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

[Flubber]

Originally posted by Kidicious


It explains why the price of gas is driven by profits, not the price of oil, since they paid a lower price for oil than it's fmv.

IMHO the price of EVERYTHING is driven by profits . . . People will sell things for what the market will pay as long as it remains profitable to do so.

Just curious but what do you think a bottle of Coke costs to make? My house is "worth" 40% more than I paid etc


Now with gasoline, what the market will pay is very much linked to the price of oil and the basics of supply and demand. The prices don't move in lock-step but the correlation is obvious.

I would still bet that an examination of the margin for the retailer on gasoline, you would still find it to be pretty small

[Kidlicious]

Originally posted by Flubber


Well apparently you can improve your gas mileage by properly inflating your tires.

I didn't hear what Arnold said but better mileage might lessen demand somewhat

It's just typical political bull****.

[Kidlicious]

Originally posted by Flubber
IMHO the price of EVERYTHING is driven by profits . . . People will sell things for what the market will pay as long as it remains profitable to do so.

Actually the gas industry is special in this regard. I'm sure producers in other industry would love to do this sort of thing, but they aren't with such success.

Just curious but what do you think a bottle of Coke costs to make? My house is "worth" 40% more than I paid etc

I don't know really. I figure they make a pretty good margin though, but they probably spend a lot on advertizing and other monopoly costs.

Now with gasoline, what the market will pay is very much linked to the price of oil and the basics of supply and demand. The prices don't move in lock-step but the correlation is obvious.

Actually the price of gas goes up with the price of oil lock step, but when the price of oil falls the price of gas stays high. That's because there isn't significant competition in the refining industry. And there isn't going to be, because it isn't cost effective for the refiners to compete with each other that much.

I would still bet that an examination of the margin for the retailer on gasoline, you would still find it to be pretty small

relailers yes, but we're talking about refiners.

[KrazyHorse]

And there isn't going to be, because it isn't cost effective for the refiners to compete with each other that much.

If that's true, then what is the reason for that (you're almost there)?

[Spiffor]

Because the demand is inelastic, and many people are still willing to buy gas, even if it costs them an arm and a leg.

[Flubber]

Originally posted by Spiffor
Because the demand is inelastic, and many people are still willing to buy gas, even if it costs them an arm and a leg.

It is becoming apparent that demand is actually a fair bit stronger at higher price levels than what I would have anticipated.


But I have a question about "value"-- Is it "worth it" to pay $20 for the amount of driving that $20 gets you. When I compare the amount of driving I get for $20 I must say it compares favorably to me with a lot of other things I get for $20-- I think a lot of people find that and thats why demand is staying strong at these prices

[KrazyHorse]

No. First off, the customers of refineries are retailers and wholesale purchasers, not end consumers, so while they might not make the choice to not buy gas at all due to price, they will be fairly conscious of price considerations in choosing their supplier.

Secondly, if there is spare capacity and margins are anything other than razor-thin then refinery operators should be willing to drop their prices slightly in order to capture more market share (assuming that most refineries operate in a competitive environment)

Thirdly, if a refinery doesn't operate in a competitive environment (local problem) then why wouldn't other refineries be brought on-line to compete with them in their juicy, formerly protected market?

Either you have to posit that there is large-scale collusion between refinery operators (could add...20 cents to the cost of a gallon of gas at station?) or you have to accept that there are only local problems (could add more like 5-10 cents in different regions)...

[KrazyHorse]

Your problem is that you are pretending that there is only one supplier of refined products, spiffor. Overall demand may be elastic, but demand from a single supplier is highly elastic.

[Zkribbler]

Originally posted by KrazyHorse
No. First off, the customers of refineries are retailers and wholesale purchasers, not end consumers, so while they might not make the choice to not buy gas at all due to price, they will be fairly conscious of price considerations in choosing their supplier.

Yes, but if we tinfoil-hat-wearing conspiracy theorists are correct and the refineries an engaged in at least an implicit price fixing scheme, then it wouldn't matter which refinery was the supplier.

