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

[Spiffor]

Originally posted by Flubber
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?

I don't see their behaviour as particularly sinister. "Market" doesn't equate "Good" in my vocabulary, as you might already know

I'm just saying that the refining industry doesn't strike me as one where the market mechanisms are applying, because it is an oligopoly (this might actually be the reason why US gas prices used to be so low when compared to inflation btw). My point is nothing mysterious (I'd even say it's fairly obvious), but I felt it needed to be told here.

[KrazyHorse]

Originally posted by Spiffor

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

No, he's not. If you accept a 5% return on capital then you accept that nobody's ripping anybody off. The ****ing stock market averages 7-8%. If you can only get 5% on your money then the oil companies are better off buying index funds than building new refineries. This means that prices have historically been too low

[Frozzy]

Originally posted by 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.

No

[Spiffor]

10% of US gasoline is imported directly, and this number is only increasing.

OMFG! 10% Only 90% of the gas consumed in the US is domestically produced? How amazingly global the market is!
Seriously, you sound like Kaak when he backs his argument on the difference between the oil price in London and in the US.
And yes, the gas market is becoming more global, notably as European companies are becoming increasingly less national, and more European. However, we are very far from a global market similar to oil's.

As to the dozens of independant refineries, I'd like to point out that the majors produce about 80% of all refined oil in the US (1998 figures), and since refineries are horribly expansive and take forever to build, I strongly doubt the smaller refiners have any ability to increase their supply in any significant manner.

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.

And yet this is precisely the way prices go down, at least to the market theory. Because the infite amount of suppliers all try to outcompete each other. Oh, and the market theory doesn't think one notch about brand recognition: the model is actually supposed to work better when all products from the same category (different supplier, but exactly same merchandise) are interchangeable.
Brand recognition is actually a way to turn price into a less essential aspect of demand, because the demander might be willing to put up with higher prices to have his favourite brand.

[Spiffor]

Originally posted by KrazyHorse
This means that prices have historically been too low

Originally posted by Spiffor
I'm just saying that the refining industry doesn't strike me as one where the market mechanisms are applying, because it is an oligopoly (this might actually be the reason why US gas prices used to be so low when compared to inflation btw). My point is nothing mysterious (I'd even say it's fairly obvious), but I felt it needed to be told here.

[KrazyHorse]

Originally posted by Spiffor

10% of US gasoline is imported directly, and this number is only increasing.

OMFG! 10%

Spiffor, if you'd bothered to continue reading I went on to point out that this implies that a large percentage of domestic refining takes place a large distance from consumption, thus the production is not truly local. Given that there are over 50 independent refinery operators in the US, it's a bit of a stretch to call the refining market oligopolistic. If there were only 3, then maybe.

[KrazyHorse]

However, we are very far from a global market similar to oil's.

We might never get there. I'm not sure if transporting gasoline by ship is more troublesome than transporting oil by ship. And since refineries are not as dependent as are oil rigs on their location, you won't see the same level of forced trafficking (production necessarily in one spot, consumption in another). Plus there are regulations on refined products which make international shipping a bit more of a hassle. Gas standards in the US and in Europe are different...

That doesn't mean that the US market is totally isolated either. 10% of the market is probably enough to do serious damage to a cartel.

[Spiffor]

Originally posted by KrazyHorse
Spiffor, if you'd bothered to continue reading I went on to point out that this implies that a large percentage of domestic refining takes place a large distance from consumption, thus the production is not truly local. Given that there are over 50 independent refinery operators in the US, it's a bit of a stretch to call the refining market oligopolistic. If there were only 3, then maybe.

Well, you know, the pop and mom refinery (I say "pop and mom" because among the ~50 refinery operators, only a few of them make 80% of all refined oil in the US, so most of them are pretty small) cannot significantly increase its production. It would have to build a new refinery to that effect, and that's quite a bit expansive.

The mom and pop refinery is no more dangerous to the majors than a corporation totally alien to the market: neither is likely to invest in new refineries, and thus to increase its production.

Also, when I used the word "localized" I meant it in a global context. Gas markets strike me as being something localized to countries or economic areas, with only a hint of globality. Nothing similar to the oil market.

[KrazyHorse]

Spiffor, do you have a point in all this?

it is an oligopoly (this might actually be the reason why US gas prices used to be so low when compared to inflation btw)

What?

Please explain your reasoning here.

[KrazyHorse]

Originally posted by Spiffor

Well, you know, the pop and mom refinery (I say "pop and mom" because among the ~50 refinery operators, only a few of them make 80% of all refined oil in the US, so most of them are pretty small) cannot significantly increase its production. It would have to build a new refinery to that effect

No, it wouldn't. Existing refineries are upgraded to increase capacity. It happens all the time.

[KrazyHorse]

In fact, it's been 30 years since a totally new US refinery was built, and many have shut down since then...

All capacity increases have come from same-refinery increases.

[KrazyHorse]

[Kidlicious]

It doesn't matter how many producers there are in the industry. It matters how many real choices relailers have. I bet retailers don't have many real choices when they buy gas. There's probably one wholesaler that is able to offer a much lower price than the rest because of it's position in the market. If a wholesaler dominates a particular local market it's transportation costs are much lower because it already has many customers in that local market to serve. A gas station in California that wishes to buy gas that is normally sold in Nevada will find that that gas is way too expensive, or the producer there won't deliver at all.

Then there's the issue of capacity. In order to take market share you need the capacity to do so, but the only time there is excess capacity in the industry is when prices are falling and sellers are leaving the industry. Usually at the point efficient producers are buying out the inefficient producers which creates the situation of more monopolistic power when prices start increasing again.

Anyone who thinks that the refining industry is competitive hasn't thought it through. It can not be competitive.

[Flubber]

Originally posted by Kidicious

Anyone who thinks that the refining industry is competitive hasn't thought it through. It can not be competitive.

I haven't expressed any opinion of the competitiveness of the refining industry, nor do I intend to.

The tone of some posters seems to be along the line that there is monopolistic profiteering going on in the refining sector. All I know is that that industry statistics indicate that the sector has returned a 5% rate of return since 1990, so its not like it can be viewed as terrible profitering at that level.

People can talk about whether its competitive enough but my question is whether people dispute that 5% number and if so, on what basis. because from my point of view, if that rate of return is accurate, consumers have NOTHING to complain about when it concerns the past practices of the sector.

[Kidlicious]

Originally posted by Flubber


I haven't expressed any opinion of the competitiveness of the refining industry, nor do I intend to.

The tone of some posters seems to be along the line that there is monopolistic profiteering going on in the refining sector. All I know is that that industry statistics indicate that the sector has returned a 5% rate of return since 1990, so its not like it can be viewed as terrible profitering at that level.

People can talk about whether its competitive enough but my question is whether people dispute that 5% number and if so, on what basis. because from my point of view, if that rate of return is accurate, consumers have NOTHING to complain about when it concerns the past practices of the sector.

Why should consumers be expected to give them return on the're investment. We're talking about what a fair price is today. I don't care what cost their trying to recover. I'd like to recover some costs that I've had over the years too, but am I going to get paid more for my work because I have those costs? Hell no. Those costs have nothing to do with what I will get paid. That's because I have no monopoly power to make an empolyer pay for those things for me. The refining producers have that power. That doesn't mean that we should have to pay for those investments.