Down with the evil Gas lords II: Kaak's Revenge!

[Flubber]

Originally posted by Zkribbler


If, if, if. I think it was JohnT who posted a chart earlier showing refinery production dropping to 75% of total capacity last September.

Err Hurricane Katrina !!!!!!!!!

It was declared on August 29, 2005 and the refiners slowed production for the silly reason that most of their refining capacity in the Gulf Area was partially submerged

[Zkribbler]

I didn't realize that 25% of our refinering capacity was located in New Orleans.

With all that lost refining capacity, oil profits must have plummetted. -- Oh wait.

[Flubber]

Originally posted by Zkribbler




Let's try again: Record profits are not indicative of an intensely competitive industry.

Why not? I work in the industry and at every level these guys are trying to gain an advantage over each other. However they are not stupid . . . At current demand levels, trying to "compete"on price only means that the supplier that drops its price will make less money. All the other suppliers will still sell every drop of oil they can produce at their higher prices. Basically suppliers of crude oil are selling all they can now and have limited abilities to produce more quickly so trying to get "market share" seems nonsensical.

Put more simply-- can you think of any industry where, when selling everything you can produce, it makes sense to drop your price in order to attract more demand?

[Zkribbler]

When the free market is unable to keep the price of a commodity down, it's time for price controls!

[KrazyHorse]

Sure. Just tell me ahead of time so I can stockpile and resell on the black market

[Flubber]

Originally posted by Zkribbler
I didn't realize that 25% of our refinering capacity was located in New Orleans.

1. I doubt the industry is ever at 100% since there are safety shutdowns, maintenance reworks and upgrades for various changing regulatory requirements.

2. I don't know how much was in N.O. itself but a significant portion of US refining capacity is on the Gulf Coast ( maybe has something to do with the bulk of US production being there) and Katrina impacted quite a few of them. I know of several facilities that were completely shut down since many oil majors evacuated and closed facilities in ADVANCE of the hurricane.

3, Even if the facility was untouched , much of the Gulf Coast was focused on relief efforts. I doubt that trucling oil around was a priority

[Spiffor]

Originally posted by KrazyHorse
While this is possible, how much of an effect on prices can collusion have when refined products in addition to crude can be easily shipped? The answer, of course, is going to be of the same order as the transportation costs....

I am not under the impression that gas is structurated into a world market currently. It seems to be structurated in many localized markets, especially considering that many countries have nationalized refiners, or only-recently-privatised refiners.

There are a few world actors in the business of refining, and not all are American indeed. But still, there only are a few.

Flubber said it well:

The majors are also immensely large and think in terms of 20 to 40 year cycles and so are not likely to engage in short-term tactics like price wars since they know that competitors will match and just result in less profit for all.

The majors don't expect their market to change fundamentally. They expect their competitors to remain the same in the coming decades (already, this is absolutely nothing like the pure market conditions in which the economic theory applies). They are aware of the interest of their industry, because they are aware they are compatible with their own interest in the long run.

Such a thing (long-term planning, no price-competition) can only work in a market where no upstart is going to crash the party, i.e. where no newly-founded competitor will start a price war to get a sizeable market share. The majors seem confident in that respect, at least if Flubber is to be believed.

In short, even if there is no secret meeting in order to set specific prices, there is an idea common to the entire industry about how gas prices should be set: i.e., that the price of gas doesn't follow the strict principles of supply and demand, but that the refiners have a right to a "tithe" over the refined product.

You shouldn't put too much faith in market mechanisms. The model you learned in Econ 101 is not a be-all end-all. For once, it's a theoretical model that works in the world of the "pure and perfect competition", one of whose components is the atomicity of the market (plenty of small suppliers and demanders).
For twice, market mechanisms only work when an industry doesn't have a"gentleman's agreement" about their behaviour. When nobody is willing to play the market game (at least, the ugly part of the market game, i.e when you try to undercut your competitors by being cheaper), then the market game simply doesn't happen.

Until a major becomes rash, or until a new rash competitor pops up, I just don't see why the status quo would be changed.

[Flubber]

Originally posted by Zkribbler
:

With all that lost refining capacity, oil profits must have plummetted. -- Oh wait.

Some oil companies don't refine at all but in any case the bulk of the profits from the increase in oil has been in the upstream units.

[Flubber]

Originally posted by Zkribbler
When the free market is unable to keep the price of a commodity down, it's time for price controls!

Who imposes these and who enforces these. Canada has a lot of oil and if the US decided to peg a barrell of oil at $45, we would just start selling to China at $60 or $70.

WE debated worldwide price controls a few threads back. They won't work. If oil was pegged today at $35 there are a bunch or reworks, recompletions and injection schemes that get cancelled and several long-term oilsands projects get shelved-- Production would dip and soon there would be unsatisfied demand. Pretty soon someone would be willing to pay a "premium" for a more secure supply and anotehr and anotehr until the price floated to a "market level" where new supplies and abated demand reached a reasonable equilibrium.

[Flubber]

Originally posted by Spiffor


Such a thing (long-term planning, no price-competition) can only work in a market where no upstart is going to crash the party, i.e. where no newly-founded competitor will start a price war to get a sizeable market share. The majors seem confident in that respect, at least if Flubber is to be believed.

