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Oil- Someone please explain!!

Discussion in 'The OT' started by missileman, Apr 27, 2006.

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  1. missileman

    missileman Legend/Supporter DBSTalk Gold Club

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    May 28, 2004
    How can the COST of oil be the cause of high gasoline prices when oil company profits are rising? It seems to me that if oil/gas companies were merely passing along the higher cost of oil to consumers, profits would remain relatively unchanged. However, since oil/gas company profits are increasing, doesn't that mean that someone is passing along MORE than just costs? or are they selling more oil?

    It seems like simple math to me. It looks like a small number of large companies are taking advantage of consumers by raising profits through increased retail prices even though their costs are not as fast as the prices they charge. Someone please expain where I'm wrong.

    We are screwed because we have to have gasoline, and there are no real alternatives.
     
  2. Halfsek

    Halfsek Hall Of Fame

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    The higher the cost of oil, and as long as demand stays the same, the dollar amount of profit will rise. The profit per gallon of oil is a percentage, not a dollar amount. As the cost of producing a gallon of gas goes up- due to many factors, the profit percentage built into that to make the price we pay stays the same. But since the same percentage is working on a higher number, the actual dollar profit goes up.

    Simple math.
    It costs my company $10.00 for a product. I put a 50% margin on it and sell it for $15.00. $5.00 profit.

    Suddenly the cost for that same product goes up to $100.00. My 50% margin now gives me a $50.00 profit.

    My profit shoots up as long as demand stays the same.

    Oil companies of course don't have a 50% margin. The number I've heard bandied about- and never refuted by anyone, is about 7%-9%.

    As for the direct relationship. Gas station owners bought their existing gas supplies at a lower price (back when they filled their tanks). They now have to account for how much it will cost to refill their tanks. They can't price their current gas stock at the old price since they have to buy the next round at the higher price.

    And yes, I'm sure that there are individual gas stations marking up the price more than they have to.
    I'm sure that oil companies are squeezing every penny they can from us; but not necessarily any more than any other business does.
     
  3. Bogy

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    Of course Halfsek leaves out the part where the cost of oil currently being pumped out of the ground is NOT 70+ dollars. That amount is what commodity speculators are paying for oil. The gasoline in your car was not refined from $70+ crude oil. Neither was the gasoline in the tanks at your dealer. Or the gasoline in the tankers on their way to the service stations, or the gas in the storage tanks at the refinery, or the crude being cracked into gasoline today, or the crude in the tankers on their way to the refinery, or in the pipeline running from the well to the docks, or the crude being pumped out of the ground today. Or tomorrow. But if a commodity trader today says he is willing to bet that he will be able to sell $76 crude six months or a year from now, the price of gas at your local station will be changed before they close tonite.

    OTOH, when or if the price of crude drops, all that expensive crude will have to have moved completely through the system before the price at your station will drop.
     
  4. missileman

    missileman Legend/Supporter DBSTalk Gold Club

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    May 28, 2004
    Now THAT'S what I call gouging!!!
     
  5. Bogy

    Bogy Hall Of Fame

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    Semantics. Most people consider a profit of $50 to be better than a profit of $5 any day of the week.
     
  6. Danny R

    Danny R Goblin the Pug DBSTalk Gold Club

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    It seems to me that if oil/gas companies were merely passing along the higher cost of oil to consumers, profits would remain relatively unchanged.

    If you look at just the gasoline portion of the oil companies, that would be true. Service station profits are the same, if not down.

    But "big" oil isn't just a refiner of oil. They are also the source. In many places oil companies buy the rights from landowners, or buy the land directly, and thus are the ones selling the oil at the current high prices.

    Thus the profit is easily visible. They bought the oil long ago at much cheaper rates.
     
  7. Halfsek

    Halfsek Hall Of Fame

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    Of course the price of barrel is speculation and reactions to current issues. I hope someone didn't mistake my post for an overall answer to the whole oil issue. If so, my apologies.

    There is so much going into all of this that no one on this board will know enough to make a difference.

    The idea was to explain the dollar amount of the profits. Do any of us know at what price per barrel is being refined now? No.
    But it's the percentage of the profit which counts and ultimately determines the dollar amount of the profit.

    And as the percentage is <10%, any cut in oil profit percentage really would make no difference at the pump.
     
  8. anthonyi

    anthonyi Legend

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    Feb 4, 2006
    Oil companies are not the gougers, it is our own Federal and State taxes that are gouging us to death.
     