Secondly, if there is spare capacity and margins are anything other than razor-thin then refinery operators should be willing to drop their prices slightly in order to capture more market share (assuming that most refineries operate in a competitive environment)

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

Thirdly, if a refinery doesn't operate in a competitive environment (local problem) then why wouldn't other refineries be brought on-line to compete with them in their juicy, formerly protected market?

Because refineries are enormously expensive and take a long time to build.


I heard Sen. Barbara Boxer (D-CA) on a talk show today. She opined that there was gas gouging but went on to say that, even if that extra price were backed out of the cost, gasoline would still be very expensive because of the increasing demand. She announced that she's working on many different pieced of legislation, including one which would require the government's fleet of cars to be energy efficient.

[Flubber]

MY question is why are people so fixated on cost for this industry. Consider . .. if you go to buy a house, or a diamond ring or a pair of pants, you don't itemize what their costs are and revile them as a dirty profiteer . . . even if you can get said pair of pants for cheaper in Tajikistan than Rodeo Drive


So why is oil/ gasoline different? Well because it is a "necessary" for many people and industries and failure to obtain it could lead to industrial ruin. So obviously people and nation-states are concerned about having a secure supply and not being held to ransom by monopolistic practices

I get that. I understand why its important.

But the oil industry is an open market and intensely competitive. Every company , business unit and sub-unit is very motivated and incentivized to "beat" the other companies. 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.

People may not like the current resulting oil price but the reality is that the current price is fundamentally supported to a large extent by supply and demand (although hype around Iran, Nigeria and Venezuala also impacts). That oil price is set by the market and I'f bet that most senior oil execs would on some levels rather it were lower since these levels trigger backlash, nationalistic expropriations or other government money grabs AND more fundamentally causes people to start looking seriously at alternatives. While they love this short term cash flow, they continue to think very long term

[Spiffor]

Originally posted by KrazyHorse
Your problem is that you are pretending that there is only one supplier of refined products, spiffor. Overall demand may be elastic, but demand from a single supplier is highly elastic.

1. I have the prejudice that in a market as specific, and as oligopolistic as refinement, collusions are almost bound to occur.

2. Supply can be inelastic when the initial investments are extremely high, or when the return on investment in going to take a long time (which is actually the same thing). Even though the market is not protected by legal arrangements, the position of the current actors "protect" it from a great many investors.

3. An infrastructure such as a refinery takes a long time to set up, even when the money is put on the table. This is true of most oil-related infrastructure.

[KrazyHorse]

Originally posted by Zkribbler

Yes, but if we tinfoil-hat-wearing conspiracy theorists are correct and the refineries an engaged in at least an implicit price fixing scheme, then it wouldn't matter which refinery was the supplier.

I covered that later.

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

a) I thought it was more like 80-85%

b) If the margins are razor-thin then you have no cause to complain. If there is not sufficient spare capacity then it's a scarcity issue, and is temporary. Which of those would you like to posit?

Because refineries are enormously expensive and take a long time to build.

Yes, which means that once you build one you need to make money with it. There will always be a delay between there being a local niche for another refinery and its being built. The fact that historic rates of return are low, discouraging further investment is the whole point. Those rates of return should rise to make refinery investment attractive.

She opined that there was gas gouging

Price gouging doesn't really mean anything. It seems to me to that calling setting a price commensurate with the scarcity of an asset "price gouging" is a little bit disingenuous. Secondly, saying that there is price gouging across all of North America is just stupid. There are no overwhelming local supply issues which are temporary (as in the wake of hurricane Katrina) so even the usual vague definition doesn't apply. Though it's nice to see politicians engaging in a bit of populist *****ing

[Zkribbler]

Originally posted by Flubber
But the oil industry is an open market and intensely competitive.

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

[KrazyHorse]

Originally posted by Spiffor

1. I have the prejudice that in a market as specific, and as oligopolistic as refinement, collusions are almost bound to occur.

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....

[KrazyHorse]

Originally posted by Zkribbler




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

They are not non-indicative of them either.

Cheap oil is scarce. There is more demand than can be supplied at low prices. This demand is inelastic. This demand has increased recently. Bringing additional supply online quickly is expensive. What does this mean for profitability? Duh.