Saving Green at the Expense of Saving Green

Anyone else getting the impression that this is EXACTLY what the oil companies wanted when they started gouging us?

 

Deck chairs. Titanic.

 

Between not replacing platforms in the gulf after Katrina (old, mostly spent oil fields) and drops in production in places like Nigeria, production is down something like 800,000 barrells a day. If you can get demand to drop enough or the daily production to rise enough, that will help prices the most. Cannign the ethanol requirements would help a bit too. But who wants to tick off big farmers and ADM with elections looming? This announcement is likely to have little impact.

 

Finger. Dyke.


What I don't understand, (and I still admittedly don't have a good understanding of big oil, prices and profits) is how this will have any effect on consumers. Big oil had great profits over the past year with prices soaring. It's not as if their costs in purchasing crude or refining capacity had any serious negative effect on them. I am guessing that there is no incentive to lower those prices unless demand falls.

So bush is doing things to ease the supply side, but won't that simply result in biggger profits? They are not required to give any corresponding relief to consumers. If they can get $4.00 a gallon, they will.

 

While I think what Dubya has done is crap, he at least is giving the impression he is doing something here.

The dems have a built-in issue that whenever something bad happens here, they can say the administration is distracted by Iraq.

Or with clearing brush.

I don't know where I'm going with this post.

 

People really need to wake up to the basic economics of oil. Yes, the oil companies are making insane amounts of money. But it is not because they are gouging. Gouging, at least to my mind means charging way more than is necessary just because a product is scarce e.g. ticket scalping for a sold out show.

The wholesale price of oil on the mercantile exchanges comprises about 50% of the wholesale price of refined gas. The oil companies buy crude on the international market. The price of crude is set largely via speculation on the future supply and demand of same as well as additional factors such as security of the supply i.e. Iran and Nigeria. All of those factors are looking pretty dicey right now which explains the runup in the crude price ($72.25 right now, down from a peak of $75.12 yesterday). Now, because many oil companies orignially invested in many of the production facilities based on a model of $20/bbl oil, they are making boatloads of money right now.

You can track wholesale refined gas prices -- the prices the independent gas companies pay -- here: http://www.nymex.com/index.aspx Current price $2.27 a gallon. Here in Iowa, where gas is just about as cheap as it is anywhere in the country, the pump price at the corner up the street with the two big independend convenience stations tracks almost exactly $.50 over the wholesale price.

If you watch the wholesale price and your local station, you will find out what the average premium is on the wholesale price. Markets being what they are you will find that over a several month period it stays constant; wholesale price goes up $.10, pump price goes up $.10 (or 11 or 9 but usually very close to the range). Also, by the way. Independent gas stations see none of the windfall profits that the oil company-owned stations, the BP and Exxons, do. For them they are lucky to make $.07 - $.11 a gallon they sell.

So, this is just the market at work. Not gouging.

The problem here is that there is no one in any position of power or influence who is willing to tell the American people the ugly truth:

We drive to f***ing much!

 

After re-attaching my spinning head, I think I understand this, and I certainly agree with your last sentence, but I am not sure if this is at odds with what I have said. If you are saying that big oil will consistently charge .50 over their costs, then an increase in supply will have a corresponding effect on prices, no? But if people are buying the gas at $3.50 then what incentive do oil companies have to back off of that price with any ease on the supply side.

 

You're not talking about Big Oil when you're at the pump. You're talking about the local station owner. And he's in a purely volume business. Some of these guys even cut into their already small margin and use gas as a loss leader to get people into their overpriced convenience markets.

 

Bingo! Even the local BP Amoco owner has to buy the gas at the going wholesale price from the BP supplier.

No it is not at odds. And in this you are essentially correct...

but only up to a point. What keeps true gouging from ocurring is the intense price competition in the retail gas business. As soon as a station or stations raise their prices to be very high in comparison to their neighbors they risk losing business. That's why you see your regions retail prices among all retailers tracking within a pretty close range of the wholesale price. Some might be a few cents higher or lower as they jostle for advantage, but the entire crowd will follow the wholesale market up and down.

Bush's thing today is a meaningless PR stunt because of the following:

a) the environmental adjustments -- I'm assuming we're talking about the conversion away from MTBE -- are sunk costs for the refiners. They've already made the capital acquisitions and begun infrastructure changes. It costs more to go back.

b) This time of year always shows a tight gas supply as refiners switch from home winter heating oil production to gasolene production for summer driving. We go through this little price spike every goddam year.

Problem is this year is coincides with an sharp increase in oil cost due to global supply issues and geopolitical security premium tacked on by the markets.

If anything stops Iran's 4M bbl/day production the cost of oil will head towards $100 in a heartbeat. They are the third largest daily producer in the world and the loss of that much even for a couple of weeks will put the global market into shortage mode.

My sense is that BushCo will have to ratchet the whole Iran thing way down until after the midterm elections. There are a lot of reasons why going after Iran right now is stupid, but the domestic politics of energy is has got to be top of mind for them right now.


Prediction: gas prices will probably settle back to a national average of about $2.50 or so in a few weeks and stay there until some new event changes the supply dynamics.

 

But in the meantime, Big Oil gets to lower its production costs with no guarantee that they'll pass that savings on to the consumer - a win-win for them.

 

But it's not just the market at work. If we take away their anti-trust exemption, subsidies, and tax breaks, then it would be.

 

What's the new event that precipitated this latest price surge?

 

I'll believe that when there's some transparency (hell, even mild opaque-ness) to the pricing calculations.

 

Easing the environment rules will allow refiners greater flexibility in providing oil supplies since they will not have to use certain additives such as ethanol to meet clean air standards

 

See, that's the problem. The oil industry isn't "any other industry".

 

What other industry relies on my tax money, my military, and my anti-trust exemption to get by?

 

Not as much "in real life" as it "makes sense on paper" - as soon as one station raises it's price - the others will as well, since the incentive for them to charge less doesn't really exist - people are very-to-mostly loyal to a station and/or brand than they are to just picking the station who's price is a penny cheaper. Obviously some do, but not the majority. If that were more true, no human being would buy gas at an Exxon station, they are always more expensive. I drive right past the cheap place to hit the BP quite often as I have a BP card, even though they are more expensive.
I hardly ever buy the "the market will decide" nonsense I hear from business majors and right-wing folks because I've known too many people who run businesses, it's about how to make more money than the market would normally bear that they live for - and I do not put price-collusion (and therefor gouging) beyond the big oil guys, they routinely do way worse in their daily business dealings, overseas especially.
I mean, really, what are the odds that after all the hands the oil passes through to the consumer (never mind all the hands belong to fellow oil guys), that the prices for each different brand would all be the same? In a true demand-style market, that would not be the case, one manufacturer or refiner would find a way to do his job cheaper or faster than his competitor to drop his price while keeping the same margins.
Letting all those mergers happen was bad for consumers.