  9. RayChuang1654

    RayChuang1654 Cool Member

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    This is why I think the SEC, FTC and the regulators at the New York and Chicago Merchantile Exchanges should carefully look at who are the biggest oil speculators. We may have a case of someone trying to "corner" the market on crude oil for personal gain and political reasons, just like what the Hunt Brothers tried to do to silver in the 1970's. [​IMG]
     
  10. olgeezer

    olgeezer Guest

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    Would you prefer gravel roads and ferries?:D
     
  11. Richard King

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  12. AllieVi

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    The companies making large profits are those that own oil in the ground. In the same way, a little old lady in Texas with an oil derrick pumping away in the back yard is laughing all the way to the bank as crude prices climb. Neither that lady nor the oil companies control the price of oil - traders do, and they're nervous about supplies meeting demand for a number of reasons. That means the price of crude rises and refined products follow suit.

    As China's consumption increases, the future will likely get gloomier. We may soon fondly remember the days of $3/gal gas.
     
  13. missileman

    missileman Legend/Supporter DBSTalk Gold Club

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    May 28, 2004
    38 cents per gallon is gouging?
     
  14. Bogy

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    Oil companies are so worried about not being able to meet demand that they are spending millions to discourage use of ethanol. Within 20 miles of my house I have a couple of the biggest ethanol production plants. Not to mention all the farmers who are receiving better prices for their corn whether the corn they raise is made into ethanol or not. Iowa has had legislation requiring that all gasoline sold in the state use ethanol, and to require more e-85 be made available. One day when I was filling up at a Phillips 66 station near me I noticed stuck on each pump was a pad of sheets asking you to call you legislator and ask them to vote against this. It claimed selling ethanol would hurt the small service station owner. The name on the bottom of who had paid for it was a "concerned people for..." type name that said nothing.

    I took one of them in and asked the gals behind the counter who the group was that had paid for them? They said I could call the number listed on the sheet. I said, no, that is the number to call my legislator, I want to know who this group is. Either they really didn't know, or they didn't want to tell me. I asked them why they would post something like this, when our area is so dependent on farming, and ethanol production. They claimed it would help the farmers. I said they evidently didn't know what the thing actually said. I left, but I noticed the next day when I drove by the anti-ethanol propaganda material was all gone. I have a suspicion a farmer or ethanol plant worker probably wasn't as nice as I was and just ripped them off. Big oil companies are not in the ethanol selling business, they are in the business of selling oil. They will do whatever they can to keep competition out of reach of their customers.
     
  15. missileman

    missileman Legend/Supporter DBSTalk Gold Club

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    What about TDP? It seems that the process will create oil from waste. There is a plan in Mo.
     
  16. Tom in TX

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    It's alot more than the Oil companies make, for doing all the investments, and work!!!
    Tom in TX
     
  17. Stewart Vernon

    Stewart Vernon Roving Reporter Staff Member Super Moderator DBSTalk Club

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    Depends on how they have their business structured.

    As has already been mentioned, some companies just do a straight percentage markup... so if their standard markup is 20%, or whatever, then their profit can rise with increased prices.

    Other companies strive for a dollar-amount profit rather than a percentage. Those companies would not see a profit increase with a price increase since their dollar-amount over cost would remain the same.

    There's nothing wrong with either way of doing business... but with the percentage method, IF there is a sudden price spike (or price drop) it can make you look really greedy (OR really stupid if the price drops).
     
  18. Richard King

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    I know of no businesses though that operate on the second method. Every company, after the start up stage, looks for a certain return on their investment, a percentage. When a supplier raises prices the seller raises prices to go along with it, maintaining it's profit margin.
     
  19. Stewart Vernon

    Stewart Vernon Roving Reporter Staff Member Super Moderator DBSTalk Club

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    I can't cite specific examples other than myself when I have sold things.

    The example, and I'm sure some big businesses use it sometimes at least, I give is markup from wholesale.

    Say I have an item that wholesales for $5.00 and I get $10 retail for it regularly. That's a 100% markup so I always double my money.

    Ok... I have competition, and we are all selling for the same price... but one day I get a super-deal on the same item in quantity and am able to get it for $2.50!

    Now, IF I just used 100% markup, I would sell for $5 and still double my money, but not make as much as I could make... OR I could still sell at $10 and make $7.50 which would be 300% markup.

    OR, I could try and steal some customers... but maintaining my $5.00 profit margin, and selling at $7.50 (only 200% markup)... so I keep making the same profit per item but sell a bunch more while I steal customers... and then when I have to go back to the normal $10 price it would be as big a bite as if I'd dropped the price lower.

    It works with some business models better than others of course.
     
  20. dpd146

    dpd146 Godfather

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    That is the tax placed on top of the price per gallon. Don't forget about the embedded taxes which makes the gas exponentially more expensive.

    I don't know what that really means but I heard it on the radio. I threw in a couple of big words to seem like I knew what I was talking about :grin:

    I remember everyone going crazy over $2 a gallon. It's a free market and we have to deal with it. Unless you prefer waiting in line for bread and toilet paper.

    and HDME, I went into vapor lock reading your post. I don't know what the heck you're talking about but you're hired :)
     
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