Gas Piggy

Pirces suck all around.  Diesel fuel once was a throw away item.  No use for it, they said.  Now it's 80 cents higher then unleaded and I don't see it stopping. 

Government whats everyone to get involved with "alternate fuels".  So where is the Ethonoyl around here?  They want car manufactureers to do more with diesel. WHY? Who will buy them if someone doesn't get a hold on the price.  I read an article last week blaming our high cost of diesel on Europe since they use in twice as much as we do, however I don't really think we export diesel do we?  If so why?

On the gas front.  Stocks of gasoline are 4% moe then last year and the highest in 14 years so why the cost increase?  At first everyone claimed "supply and demand". Yet consumption has been down.  Now it's because of the weak dollar.  It's really hard to put a finger on it.  If we have so much in stock then why?  I've also heard that there will be shortages of gas because the refiners have to go to  a "summer blend" so what happens to the "winter blend"?

Sam has helped bail out a speculator type investment bank to easy the troubles on Wall Street (which helped for one day) so now it's time to strengthen the dollar and force commodity prices back where they belong. 

That 146 billion stimulus package will not help the economy if it means that we have to pump the money in gas just to get to work. 

 Lets just wait and see on the seond quarter profits.  They are due out soon.  I'll bet records are broken again.   Wall Street will go up with the "great" news and our pocket books will decline.  Same ole, same.  Rich get richer and the poor get poorer.

Don't know what happened.  Suddenly there were three.  Sorry.

Foxx

If I am not mistaken in 1977 the median household income was 13, 572 dollars and the average price of gas was 0.62 cents

In 2005 the median household income was 31,275 dollars and you paid 3.29 for gas today.

The population was 225,055.487.

Inflation was 13.3%

Consumer price index was 72.6

Unemployment was 6.1

TRUTHHURTS

I don't go by price of a product. I go by how many hours did you have to work to buy it.

Those who give up freedom for security have neither. 

As Foxx points out, the price per barrel of oil is $106.  That's what it costs the oil companies.  In other words, their costs have gone up.  It is 100% irrational to expect a for-profit company to just eat that cost themselves.  Businesses exist to make money.

What no one ever looks at when they're railing against the profits that "Big Oil" is making is this: what is the profit margin?  Here's an example:

Let's say JonInClay sells barrels in Clay County for $10, and that $5 is what it costs him to buy a barrel.  He makes a profit of $5 per barrel.  Now let's say that Jon's barrel supplier says "Hey, Jon, our costs just went up, so we're now going to have to charge you $10 instead of $5.  Sorry 'bout that!"

Jon now has a choice: keep selling at $10 a barrel (and make no money), or pass the cost increase on to the customers.  Obviously, Jon is trying to make money, so he passes it on to the customers.  Jon now charges $15 for a barrel instead of $10.  Jon would have charged $20, but he decided that at this time, the market wouldn't go for it and he would lose business.  So for now, Jon charges $15 for his barrels.

Before the cost increase, Jon's profit margin per barrel was 100% (since his cost was $5 and his barrels were $10).  Now, Jon's profit margin is only 50% (since his cost is $10 and his barrels are $15).

Now, let's apply this to the real world.  As established above, Jon is now charging $15 for his barrel.  However, Jon starts getting orders from China and India at astronomical rates.  They want his barrels, and in large numbers.  Well, Jon is selling his barrels and ordering new ones as fast as he can, but since the demand has picked up so much (and since Jon can only order so many barrels at one time), Jon's suppliers have raised their prices again (this time to $20, based on normal supply-and-demand models).  Jon has no choice but to now charge $25 for his barrels.

Because of the flurry of new orders, Jon is making more profit than ever before.  However, his profit margin has dropped from 100% in the beginning to 25% now.  Jon's Clay County customers are likely going to think "Jon is gouging us!  We used to pay $10 for a barrel, and now we're paying 2.5 times that much!  Look at all that profit he's making!"  With all due respect to Jon's local customers, they're economically ignorant if they make those claims.

If Jon's supplier says "Hey, guess what?  Demand has dropped off for us, so we're lowering your costs down to $10 per barrel!", then Jon can either (a) pass the savings on to his customers by lowering it back to $15; or (b) keep charging $25.  Because Jon isn't the only one selling barrels, Jon's competitors will lower their prices to where Jon will have no choice but to lower his prices.

This, my friends, is what is happening in the world today.  China and India are ordering more oil than they have ever ordered, and as such, global demand is up compared to what it used to be.

