Oil's Well that Ends Well

[OldGreyEagle]

Ok, I know this is not scouting related, well, maybe it is if you factor in fuel costs of trips, but I digress. I have an politco-economics question and since I know of no other erudite group as august as this, I have a question.

 

I understand gas prices are going up due to increased acquisition and refining costs. But then oil companies are also reporting increased profits, how does that happen?

 

I understand that oil company revenues would be up, but if costs are up as well, how can profits be up as well? Just as an example, if it costs one dollar to acquire and refine and deliver a gallon of gas, I can see the oil companies charging $1.15, effectively making 15 percent on their investment. So if factors change and it now takes two dollars to refine and acquire and deliver gas, is it practical to charge $2.30 a gallon to keep the same 15 percent return on investment? Could the oil companies be charged as price gouging? why not charge $2.15, they are making the same amount per gallon. If the argument is with higher prices gas purchases go down so the price needs to be higher to maintain the same profits, I can see that, but at the same time, oil companies profits are up, why isn't this a bigger issue in the public? Am I missing something?

[buffalo2]

I think the concept that you're dancing around in the most delicate of manners is MONOPOLY... You'll note that these pricing fluctuations happen more and more quickly (technology in action!) and with even more flimsy reasons.

Make sure there's some petroleum stock in your 401k and just clench your teeth - be glad we don't live in California

[scoutingagain]

Well I'm no more qualified to respond to this inquiry as any other that I respond to so here goes...

 

My perception, and that's all it is, is that not only are costs up, but consumption is up as well. So if oil companies were selling say 1 million gallons of gas a year ago and making a profit of $1 per gallon they make $1 million. Now, even with higher prices, they are selling say 1.2 million gallons so they make $1.2 million. A very simplified response, and I'm sure they're are other factors.

 

But over the last 5 years or so we have totally forgotten energy conservation. When I got out of school, in the late 70's the first car I owned had a 2.2 liter engine and got 30 mpg. When I got married I bought a minivan with a 2.4 liter engine that got 25 mpg.

The next car I got, had a 3.0 liter engine and got 22 mpg. The last vehicle I purchased has a 5.2 liter engine and gets 16 mpg at best. I suspect I'm not alone based on the number of larger SUVs, pickups and other vehicles on the road.

 

In general it seems that when the Texas economy is doing well, the rest of us seem to struggle. When energy is cheap, and oil profits are down, Texas sort of bumps along and the rest of us do better. Remember $0.99/gallon gas and Houstonians were complaining about the economy? The rest of us were in the middle of the dot.com economic orgy.

 

I'm sure once a puppet ..er I mean democratic government is established in Iraq and Iraqi oil is back on the market in significant quantities prices will stablize. The good news here is that with a puppet...pardon me, friendly democratic government in Iraq, there should be less of a reason to be looking for oil in domestic wilderness areas. How's that for a domestic environmental policy. It also wouldn't hurt to build a new refinery or two. There has not been a major refinery built or expansion in this country in quite a while.

 

Sorry, I've become politically pretty cynical lately.

 

The democrats are solving this problem by coming to my town in July and shutting the city down for a week. Since the major expressway going through town will be closed and the largest commuter rail center will be closed for the week of the DNC, no one in Boston will be going anywhere. That should free up enough gas so we can take a summer road trip.

 

OGE you asked and got just some of my ramblings on gas prices etc. Can't wait to see other ideas.

 

 

SA

[packsaddle]

Personally, I think the price is low considering what we get for it. And yes, I also own a guzzler...I just drive it a lot less. The irony I see is that if any elected official proposed, say, a 5-cent increase in gasoline tax, they would be working another job after election time. But we hand over 30- to 50-cent increases to corporations almost without comment. Interesting.

[fboisseau]

Working for a company that provides software to fuel order retailers/wholesalers, I find the amount of profit you are associating to the fuel oil companies interesting. Lets look at some real numbers. In the pass few days I purchased gas from the local Wawa(a discount gas station) @ 1.55 a gallon. From what I have found on the web the current cost for a barrel of crude oil is 35.76. There is 42 gallons in a barrel, but the refineries get out about 44.2 gallons of final product (I do not understand how this is). Now if we assume that all of the final product is gasoline (actuall only about 20 gallons is) we get a base cost of .8090 cents per a gallon. Add to that the Federal taxes of .184 cents per a gallon and the State of VA taxes of .175 per a gallon you get a cost of 1.168 a gallon. That substracted from the 1.55 a gallon leaves you with .382 cents of potential profit. From that you have to substract the cost of any additives that the Government requires to be added, the cost of running the refineraries(which include OSHA and EPA guidelines)and any transportation and storage fees. The only people who get rich off you buying fuel is the Government.

