Down with the evil Gas lords. (yes, i am brave enough to post another from myspace)

[Imran Siddiqui]

Hell, haven't you seen companies that was losing money give millions to CEOs as a severance package?

[MRT144]

jesus, i leave for 3 and a half hours and theres another anectdote about his dad. what the ****.

[Flubber]

Originally posted by Kaak
Flubber, not really. You see, whether it comes from your side or not, there is a lot of extra money. Record profits, unprecedented raises and retirement package, etc. For people to sit here and tell me that I'm wrong about this or that doesn't really change this fact. I guess all i'm really trying to say is that we are paying A LOT at the pump, and it isn't lost in increased costs or raises or whatever, it is still evident in earnings on top of all of that. Therefore, I still think that it is possible that Exxon could lower prices at the pump if millions of people just stopped using them. Would it mean less profits for them? Well sure, but what else would they do if no one was buying their gas?

What you are missing is that most of the profit is in the upstream side. Gasoline is still a relatively low margin business IIRC and so is refining. Gasoline is high because oil costs are high, period. If gasoline prices were far lower, I suspect that it would be uneconomic to sell it.


I simply think you are barking up the wrong tree. If you want to rail against anything, rail against the high cost of crude.

Oh and its unrealistic to expect the upstream business units to be transferring crude down to the downstream business units at less than market price. Each business unit is expected to make money on its own merits so there is no way a business unit would accept it had to sell crude for far less than the market price

Your Exxon Mobil boycott would result in ExxonMobil gasoline being sold to you through other retailers. Are Exxon MObil gas stations franchises? I don't know but many retail gas operations in Canada have local owner/operators and killing their sales just hurts a small business. ExxonMobil just sells their gasoline elsewhere, or does a needed maintenance slowdown or something.

OH and on an inflation adjusted basis , we are not paying a LOT at the pump

[Spiffor]

Originally posted by Kaak
Correct me if i'm wrong here, but your linear model isn't an accurate representation.

in '04, Exxon's revenue was 298 billion. in '05 it was 370.7 bill. That's an increase of ~24.4%

net income was 25.3 billion in '04 and 36.1 bill in '05. That's an increase of about 42.7%.

2002-2003 has even more profound numbers.
20.6% increase in revenue, with AN 87% INCREASE in net income.

The model presented by Adam Smith is the canon generally used in economics, to show the general way prices are set. It's no gospel, but it shows the general tendancy, and is thus an interesting noition to understand.

As to the "correct me if I'm wrong", I'll take an imaginary example to show that there is no reason for being a correlation between price and profit (this is not an allegory of what happened to the majors, far from it):
Let's say you have a lemonade store. In the winter, very few people want lemonade, and you struggle to keep your store alive. You set your price at 25c a lemonade, so that some people might actually choose to take your lemonade over some coke. Even though your low prices manage to keep you a few customers, the season is harsh for your business, and it is miraculously that you avoid losses, and manage to make a measly 10$ profit for the entire season.

Comes the summer. Everybody is thirsty for lemonade. You raise your price, because you know it won't alienate your customers (you set it at 50c), and since there are plenty of customers, you make quite a bit of profit (let's say, 1000$ over the whole season).

You have doubled your price (+100% increase in price). In the meantime, you went from 10$ profit to 1000$ (+9,900%).

[KrazyHorse]

And kaak still doesn't understand the difference between marginal and average cost.

When oil prices increase, of course the average profit from a barrel of oil also increases. What doesn't necessarily increase is the marginal profit. If Exxon and other oil companies were to lower their prices then two things would happen:

1) The marginal oil would cease to be profitable, so there would be less supply

2) Demand would increase

What don't you understand about this? If those two things happen at the same time there will not be enough supply to fill demand.

[KrazyHorse]

Originally posted by Spiffor

The model presented by Adam Smith is the canon generally used in economics, to show the general way prices are set. It's no gospel, but it shows the general tendancy, and is thus an interesting noition to understand.

As to the "correct me if I'm wrong", I'll take an imaginary example to show that there is no reason for being a correlation between price and profit (this is not an allegory of what happened to the majors, far from it):
Let's say you have a lemonade store. In the winter, very few people want lemonade, and you struggle to keep your store alive. You set your price at 25c a lemonade, so that some people might actually choose to take your lemonade over some coke. Even though your low prices manage to keep you a few customers, the season is harsh for your business, and it is miraculously that you avoid losses, and manage to make a measly 10$ profit for the entire season.

Comes the summer. Everybody is thirsty for lemonade. You raise your price, because you know it won't alienate your customers (you set it at 50c), and since there are plenty of customers, you make quite a bit of profit (let's say, 1000$ over the whole season).

You have doubled your price (+100% increase in price). In the meantime, you went from 10$ profit to 1000$ (+9,900%).

In your imaginary world why is it that nobody else is allowed to sell lemonade?

[MRT144]

you have to start really basic for people who dont understand basic concepts

[Spiffor]

Originally posted by KrazyHorse
In your imaginary world why is it that nobody else is allowed to sell lemonade?

Extremely high initial investments make it a closed market

[Spiffor]

Also, his experience in the field means more productivity, i.e. more competitiveness than the upstart ****ers who try to corner his market

[Flubber]

Originally posted by Kaak
No flubber, since if costs were raised to a level equivalent to what was being paid at the pump, there would only be extra profits if more was sold.

Huh?? There are several levels of profit in the process of getting from crude in the ground to gasoline. In many cases third parties are taking this profit. If Exxon mobil does crude to gasoline, its business at each of the steps would expect competitive rates of profit.

[GhengisFarb™]

Originally posted by KrazyHorse


In your imaginary world why is it that nobody else is allowed to sell lemonade?

Because they're all members of the Axis of Evil and the lemonade consumers have embargoed them.

[Spiffor]

Originally posted by KrazyHorse
In your imaginary world why is it that nobody else is allowed to sell lemonade?

Serious answer: Kaak was wondering why revenue and profit didn't have a linear correlation. I could have used other examples (real-life examples even) to show that a company can have wildly different profits with a similar revenue (such as a company in a non-expanding market that downsized its production costs), or even to show that a company that makes less revenue might actually increase profit by cutting off unprofitable aprts of its activity.

However, since I replied to his reaction of AS' graph (that shows an increase in profit after a price hike due to a surge of demand), I preferred to stay in the general feeling of "demand increases, prices increase, profits soar, and it isn't illogical".

[KrazyHorse]

Kaak

profitability increases as price increases, even if the price increase is due entirely to high cost of supplying additional demand

Profit is the coloured area. Profitability is the area divided by the volume sold (length of the top of shaded area)

Note how the red + red/green sections is much larger than the red/green section even though volume has only increased a little bit. Yet at the same time, in neither case is the oil company making any profit on the last barrel pumped out of the ground. If you decrease the price the volume sold will decrease as well, leading to a shortage.

[Flubber]

Lets put it more simply

Gasoline prices will be a function of local supply and demand but with a floor which is based on purchase costs plus operating costs.


Again I ask . . . Are exxonmobil stations operated by franchisees? If they are, they pay a wholesale price and in most markets make a very modest markup. If you boycott the Exxonmobil station, Exxonmobil gasoline wholsaling inc. just sells its gas to Joe's Fillup (maybe even at a higher price)

[KrazyHorse]

The oil company isn't going to operate by ensuring that they make a profit on average. They make a profit on every barrel of oil, or else they simply don't drill. Decreasing the price means that some of their barrels are unprofitable, so they would make more money simply by not drilling for that particular barrel.