volume, last year was a good year, we made 7 cents per dollar volume." Now you can call this margin or profit whatever but it boils down to big oil made about 30 to 40 percent more profit per dollar last year. There is no indication of an increase in investment as the figures are based on a per dollar return.

[lsbets]

Thats the question I would like to see answered - where have the increased profits come from? Just as you would not accept someone saying "Some guy on TV says the oil companies have trimmed costs", it is hard to take "Some lady on CSpan said ......." Has anybody looked at the financials to see where the increase in profits has come from? That is what I would like to know.

[chickenhead]

just looking at the basics:

CVX
Revenue +23%
Net Income +73%

XOM
Revenue +21%
Net Income +21%

BP
Revenue +23%
Net Income +43%

Revenue up just about the same amount for all, which would go up with price of crude and increased sales...Net income up more, which would indicate efficiency gains somewhere, an increase in margins.

[Bobby]

Wonder how much was spent on research and development (e.g., exploration and drilling)? 0

[Kreed]

Careful. NET INCOME can be real false. A better measure is NOI --- NET OPERATING INCOME AFTER TAXES. Now that figure is much harder to fake.

[Secretariat]

What does record oil company profits have to do with ANYTHING? Seriously? Our economic system is BASED on companies MAKING AS MUCH PROFIT AS POSSIBLE.

Are you suggesting these oil companies somehow be penalized because they are making TOO MUCH money at the present time? Should we have subsidized them when oil was $12 a barrel?

Sometimes I wonder if folks realize we practice something called CAPITALISM in the United States.

"Our economic system is based on companies making as much profit as possible." Enron comes to mind. The Great Depression comes to mind.

PA, I have no problem with Exxon making a profit. I do have a problem with them gouging customers in excess. Imagine after Hurricane Andrew a guy going down to Miami and selling bottled water for 10.00 a bottle. He is after all selling a commodity that consumers need and he has control of the supply. Now this guy will be thrown in jail, and rightfully so because "making profits" has its limits in a civilized society.

Exxon Mobil and the Enrons of the world exceed the public trust and make/made obscene profits in the midst of an energy price explosion.

I know Repubs have bought into the myth that the marketplace takes care of itself and does so more efficiently than government. I suppose this is why we have the largest trade deficit in history, jobs being outsourced in droves. Business had its chance with workers during the Industrial Revolution and gave us the Great Depression. It took government to give us Child Labor Laws, a 40 hour work week, minimum wage, and better safety conditions. If it was up to business we'd be back in 19th century shop practices because truthfully sweat shops make more money for the company. That isn't however in the best interests of the workers of a nation.

[Tom]

Let's not forget the liberal enviromentalist wackos driving the cost up in Califonia with all thier inane regulations on types of gasoline allowed to be sold. Factor in the huge demand from China, the price of crude that the oil companies have to pay, not set, and then add in the taxes on each gallon.

As PA said, count the SUVs on the road - hey, anyone remember 1973?

Bobby wants to know how much was spent on R&D.....but then look at the uproar when we try to drill in Alaska.

[Tom]

Look up the EBITDA...it is the driving factor in all comversations we have about the state of our business.

Earnings before interest, taxes, depreciation, and something else - I forget.

[lsbets]

Sec, stating that the oil companies are gouging the consumer is great populist rhetoric, but I posed a serious question before. To paraphrase it, are they gouging the consumer? What are their profit margins with the higher oil prices? If their margins have improved, why have they? It is easy to say they are gouging the consumer to make them look bad, but do we indeed know that they are? Is the proof on their balance sheets? If you are so intent on saying they are gouging the consumer, please provide the proof, and proof is more than just their profits are up.

[Secretariat]

Sec, stating that the oil companies are gouging the consumer is great populist rhetoric, but I posed a serious question before. To paraphrase it, are they gouging the consumer? What are their profit margins with the higher oil prices? If their margins have improved, why have they? It is easy to say they are gouging the consumer to make them look bad, but do we indeed know that they are? Is the proof on their balance sheets? If you are so intent on saying they are gouging the consumer, please provide the proof, and proof is more than just their profits are up.

