Where the money went for rising gas prices

[PraiseA||ah Profile]

http://money.cnn.com/2005/10/27/news/fortune500/exxon.reut/index.htm?cnn=yes

Can you say profiteering?

[deathBOB Profile]

http://stengazette.org/wordpress/2005/08/06/the-oil-cycle/

Scroll down to the Oil cycle from the daily show. I couldn't find a clip, but its really really funny.

[CodeRed68 Profile]

I don't understand how they made such a profit. The bastards. The gas prices are up because the price per barrel of oil is supposedly up. This would mean the companies like Exxon would not see such a gain in profit because they are paing more for the oil? Thier profits would remain the same as when the oil was cheaper and gas was cheaper? If anything, people are buying less gas and they should see a loss in profit?
WTF !!!

[JimmyTango Profile]

Originally posted by CodeRed68
I don't understand how they made such a profit. The bastards. The gas prices are up because the price per barrel of oil is supposedly up. This would mean the companies like Exxon would not see such a gain in profit because they are paing more for the oil? Thier profits would remain the same as when the oil was cheaper and gas was cheaper? If anything, people are buying less gas and they should see a loss in profit?
WTF !!!

That is because you assume X company brings it out of the ground and Y company buys it from them.

Sometimes there is Z company, who is both.

[PudriK Profile]

It's basic market economics:

Oil is a commodity. It is traded on commodities markets, just like pork bellies and frozen concentrated orange juice. There are thousands of buyers competing to buy oil from thousands of suppliers. Each offers a price, and it is bid up or down, just like at a flea market, based on what the buyer thinks it is worth (what he thinks he can sell it for) and what the supplier thinks he can get for it. When demand increases, or supply decreases, then buyers are willing to pay more to ensure they get the scarce resources.

For example, say oil was selling last week at $50 per barrel. Then a hurricane comes, takes out a few rigs. Now there is less oil to be sold. I run a refinery. I need that oil to stay in business, to sell to gas stations. So I am going to offer $52 to a seller to make sure I get it. The guy next to me offers $54. I counter-offer $55. The guy next to me decides, that's too much, I will try another supplier, or I'll wait it out. The price of oil has increased, not because the cabal decided to raise prices, but because of the market.

Just like any other commodity, when supply is reduced, people are willing to pay more to ensure they still get what they need. That raises the price. If you are an oil supplier, this extra money makes for bigger profits.

Oil companies blame environmental regulations and bureaucracy for making the building of refineries cost-prohibitive and restrictive. Consumer advocates say oil companies are purposefully not building refineries and doing other things to keep supply tight. This may have some merit.

As you may know, a monopoly is able to reduce supply sold and raise prices to maximize profits because no competition is able to come in to undercut their market. Several commentators have pointed to oil companies and refineries and charged them with artificially limiting supply by cutting production and closing refineries. In a truly open market, that would quickly invite new refineries to enter the market and undercut their prices. Part of the problem is that a refinery takes years to build. Another problem is that a refinery may take years just to get approved to be built.

I don't doubt that companies may be reducing their production and raising price where they are capable of doing so. The left's solution would be to impose governmental regulation, taxes, and fines. More bureaucracy cannot make a more efficient system. The left may be right that companies have a monopoly. But it could be that the excessive regulations and barriers to entry that the left has imposed are the reasons for that monopoly.

At the moment, oil companies' outrageous profits are a product of market reaction to a FEARED reduction in supply (that's why it's correcting back down now), and the barriers to entry in the market.

PS According to the article you linked to, Exxon made $10B on $100B revenue. That's 10% profit, not an outrageous amount. That $10B sets a record is a testament to how big Exxon is. For comparison, General Electric made 15% last quarter, $4.67B on $41.9B revenue. Wal-Mart made $2.8B on $77.46B, about 3%. In 2004, Microsoft made $2.9B on 9.2B (30%!, now there's a monopoly!).

[A.M. Foxtrot Profile]

That's a pretty good summation of the situation

[PraiseA||ah Profile]

http://today.reuters.com/news/newsArticle.aspx?type=politicsNews&storyID=2005-10-27T194507Z_01_SCH769868_RTRUKOC_0_US-ENERGY-CONGRESS-REPUBLICANS.xml

[LordShard]

Originally posted by PudriK
[B]It's basic market economics:

Oil is a commodity. It is traded on commodities markets, just like pork bellies and frozen concentrated orange juice. There are thousands of buyers competing to buy oil from thousands of suppliers. Each offers a price, and it is bid up or down, just like at a flea market, based on what the buyer thinks it is worth (what he thinks he can sell it for) and what the supplier thinks he can get for it. When demand increases, or supply decreases, then buyers are willing to pay more to ensure they get the scarce resources.