However, there is a hidden culprit: speculators.

Using the above examples (and I'll spare you the numbers this time), let's say Jon asks his suppliers why they keep jacking up his costs.  The supplier says that speculators are telling HIS supplier that supplies are going to be tight in the near future...which frightens Jon's supplier's suppliers into raising their rates.  That, of course, snowballs down to Jon and then to Jon's customers.  Jon screams "The speculators don't know what the Hades they're talking about!  They're just trying to profit off of a condition that THEY are causing!"  Jon's supplier says "True, but the cost is the cost...pay it."

That, too, is happening today, my friends.  Speculators (many of whom lost their butts in real estate and are looking to make it back on the backs of normal Americans) add absolutely NOTHING OF VALUE to the oil cycle equation.  All they're doing is convincing oil suppliers that things are dire and that they need to charge more for oil.  The speculators then make money off their self-fulfilling prophecy.  For more information on how that effects us, check out this article:

Hedge funds play major role in gas price hikes

The article is two years old, but it's more relevant now than ever.

It's not Chevron or Exxon or anyone like that.  It's the speculators, and if Congress would ever pass a law that removed speculators from the process, most experts agree that the cost of gas would fall 25-40% pretty quickly.

Finally, there is the topic of oil supplies.  We have oil sources in Prudhoe Bay that are capped.  We have oil sources in ANWR that the treehuggers have stopped because they fear we might disrupt the mating habits of the snow possum or whatever the Hades is there.  We have natural gas sources off the coast of FL, but our elected officials don't want to drill for it.  We haven't built an oil refinery in this country in over 30 years, so when one goes down, our prices spike.  Instead, we import oil from parts of the world that hate our stinking guts.  When people abdicate common sense, we get what we deserve.

Sorry for the rant (and the econ lesson).

Supply remains the same, but yet demand continues to rise, i think that's a shift to the left on the supply and demand curve.  So, we watch prices continue to rise and we complain about them, but yet even with the option to add more to the supply we don't take it due to animals and trees in ANWAR among other places, is that pretty much summed up leaving out speculation?  What say you. 

Not the oil Companies?

Foxx;

Actually supply has increased and demand has decreased over the last 6 months.

Joninclay;

I agree with your math on a single element macro analysis. But let’s look at it from a micro dual element analysis.

There is one profit aspect that I think you left out in your profit margin explanation. That is total profit. Profit margins are the same words that oil companies (and others) have been using for years to justify their prices and placate the public.

If Jon was making a good profit for himself and his stock holders by making $5 profit per barrel when he was selling 1,000 barrels why does he need to continue making $5 per barrel when he is selling 100,000 barrels?

Your comment about he could have went to $20 but decided the market wouldn’t go for it is very telling. You see if he raises the price to $17 and the public begins to grouse about his exorbitant prices he can drop it to $16 to show how he listened and did his part.

When the market gets used to him making $6 per barrel and the price goes up again he can bump his price up some more so that he is eventually making $7 per barrel. This can continue forever and his ‘profit margin’ will still come down but his profit per barrel will continue to go up.

Do a study of price per barrel of oil compared to price per gallon of gas, diesel and other oil products and you will see this play out. If it did not then the oil company total profit would not be rising at such an extreme rate.

There is at least one other profit element I would like to cover. That is the price of gas in the ground at the station compared to the price at the pump.

Bill the station owner has 10,000 gallons of gas in the ground at his station. He is going to make 10 cents per gallon for every gallon he sells whether he sells 100 or 1,000 gallons. This number is dictated to him by the company that supplies his gas. His price at the pump is also dictated by the same company.

Yesterday the price at the pump was $3.00. Today the company says he has to bump that price up to $3.10. Those 10,000 gallons in the ground just made the oil company an extra $1,000 profit.

Bill isn’t going to make one penny more in profit for himself. He still gets 10 cents per gallon. The state doesn’t make one penny extra for roads. Their gas tax is a per gallon sold tax.

Your theory of speculators has a lot of merit. My only question to you is: who are the ‘speculators’? Don’t be fooled or try to kid anyone. They are the speculators. The oil companies control prices. They are manipulated and fixed by them to meet their wants and needs.

When people abdicate common sense, we get what we deserve.

Part of that one I’ll give you gratis and add two other points.The reason that we do not drill here so that we are not so dependent on outside oil is that if we get it locally the oil companies would not be able to manipulate the price as easily.