Well, it is difficult to gain access to the energy meetings at the White House much less the energy meetings at Exxon Mobil.

However, a couple of interesting links in relation to your gouging question. One from a Portland publication which I think accurately addresses some of the issues, and one from Public Citizen. The Portland link addresses the gouging issue.

Here’s an excerpt from the Portland one below:

“I'm confused. Gasoline is made from crude oil. In recent weeks, crude prices hit record highs while prices at the pump kept dropping.
The explanation is simple: The $2.30 gallons we saw in June reflected pure profiteering by Big Oil.
How can we tell? The California Energy Commission takes snapshots showing the breakdown of a gallon of gas. They show that starting in January, major oil companies nearly QUADRUPLED their profits at refineries, which is where they make their money (see chart, this page). Gas prices peaked in June and have since dropped as crude oil prices went up. That's because Big Oil reined in its profit margins, the California numbers show.”

So apparently, the California Energy Commission has noticed the quadrupling of profits in January during the recent explosion in crude. Notice it said "profits" quadrupled, not price.


http://www.wweek.com/story.php?story=5440&page=1

On the very last page of the Portland article one interesting piece in a timeline:

“2001 The White House commissions an energy study that calls for removing Saddam Hussein, saying he is destabilizing the "flow of oil to international markets."”

Saddam has been captured and the price keeps going up.

As to the second article and perhaps a more revealing article, it addresses how this mess occurred.

http://www.citizen.org/documents/oilmergers.pdf#search='gas%20gouging%20oil%20compa nies'

eom

[PaceAdvantage]

PA, I have no problem with Exxon making a profit. I do have a problem with them gouging customers in excess. Imagine after Hurricane Andrew a guy going down to Miami and selling bottled water for 10.00 a bottle. He is after all selling a commodity that consumers need and he has control of the supply. Now this guy will be thrown in jail, and rightfully so because "making profits" has its limits in a civilized society.

Exxon Mobil and the Enrons of the world exceed the public trust and make/made obscene profits in the midst of an energy price explosion.

You're not making any sense. You are comparing a price increase at the pump, to a natural disaster on the order of Hurricane Andrew.

If there were 1-2 hour waits at the pumps, and gas was selling at $4/gallon+, then I could see your point. But right now, you have no point.

[ljb]

PA,
Sec is saying the oil companies are taking advantage of the current condition in crude oil supplies by gouging the gas buying public. This is just as bad as a vendor taking advantage of conditions after a hurricane by gouging the water seeking victims. I find it hard to believe that someone of your intellect cannot see this.

[linrom1]

History Lesson #1: The rise of price of oil correlates with the Bush and Co coup in 2000 and the Republican Congress' booty raid in 2002. Speculators have anticipated Bush's victory and were bidding up the price of oil in 1999 that was trading then at less than $15. Of course, after liberating Iraq, it is now trading in excess of $50.

[PaceAdvantage]

PA,
Sec is saying the oil companies are taking advantage of the current condition in crude oil supplies by gouging the gas buying public.

I don't understand how they are gouging if they are basing their pricing model on the current MARKET VALUE as determined by people all over the WORLD trading futures contracts. Tell me how they are gouging....

[ljb]

I don't understand how they are gouging if they are basing their pricing model on the current MARKET VALUE as determined by people all over the WORLD trading futures contracts. Tell me how they are gouging....
I don't know what they are basing their pricing model on. Tell me how they made an additonal 30 to 40 percent profit last year without any inovative new process's or some breakthrough in technology?
The lady who was on CSpan was a spokesperson for the American oil industry. She just said "We had a good year."

[ljb]

I have found the link to the cspan segment. The video can be purchased at this link.
Rayola Dougher, Energy Market Issues Manager, American Petroleum Instit.
Rayola Dougher, Energy Market Issues Manager for the American Petroleum Institute, discusses oil prices.
4/8/2005: WASHINGTON, DC: 30 min.
Well the link does not work but, anyone wishing to view can go to cspan and search for this name.


This is just to point out that this was not just "some lady".

[lsbets]

ljb, trust me when I say I hate the high gas prices as much as anyone. I have a Suburban and a Silverado. $60 each to fill them up now. It sucks. But, before I will say anyone is gouging (which I would consider to be at the very least immoral), I would like to see some proof that is actually happenning.