For example, say oil was selling last week at $50 per barrel. Then a hurricane comes, takes out a few rigs. Now there is less oil to be sold. I run a refinery. I need that oil to stay in business, to sell to gas stations. So I am going to offer $52 to a seller to make sure I get it. The guy next to me offers $54. I counter-offer $55. The guy next to me decides, that's too much, I will try another supplier, or I'll wait it out. The price of oil has increased, not because the cabal decided to raise prices, but because of the market.

Problem here is the type of commodity oil is. YOu cannot simply decide to NOT buy oil. You have to buy it weather you like it or not.

[Sabres Profile ICQ]

We need to make cars run on bottled water...

[JimmyTango Profile]

Originally posted by Sabres
We need to make cars run on bottled water...

Hydrogen will be the future source.

[PudriK Profile]

Hydrogen is not a source of energy. You can't mine for it, it doesn't come out of the ground. It can only be obtained from water by expending a greater amount of energy. It can be produced from hydrocarbons as well... that means oil, coal, or gas, right back where we started.

Properly understood, hydrogen is a means of energy storage and transfer, not production. The energy to produce hydrogen will have to come from all the sources that already exist.

(That is until we come up with an economical way to mine it from Jupiter's atmosphere.)

Short term, nothing can be done that won't be an artificial disruption of the market and probably prolong the situation. Long term, companies need to invest these profits into increased production. That's how all other markets work. Government needs to see that companies have good reason to invest. It also needs to examine whether its own practices have exacerbated the problem, either through excessive regulation, or by letting companies merge to the point where there is not enough competition.

You are correct about the problem that oil is an inelastic commodity--that is, the quantity demanded does not change much with price--a consequence of their being no real alternatives, but only in the short term. In the medium term, people will change their consumption habits based on gas prices. In the 70s it meant buying econoboxes. Now it means more interest in hybrids, which suffer from the problem that, unlike an econobox, they are not also cheap to buy.

The irony is that only a few years ago some Democrats wanted to tax too cheap gas in order to provide artificial market incentives to conserve and use the revenues to invest in alternative energy. Now they want to provide tax rebates or redistribution of taxed profits to reduce prices. Can't have it both ways.

BTW, heard today on the radio that Honda has, after years of research, beaten the competition to develop a type of compression ignition gasoline engine that gets 65mpg. Can't find anything in google news, though. Look for that to come in the next few years.

[LordShard]

Originally posted by PudriK
Hydrogen is not a source of energy. You can't mine for it, it doesn't come out of the ground. It can only be obtained from water by expending a greater amount of energy. It can be produced from hydrocarbons as well... that means oil, coal, or gas, right back where we started.

Properly understood, hydrogen is a means of energy storage and transfer, not production. The energy to produce hydrogen will have to come from all the sources that already exist.

(That is until we come up with an economical way to mine it from Jupiter's atmosphere.)

Greenland uses hydrogren well. They use thermal energy from all those volanic hotspots to use it. But the USA has no means for that, so we woul dhave to use gas for our hydrogen.

[PudriK Profile]

Here's some info on the engine. It's called a homogenous charge compression ignition (HCCI) engine. http://en.wikipedia.org/wiki/HCCI

http://www.caranddriver.com/article.asp?section_id=30&article_id=10230

The challenge, it seems, has been controlling the ignition in an engine where it is not ignited by a spark (like a gasoline engine) or by fuel injection (like a diesel), but by the spontaneous ignition of the compressed fuel-air mixture.

An Additional problem with the oil market is that at the supplier level it takes several years to add capacity, yet the market is highly speculative and subject to suppy and demand shocks, and consumers generally cannot store up fuel during cheap times to use during expensive times, which would buffer price changes.

[cavalierlwt Profile]

I don't know if hydrogen will work or not. I hope so. The big problem isn't getting it (splitting H2O), I think the issue is gas vs liquid. As a liquid, you can hold quite a lot of hydrogen in a small tank, as a gas, not very much. Problem is hydrogen is liquid at about -450 F ---pretty damn cold!
If you think about it, storage/miles per charge,etc is the issue. We can make electricity, but getting batteries to give a full size, normal weight vehicle the same performace speedwise, acceleration, and range is a tough nut to crack. That's the allure of gas: a lot of energy in a very dense package. Same problem with hydrogen. In liquid form, performs great, just tough to get the liquid. In gas form, tough to reasonably get enough of it stored in a car's tank to do anything useful. They're working on it though, fuel cells and such. I should say, foreign car companies are working on it. Our car companies are trying to figure out how to make an SUV that's just a bit bigger, and gets just a little bit less fuel economy.

[LordShard]

CvLWT:Gasoline has 2600 times the energy hydrogen. You cannot compress hydrogen enough to get that much energy. Even in it's liquid form it would not as good as gasoline.