Instead, we import oil from parts of the world that hate our stinking guts. 

How many times have you seen articles that promote boycotting CITGO gasoline because we are not well liked by our good buddy Hugo Chavez? I believe I’ve read a few that pretty much indicate that he would like to see this country and our government fall. Now here is a question for you and anyone else that may have an answer: Why would NAS Jacksonville have a contract with CITGO oil to supply their gasoline?

Mike Heemer

Okay back to the drawing boards before i take my next economics test probably next week.

There seems to be no real cause for a barrel of oil to be so expensive.  The only reason is that the speculators are driving the price up.  They are driving the price up because the dollar is worth less.   The dollar is worth less because of the bad economics that have been practiced in the US for the last few years.  We have met the enemy, and he is us.  

Why would any OPEC member country want to pump oil today, when it will be worth more tomorrow?  DUH, just because those guys wear lots of white and cover their bodies doesn't mean they are stupid.  They know that oil is a finite resource.  One day we will run out of oil, period.  Not today, not tomorrow, or not even next week, but someday we will.

Bear with me a moment as I vent and digress a bit.  Okay, OPEC says supplies are adequate and that they don't need to pump more oil.  I tend to agree with them.  They say it is the speculators who have driven the price of oil to an artificially high price.  I tend to agree with them again.  Demand is rising, but not at such a pace that supply cannot keep up.  So, what is up??  Futures trading, that is whats up.  The price of oil goes up and down because of a possible storm, a possible bit of civil unrest, or a possible mechanical failure.  No one can predict those uncertainties, but they are inevitable.  So, the speculators crank up the market, based on all those potential bogeymen that as of today do not exist.  We are the victim of our on information age.  With world wide 24 hour communications, these guys feed on the possibility that the oil production cycle may be disrupted.  If you want to bring oil prices back to a reasonable, and proper value.......then suspend the trading of oil futures.  Make it a cash and carry business.  You buy the oil for today's price and you carry it to the consumers at your predetermined profit.  You take all the speculation out of it.  If utilities are regulated in the United States, why not regulate the speculation of oil.  Your electric bill doesn't go up when a coal mine is shut down by a cave in.  Your telephone bill doesn't go up when the cost of electricity increases.  

We have become the victim of the Bear Stearns entrepreneurs.  The guys who manufacture nothing, and trade in paper only are taking hard earned dollars out of the average Americans pockets.  The economic system wasn't built for what we have going on in America today. 

Your taxes are bailing out Bear Stearns.  The average employee of Bear makes about 300K per year.  Why should the government bail out guys who make that much money, but yet don't know a bad investment if it bit them in the butt?  Bear Stearns has a lot of friends in Washington.  If our tax money can bail out those fat cats, why not bail out the ordinary Joe who is just the victim of wanting more than he can afford?  Why not bail out every person whose mortgage is ready to reset?   Why not bail out anybody who is in danger of losing their home?

We have become a country who caters to special interests and fat cats.  We cannot continue on our same path if we expect to survive.  When all the wealth is transferred to a few people, we are nothing more than a third world country.

The banks were the speculators in the present mortgage crisis.  They hedged on the idea that home prices would continue to rise in exponential value.  They lost, now we all must pay.  

Anytime you have someone who makes nothing, yet has most of the wealth, you have problems like we are facing today.  Now that the paper tiger is dead, all those leeches have nothing on which to feed their bodies.  We will survive as we always have, let us hope that we learn a lesson.

Yo, who you be callin stupid! Probably me, b/c all of that was way over my head and my pay scale

Foxx;

I don’t think Islander was actually calling anyone ‘stupid’. It looks like a takeoff on ‘It’s the economy, stupid!’ from a long time ago. Or perhaps it was me and I’m too stupid to realize it.  

Islander;

I’d have to agree with some of what you say, but only up to a point. I’ll agree that speculation in the oil market is somewhat of a problem. But you could apply that to nearly any commodity. Let’s talk coffee, sugar, corn and wheat just to name a few.

It is kind of like the chaos theory. A butterfly in Texas flaps its wings and causes a tornado in Kansas. A drought in Peru causes coffee prices to rise. A flood in Central America causes sugar prices to go up. Is it real or perception or speculation?

Here are my issues with it all being the speculators fault:

Let’s go back to my ‘gas in the ground’ statement. Oil futures are just that, futures. If I tell you I’ll by your July oil production at $100 a barrel, that’s what I have to do.