[le Voyageur]

In a nutshell, what is happening is called Peak Oil. In any closed system (our planet), all systems (resources) are finite.

 

It seems that we have either reached the top of the bell curve for available oil (the current levels held by OPEC are highly inflated), or now pass it. What this means is that the days of low prices are forever over. As oil resources slide down the right side of the bell curve, oil becomes more and more expensive to extract with the cost being passed on to the consumer...as it stands, there is really nothing no politician can do, or promise to reverse the trend, the age of oil will eventually come to end....

[Bob White]

There is 42 gallons in a barrel, but the refineries get out about 44.2 gallons of final product (I do not understand how this is).

 

Enter Bob (Cliff Clavin) White. As I recall from my chemistry days in school, not every barrel of crude oil is alike, not every gallon of crude can be made into gasoline. Different wells yield different types of crude, depending on that barrels chemical components differ amounts of various petroleum products can be refined or produced from it. So out of a single barrel some might become gasoline, some kerosene, some portion yields by products that are used for motor oil, cosmetics, rubber, etc.

 

The gasoline itself is not as dense as the crude it is extracted from, allowing it to actual have greater volume than its host material.

 

 

[Proud Eagle]

OK, let me see if I can shed some light on this.

 

OIL CO pays a combined $1.25 to purchase and refine oil to produce unleaded gasoline.

 

The company decides it wants to add a 10% mark-up to the cost. So the company adds .125 to the cost, producing a total of $1.375 to the next entity down the line.

 

Now lets say the cost to OIL CO increases to $1.35 per gallon. OIL CO still wants to keep its 10% mark-up. However, they realize if they pass on the full increase in costs and the increased mark-up to the consumer, they will lose enough sales to impact profits. (There is usually some point at which the consumer decides enough is enough and start to cut back consumption. Gas prices are relatively immune to this, but even then there is a point at which increased price decreases total volume sold.) Therefore, OIL CO decides to reduce its mark-up to 9.5%. This produces a price of $1.47825, of which 0.12825 is profit. Gasoline is usually more or less a fixed demand commodity (there are seasonal fluctuations, and external factors such as overall economic health, but all other variables being equal changes in gas prices only have a minimal affect on the volume of gas sold, since there are no readily available alternatives to gas in most applications), so we can assume the OIL CO is now making more money in total. Even if there is a small drop off in volume sold, the company can still make more money. The problem is the companies can't be 100% certain at what point sales volume will begin to decline in response to price increases.

 

So, as you can see, the oil company can easily make more money in total while decreasing the profit margin.

 

Also, the oil company can claim it did something to help the consumers (by decreasing its percentage of profit), while others can claim increases in both sales and profits in a total dollar form.

 

I should also note that decreasing the profit margin decreases a company's ability to adapt to market shifts, and it decreases its willingness to make capital investments such as extra production capacity or new technologies. That unwillingness to make capital investments later causes further cost increases to the consumers when demand exceeds new supply or when there is a loss of efficiency due to use of outdated technology.

[scoutldr]

There is also the law of supply and demand. As has been mentioned above, we are getting away from our ecology-minded conservation ways of the early 70's. The generation X and Y don't remember sitting in a line 3 blocks long to buy a 10 gallon limit of gas at 58.9 cents a gallon. And that's only if your license plate matched the odd or even day of the week. The answer is to put our high-tech intellects to work to develop alternate energy supplies so we can tell OPEC to stuff it. In the meantime, let gas go to 5 bucks a gallon. If the soccer mom next door can afford a Ford Excursion 4x4 to go grocery shopping in, so be it. Personally, I would like to see the driving age raised to 18 nationwide and the speed limits back to 55. A 33 passenger diesel school bus is more efficient than 25 souped up Honda Civics clogging the roads and school parking lots. Only then will I feel guilty about my 6 cyl Jeep Grand Cherokee that I use for scouting.

[KoreaScouter]

Here's a couple other wrinkles, one in general, and one close to home.

 

General: There's a lot of oil out there that we haven't tapped yet. We know where it is and how to get it. But, its extraction and transport is only economically feasible at progressively higher (and consistently higher) barrel prices. Ditto for alternative methods/sources, such as fuel cells, hybrids, and so on. So, the argument that decreasing supply will drive up prices, and that's that, is somewhat myopic. At the higher prices, more expensive sources will kick in, the supply will increase, and although prices may not come down appreciably, the alternative sources will become increasingly feasible at the higher prices, too. Not exactly a cinderella story, but not the end of the world, either.