You can believe me. A new refinery takes years to build and costs BILLIONS of dollars so its not like someone can surprise them with a refinery. The reality from what I understand is that the majors don't really believe that there will be much new refining capacity because THEY THEMSELVES cannot find a way to build a refinery that makes a reasonable rate of return for the investment.If someone started to build one they would each factor it into their plans

AS I have said repeatedly, historically (since 1990), the rates of return on capital employed for refineries is 5%. FIVE PERCENT. I like to get better than 5% when I invest a thousand bucks so I don't think I would be thrilled to get that on a few billion.

[Flubber]

While its not 25% of US production, the effect of Katrina and Rita had 14% of refiners down in late September

NEWS: Seven refineries (10% of US capacity) out indefinitely from Rita; NYMEX futures up 2.5% Monday
Written by Jay Ruskin

Monday, 26 September 2005

After falling in the immediate aftermath of Hurricane Rita, the price of oil for November delivery rose 2.5% on Monday, Bloomberg News reports.[1] -- The cause: seven refineries in the path of the hurricane are closed without word on how long they may be shut. -- Four percent of U.S. refining capacity is still out because of Hurricane Katrina, and the refining capacity disabled at the moment from Rita amounts to 1.77 million barrels a day, or 10% of U.S. capacity. -- Thus 14% of U.S. refinining capacity is out, with no reliable estimate of when production will resume

[Spiffor]

Originally posted by Flubber
AS I have said repeatedly, historically (since 1990), the rates of return on capital employed for refineries is 5%. FIVE PERCENT. I like to get better than 5% when I invest a thousand bucks so I don't think I would be thrilled to get that on a few billion.

Thanks, you're providing data and knowledge that corroborates my point

[Flubber]

Originally posted by Spiffor

Until a major becomes rash, or until a new rash competitor pops up, I just don't see why the status quo would be changed.

The real majors NEVER get rash. They have a process and procedure for all major decisions that prevents it. They can get things wrong but on the multi-million stuff anything they get wrong has been subject to very serious review.

I don't forsee a new rash competitor either!!! It costs too much to enter the market for anyone to be silly about things.


and Spiffor-- I see nothing sinister in their behavior. If your refinery is operating at capacity, what gain is there in dropping your fees/prices? Is there any point in attracting additional demand you cannot fill?

[KrazyHorse]

Originally posted by Spiffor

I am not under the impression that gas is structurated into a world market currently

10% of US gasoline is imported directly, and this number is only increasing. Now imagine how much gas is shipped over large distances within the US. There are dozens of independent operators of refineries in the US itself.

The majors are also immensely large and think in terms of 20 to 40 year cycles and so are not likely to engage in short-term tactics like price wars since they know that competitors will match and just result in less profit for all.

And? Welcome to game theory. In a market as competitive and with as little brand loyalty as oil/gas, price wars do not grab long-term market share. However, this doesn't mean that people can charge whatever they want, since capacity can be increased were profits sufficient to justify it.

The majors don't expect their market to change fundamentally. They expect their competitors to remain the same in the coming decades (already, this is absolutely nothing like the pure market conditions in which the economic theory applies).

Uh...what? Now you're just talking silly.

They are aware of the interest of their industry, because they are aware they are compatible with their own interest in the long run.

? What are you trying to say? This honestly doesn't make any sense.

Such a thing (long-term planning, no price-competition) can only work in a market where no upstart is going to crash the party, i.e. where no newly-founded competitor will start a price war to get a sizeable market share.

You don't have to engage in a price war to grab market share in a competitive, price-driven market. That's the whole point. Because price-consciousness is high, if you can drop your price by one percent you will already find yourself inundated by as much demand as you're able to fill. This isn't the same as ****ing cars or cigarettes. There's no incentive to engage in a price war because people are already basing their purchases on today's price, not yesterday's

The majors seem confident in that respect, at least if Flubber is to be believed.

You have completely misunderstood Flubber. Price wars are often indicative of an industry which had been due for a correction because the market was not price competitive. Engaging in a price war is stupid if customers don't have brand loyalty. Market share doesn't mean anything if you can't hold on to it whil increasing prices back above breakeven.

In short, even if there is no secret meeting in order to set specific prices, there is an idea common to the entire industry about how gas prices should be set: i.e., that the price of gas doesn't follow the strict principles of supply and demand, but that the refiners have a right to a "tithe" over the refined product.

What? Where the **** are you getting this?

You shouldn't put too much faith in market mechanisms. The model you learned in Econ 101 is not a be-all end-all. For once, it's a theoretical model that works in the world of the "pure and perfect competition", one of whose components is the atomicity of the market (plenty of small suppliers and demanders).

No ****. But I also understand the value of approximations. And I've never taken an economics class, by the way.

For twice, market mechanisms only work when an industry doesn't have a"gentleman's agreement" about their behaviour.

And if there was a gentleman's agreement then it would be called a cartel. There is a serious difference between game theory indicating against price war and people fixing the price of gas. Excessive margins cannot be maintained by the game theory approach due to the fact that there are dozens of players with the capability to add capacity.

When nobody is willing to play the market game (at least, the ugly part of the market game, i.e when you try to undercut your competitors by being cheaper)

Just because a market is stable doesn't mean that there isn't price competition.

[Flubber]

Originally posted by Spiffor

Thanks, you're providing data and knowledge that corroborates my point

hey the data is the data and the knowledge is the knowledge-- Other people will take it to support other viewpoints but I see the data as supporting the fact that the refining industry has NOT been immensely profitable. I have not seen recent data to see if that has changed