Step forward in time to July and I pay you the $100 for a million barrels of light sweet crude. It goes on the tankers and I get it in September.

Let’s step back in time to today (March). I just told someone that I would pay $100 for a barrel of oil in July. The question is; what did I pay for the oil that is being made into today’s gas production?

I paid the price I said I’d pay for March’s oil production back in October which was about $80. Gas already went up in October because I had to bid $80 for a barrel. Notice I said BID not pay. And there is where the oil companies are making their killer profits.

They base gas prices on the FUTURE price of oil as stated by the speculators not on the price they paid for the oil that has been made into gas that we are consuming today. Today’s gas price should be based on the price of oil approximately 9 months ago. Additionally, most of the gas we pump at the station does NOT come from foreign oil.

Another issue with speculation is that it is just that. If you speculate today that oil is going to cost $150 per barrel in December the price of gas goes up today. Come December if I can actually pay only $125 gas prices may come down some but not as much as they went up in March.

It’s called ‘windfall’ profits. The people at Enron were mere amateurs when it came to price manipulations. They got their ideas from big oil but just weren’t able to sustain it.

Oil companies have been doing this for years. They are the true professional at this game. As they are an oligopoly their propaganda and money have carried the day in the past and will almost assuredly continue to do so.

Mike Heemer

Think about it.   Exxon/Mobil  profit 1st quarter 43 billion dollars.  That was Profit -  Now if what I learned in school is right that means above and beyond after the bills are paid......

 I wasn't an economics major but I can see when CEO's get 400 million dollar retirement plans and such that something is wrong.  Home Depots got 210 Million +or - and they were losing money.

Tell me why did heating oil/diesel on the commotities go up 10 cents a gallon yesterday for April delivery.  Next months price is what we pay this month. 

And what are they going to do with all that winter mix gas now that they are making summer blend by law?

As I had mentioned above.  Gasoline inventories are 4.6% higher then last year, they are at the highest level in 14 years.  So I'm under the impression that "Supply and Demand" is not a valid excuse any more.

As for the Tree Huggers on ANWAR they need to let go and as they say "smell the roses"

WW

In 1977 and making minimun wage, to fill up a 20 gallon tank you would have to work about 4.6 hours ( $12.40 )

In 2008, minimum wage, 20 gallons, you would have to work 8.6 hours ( $65.80 ).

 PS

Mike (Finder) I think you nailed it

TRUTHHURTS0

If Jon was making a good profit for himself and his stock holders by making $5 profit per barrel when he was selling 1,000 barrels why does he need to continue making $5 per barrel when he is selling 100,000 barrels?

With all due respect, you have no right to ask Jon that question.  In a free market, he is able to make as much profit as he can, i.e. whatever the market will bear out.  You don't have the right to tell him he's making too much.  If you feel he's making too much, just buy less of his product.

Your comment about he could have went to $20 but decided the market wouldn’t go for it is very telling. You see if he raises the price to $17 and the public begins to grouse about his exorbitant prices he can drop it to $16 to show how he listened and did his part.

If the public groused about the prices but continued paying the prices, then why in the world would he need to show he listened and did his part?  I mean, "doing his part" means cashing in on the demand.  If the public groused about the prices and therefore didn't pay at that price, he would have no choice but to drop his prices.

That is the price of gas in the ground at the station compared to the price at the pump.

Most people are like you in that they miss the point completely.  Yes, the buy the gas in the ground at one price, then they raise prices though they have the same gas in the ground.  But dude, think about it.  They know what the price of gas is on a daily basis.  If they know that the next truck of gas they purchase is going to be higher, then they have to raise prices now to cover the extra cost of the gas that's coming! 

Your theory of speculators has a lot of merit. My only question to you is: who are the ‘speculators’? Don’t be fooled or try to kid anyone. They are the speculators. The oil companies control prices. They are manipulated and fixed by them to meet their wants and needs.

I'm not the one who's fooled.  You are.  The oil companies do NOT control every aspect of the price of gas.  Government taxes make up a large chunk, and the cost of a barrel of oil makes up the biggest share.  Here's your primer.  Notice that crude averages around 50% of the cost of gas, with federal/state taxes coming in second at around 20%, and marketing & distribution costs (i.e. getting the oil to us) averages 10%.  That's 80% of the cost of gas right there.  Factor in refining costs and refinery profits, there's not a whole lot of profit margin left over for the oil companies.  The profit they make, they make up in volume of sales (which is high, thanks to China and India).