 

Close to home: We in Hawaii pay, and have always paid, at or near the highest pump prices in the country. Average cost per gallon over 2 bucks and has been for some time. Costco's $1.85, and people are lining up for that. Why so expensive here? Common answer is cost of transportation (same reason given why everything except pineapple and sunshine are more expensive here). That's at least partially baloney, because in the highly automated, small-crew, supertanker era, transportation costs are miniscule. Moreover, most of our crude comes from Indonesia, a much shorter ride than from SWA to the east coast.

 

When I was 17, I owned a '62 Impala with a 409 V8. It only ran on Sunoco 260. $.32 a gallon, a princely sum in those days. When the first Arab embargo was on, and it hit $.50 a gallon, I panicked and sold the car for $300. It would be worth $24,000 now if I still had it...stupid!

 

KS

[packsaddle]

Responding to no-one particularly, I like to shock my environmental science students by informing them that eventually all the oil, gas, and coal on earth will be combusted or used some way and the only limit to the process will be market forces (price). Seems obvious to me.

[KoreaScouter]

Packsaddle;

 

What you're saying may be 100% correct, but I would bookend that with a big "so what?". First, nobody knows when this will happen. But more importantly, it's very easy to look at the problem just in the context of the internal combustion engines and the petroleum we use today. Who knows what innovation is around the corner, or already developed and just waiting for the right conditions to be implemented?

 

Look back 150 years, and the lampmakers were predicting darkness because the shrinking whale population was drying up the supply of lamp oil.

 

KS

[Proud Eagle]

Anyone that is in favor of more environmentally friendly energy or in favor of energy independence should actually like OPEC raising its prices. KS hit on some of the reasons why, as have others.

 

If the cost of importing oil goes up, domestic producers will increase production. Generally it is more expensive to produce oil domestically, so some of those previously uneconomic wells, such as those in western KY for example, begin to become economical to pump again. Further, incentives for finding and exploiting other sources of domestic oil also increase.

 

The economic viability of such things as bio-diesel and ethanol will increase as the costs of oil increase. These fuels are produced domestically from renewable sources such as corn.

 

As gas prices go higher, consumers are more likely to take advantage of mass transit. Mass transit is normally safer, more environmentally friendly, and more fuel efficient than personal automobiles.

 

Consumers are also more likely to purchase more fuel efficient vehicles. It also begins to become economical to buy the more complex fuel saving devices such as hybrid gas-electric vehicles when fuel prices go higher.

 

The incentive to find new alternative sources of energy to replace oil increases as the cost of using oil increases.

 

The incentives to developer and implement fuel saving technologies increases with gas prices.

 

The likely hood that same entrepreneur, garage tinkerer, or major corporate research facility will find some new breakthrough technology to save fuel or the environment increases with gas prices.

 

Personally I think we should do two things with the people in charge of OPEC. We should first thank them for making it more economically viable to replace them as a source of energy. Second, we should lock them all up for price fixing, collusion, and any of the other various anti-competitive and monopolistic practices that they openly flaunt.

[berkshirescouter]

Proud Eagle

Good points. I am waiting for the Hydrogen fuel cell to come on line. Think of a system where the gas is produced from solar or wind power and runs your car or heats your house. A non-polluting renewable power source.

 

 

[packsaddle]

KS, that bookend is equally welcome at the end of nearly every idea. The answer to your rhetorical question can only be answered based on our knowledge of current depletion with reasonably expected changes in the future. Probably 500 years or so for coal just based on what we have in this country alone. For oil or gas, if we depend only on our known domestic reserves, not long. Including worldwide reserves, we'll probably die before we run out. You ask, 'So what?' and I join you. I'm not worried personally, because I suspect that I'll predecease you and most of the other respondents on this forum. But I do care about you guys and people who will come after. My personal thought is that nuclear energy will soon have a resurgence, especially if we can solve the nasty problem of waste management. And it is a huge potential source of energy.

But my conservative view is that the largest energy source we have immediately at little cost - is to merely conserve, not waste, what we have. That to me is the truly conservative approach.

The point I try to make to the students is that in order to extract those resources, the known impacts will either be large (perhaps unacceptable) or new extraction methods must be discovered (this neglects a myriad of other problems with fossil fuels).

 

ItsTrailDay, I hope you're right. I also hope there are new technologies and lower costs for wind and solarvoltaic power even sooner. However, do try to resist the urge to go to Utah and invest in cold fusion.