Down with the evil Gas lords III: Kaak's Redemption

[Arrian]

In this context we are talking about building more refineries. The potential exists to reduce the margins for the existing refineries. I think that what matters is a comparison of (1) what the net income would be if the new refineries were not built and (2) what the new income would be if the new refineries were built. That's what matters, and that's why I'm saying we need to talk about what the net income would be and not the ROI

This, at least, makes a modicum of sense.

It's not that the ROI for the new refinery doesn't matter, it's that the impact on existing refineries also matters.

Fine. Granted.

-Arrian

[Kidlicious]

Originally posted by Flubber



and the measure that everyone looks at to see how well a manager does that is the ones with little acronyms like . . . everyone . . . lets say it together . . . ROR/ROI

I don't think so. I think they look at increased earnings, revenue etc.. ROR is down on the list for sure.

[Kidlicious]

Originally posted by GhengisFarb

Project 1
Has an investment of $1 million.
Has a net profit of $1000.


Project 2
Has an investment of $100.
Has a net profit of $750.

Kid is going follow his net profit nose and invest in Project 1. The rest of us are going to invest in Project 2 because we go by Return on Investment.

No I'm not. You're twisting what I'm saying, and I already told you that.

[GhengisFarbâ„¢]

Originally posted by Kidicious
In this context we are talking about building more refineries. The potential exists to reduce the margins for the existing refineries. I think that what matters is a comparison of (1) what the net income would be if the new refineries were not built and (2) what the new income would be if the new refineries were built. That's what matters, and that's why I'm saying we need to talk about what the net income would be and not the ROI

Time value of money is a key in the lack of motivation for new refineries. As stated before estimates to complete the required EPA studies and environmental impact paperwork are in the neighborhood of 10 years before you can even break ground.

It's difficult to know what the market will be in 10 years. Not to mention changes in environmental regulations and refinery equipment. By the time you're ready to build its already 10 years outdated and you haven't even started building it.

Net Income is what they've been making their decisions on. Hence why they've been closing refineries the last 5 years. They make more profit off making less gasoline.

[Kidlicious]

nm

[Flubber]

Lets make it simpler kid

manager "A" gets a million bucks to invest and makes 100,00 in a year and retains an investment worth 1 million

manager "B" gets 10 million to invest and makes 200,000 in a year an retains an investment worth 10 million

Now "B" made more total profit so I guess that who you think did best. To me "A" kicked ass.

[Flubber]

Originally posted by Kidicious


Honestly it is not. I've just finished getting my business degree.

Yup and school is JUST LIKE real life

[Arrian]

If you have 10 refineries and you're pondering building an 11th, Kid is saying you would not only try to evaluate the ROI on the 11th, but also the impact on the ROR(?)s of the other 10.

I think.

-Arrian

[Flubber]

Originally posted by Arrian
This is hilarious. We have someone who works in the industry flat-out telling someone who doesn't how it works, and being told "honestly, no it's not."

THat amused me too. Admittedly my experience is only inside an aggregate of 7 business units in the Candain branches of 3 different multi-billion dollar oil companies.

[Kidlicious]

Ok I was wrong when I said that managers are evaluated more on net income than ROI. I think investors look at things like earnings per share etc. And the concept in economics is that net income is maximized in the competitive firm. I still think the quesiton is which situation would bring more net income.

[Flubber]

Originally posted by Kidicious
I still think the quesiton is which situation would bring more net income.

Its a good question . .. a good theoretical question.

In practice . . . Of course people want more revenue and net income and profit-- sure. More profit is generally good . This is all obvious to say.

But most companies reject projects which don't make enough profits.

Kid ask yourself this question . If I could give you a "guaranteed" 2% profit on a project. All it requires is a 3 billion investment. Would you do it? The answer as you and everyone else knows is that none of the major companies would do it, even though it would improve net income !!! Whether you want to acknowledge it or not, you start thinking about whether that is a "good return" or not.


The beauty of ROR or ROI numbers is that it reflects profitability on an easily assessed basis. IN many majot oil companies there is a formal project presentation process where business units present their proposals to senior managers to compete for capital. The pre-eminent numbers include the ROI and risk numbers-- Al those other things that kid mentions are also there but the easiest to assess is the projected project life risk weighted ROI.

[Kidlicious]

Overall ROI is going to decrease with each dollar you invest though (assuming you make the investmenst first which yield the highest ROI). Of course, their ROI is going to decrease if they expand. How does this tell us what the profit maximizing point of production is?

[Flubber]

Originally posted by Arrian


This, at least, makes a modicum of sense.

It's not that the ROI for the new refinery doesn't matter, it's that the impact on existing refineries also matters.

Fine. Granted.

-Arrian

My question is matters to whom? Additional refining can impact profitability of existing refining-- No question. BUt we toss around an industry figure like that "18%" one without ever explicitly saying that the various refiners are making more or less than this.

Its just that when saying you want to assess the impact on existing refiners, you ASSUME that a new refinery MUST be built by an existing refiner in that market. Thats not a correct assumption.


Now assume Kid is right and that a new refinery would hurt profits at existing refineries (on all measures). That could be a factor that leads to existing refiners to be less likely to build a new refinery. If you have a marginal project to start with and then add in a projected negative consequence to other ventures . . . well its not likely to get done

BUT the rest of the world would not care about that. There are companies with the capability to build refineries and who are not currently major refiners in the US domestic market. The impact on current refineries would be irrelevant to them except to the extent that any change in the market will impact margins.


So to me, the obvious reason why there are no new US refineries is that NOBODY has yet found a compelling case to build one. The one project thats trying . . . perhaps a bunch of kooks out of touch with reality . .. Perhaps visionaries who are simply making better projections-- either is possible

[Flubber]

Originally posted by Kidicious
Overall ROI is going to decrease with each dollar you invest though (assuming you make the investmenst first which yield the highest ROI). Of course, their ROI is going to decrease if they expand. How does this tell us what the profit maximizing point of production is?

I don't think it does


In practice companies will set ROI thresholds. No project that does not meet x level gets done. Of the projects that meet the threshold, the top so many get done until the capital allocated to the sector/business unit is allocated.

IN a given year, projects with a 20% ROI can get left on the shelf. Why? Because resources are limited. A given company simply does not have the resources to get to the "profit maximizing point of production". With oil prices where they are there will be very profitable proposals that simply have to wait as they don't have the engineers/rigs/ managers to actually execute them

[Flubber]

Originally posted by Kidicious
Overall ROI is going to decrease with each dollar you invest though (assuming you make the investmenst first which yield the highest ROI).

Again yes and no. If you have 10 billion sitting, your default case might be an ROI of say 5% sitting in some safe investment. So while the second or third operational investment will have a lesser ROI than the first choice, all operational investments chosen MUST have a better ROI than the base case.