The speculators are investors...NOT the oil companies!  Hedge fund companies convince the oil producers and suppliers that current and future events MAY dictate supply chain problems, so the oil producers raise their prices to account for a speculated event that may never (and usually does never) materialize.  Exxon, Chevron, et al are told by the oil producers and their suppliers that their costs have gone up to account for this.  The hedge fund companies then rake in the money by profiting off of a mess that THEY (and NOT the oil companies) created.  Yes, the oil companies profit, but the speculators are the ones who artificially inflated the cost of a barrel.

Here is some food for thought.  Here are the profit margins of other industries:

Banks - 18%
Household & Personal Products - 11.4%
Software - 9.9%
Telecommunications - 9.1%

The profit margin for "Big Oil" companies?  A paltry 8.2%.  I don't see anyone else clamoring for "windfall profits" taxes on those other industries, do you?  Carter implemented such a tax in the 1970's, and it led to gas rationing.  Plus, as shown above, governments tax the crap out of a gallon of gas, despite being like the speculators and contributing jack squat to the process.  Like a vulture, they come in after the dirty work has been done, and they want their cut of something they didn't acquire, refine, or bring to market.  But I suppose you're OK with Uncle Sam getting his mitts on part of the action, just so long as the actual companies who bring us the gas don't get any.

Look, I hate the high oil prices every bit as much as you do.  I curse the speculators, though, because has been proven above, the speculators and NOT the oil companies are to blame.  Every article I read mentions how the speculators are getting fat and happy off of this mess they created.  If you're going to be ticked off, it helps to know at whom you should be angry.  Your frustration is misguided, though.

Over the years, we have discouraged oil companies from obtaining new supply stores, and we've discouraged new refineries from being built.  Until we get a handle on the treehuggers, speculators, and politicians exploiting this mess, it will be more of the same.

Taxes on gas are not price based like a sales tax. If gas costs $1.00 a gallon the tax in Florida is 14.5 cents (I might be wrong on the exact amount). If gas costs $5.00 the tax in Florida is 14.5 cents. Federal taxes on gas are the same way, 18.4 cents per gallon.

I don't specifically care how much profit the oil companies make except when they lie about it. I don't like people peeing on my boot and telling me it's rain. Be up front about it.

The profit they are making is killing the entire economy. The price of gas and other petroleum products is doing more to send this country into a recession than the housing market could ever do.

If you don't think the oil companies are subsidizing the tree huggers I think you may have missed something. Why would I, as an oil company want to drill more oil that is going to drop my profit capabilities?

Mike Heemer

Finder,

As seen in the past the gov't has put price ceilings on in certain areas of the economy, is the Us gov't able to the same with gas, or is this an international subject or is there really nothing that can be done short of not driving (in regards to oil, no alternative fuel souces that have been woking so well).  It seems that the oil companies couldn't give a crap what the price is as long as it rises. 

I'm sure speculation and confidence may play some role, but i'd have to agree with finder, it is the oil companies.

Foxx;

Shoot man, I only have a BS in Econ. If I knew the answers to those questions I wouldn't be here on the MCS Blog. 

All the options you mention are REALLY two edged swords. Put price or profit caps on the oil companies and their stock goes to crap. There goes the market and the economy.

Don't drive and you can't get to work to pay bills. There goes the economy. Although we certainly could do a lot better job with mass transit. We just don't have any here. Nothing viable anyway. Car pooling would help but I don't see a lot of that here either.

Alternative fuels? There goes the price of corn and everything that uses it. We just saw that in the past couple of years with the call to go to Ethanol. It can be used in fuel or it can feed people but it can't do both. Biodiesel can help some but not a lot.

Can we revive our nuclear power program in the US? I think it would certainly help. The issue I see is that Three Mile Island scared the hell out of people. I know it scared me. My family was living in the area. Chernobyl didn't help but I think that was less devastating to us mentally than TMI because that was 'over there' and it was a 'Russian' problem.

There is one positive I can see to us not drilling for new oil here in the US. When the mid-east runs out, we will still have plenty in the ground. Then the tree huggers won't matter. We'll just drill anyway. It will really be profitable then.

It looks to me like this is one that is going to be dumped into the lap of your generation to solve. BTW how about solving the potable water problem while you're at it. Hell of a mess we're leaving you guys isn't it?

Mike Heemer