As we talked about before, it is possible for profits to go up 30-40% while margins go down simply because of the increased cost associated with the commodity being processed. I do not know if that is the case or not. For a little while it seamed like we actually had a thread in Off Topic where we attempted to discuss something and figure it out. Then it seemed to deviate back to one group lining up on one side and the other group instictivly lining up on the other side. Is it possible for there to be a real discussion in here (I'm afraid I know the answer, and I am not pointing my finger at you, I am pointing it at everyone). You, chickenhead, Kreed, and Tom all seemed to be interested in finding out what is happenning rather than lining up the firing squad. I thought it was a pleasant change from what we usually see here.

[ceejay]

I wonder, are any posters (except me) on this thread in the energy business?

There are some entities that the Yahoo! article missed in the who's getting rich section. These include those who work in the business and other, small exploration companies.

I have seen my consulting rates almost double in the last two years. Why? Because I'm greedy? Because I'm gouging the exploration company clients? The reason that I can raise rates is a shortage of people in my subspecialty. That shortage is a direct result of previous low oil prices when companies were laying off people by the tens of thousands: Many left the business for good.

It's a little paradoxical but low oil prices ensure future high prices, by causing less supply by causing less exploration drilling and less field development! A few examples:
Exploration budgets are higher because exploration is risky! To say that CVX, XOM, BP spent zero on "exploration and drilling" is absurd. Everyone on this board likely understands risk is a factor in investment decisions. Bellamy Road might not make sense in the Derby @ 7/5, but at 20-1 it would be a different story.

An offshore field that is not commercial for development at $15/bbl may be commercial at $40/bbl. Off shore develpoment projects are expensive (often half a billion dollars or more).

These high prices allow even small, one- or two-well onshore US prospects to be drilled (that don't make risk-weighted ecomonic reward sense at low prices) by small independents.

Wells that would be plugged because they do not make enough $ to pay expenses stay on-line.

http://www.petrophysics.biz

[chickenhead]

that something I've always wondered about, are CVX BP etc directly involved with exploration and development?

I know from investing in gold how the price of the commodity effects production, same deal here, which can cause obscene profits for those in control of the commodity as they have more or less fixed cost per unit, so as the price rises it all goes to profit...but I'm not clear on how these big oil companies are structured.

Isn't aramco a partnership that one of the big companies is involved in? Is that reported on the same books?

[ceejay]

that something I've always wondered about, are CVX BP etc directly involved with exploration and development?
Yes.

I don't know the structure of Aramco....

[Secretariat]

ljb, trust me when I say I hate the high gas prices as much as anyone. I have a Suburban and a Silverado. $60 each to fill them up now. It sucks. But, before I will say anyone is gouging (which I would consider to be at the very least immoral), I would like to see some proof that is actually happenning.




Is,

I am curious. What is the current price for gas in Iraq?

[chickenhead]

Yes.

so they do own shares at least of fields....that certainly would explain why their profits are up more than revenues...if they own it out of the ground.

do you mind if I ask what you do?

[ceejay]

I am a petrophysicist. I was trained in geology, and petrophysics is a sub-specialty. Petrophysics is the description of the oil and/or gas distributions and production flow capacity of reservoirs, from interpretations of pore system and fluid interactions using all available data.

[chickenhead]

There is a programmer I work with that is a trained geologist...I'll probably phrase this all wrong, but he used to work in the fields monitoring when they'd pump gravel down to hold the fissures or resevoirs open? He told me about it some years ago, but if I remember the volumes of the pumps were pretty incredible, neat stuff.

[betchatoo]

THE OIL SHORTAGE

A lot of folks can't understand
how we came to have
an oil shortage here in America.
~~~
Well, there's a very simple answer.
~~~!
Nobody bothered to check the oil.
~~~
We just didn't know we were getting low.
~~~
The reason for that is purely geographical.
~~~
Our OIL is located in
~~~
Alaska
~~~
California
~~~
Oklahoma
and
TEXAS
~~~
~~~
Our
DIPSTICKS
are located in
Washington DC

[ljb]

LOL