Laws Against Price Gouging

[Kidlicious]

Originally posted by Ned
This eagerness of politicians to punish people for making profits from short-term shortages is as old as the hills. Arguably, it was a contributing factor to the fall of the Roman Empire when the despicable Diocletion imposed price controls on the Empire. This lead to economic dislocations that Herr Emperor fixed by tying people to their professions and/or land. The economy of the empire simply collapsed as it increasingly became a barter economy. As well, the Empire had to hire foreign soldiers as it could no longer recruit new soldiers from other professions. Only sons of soldiers could be soldiers, etc. We all know where this lead.

Is there a term like "Godwinised" when people say "that's what happened to the Roman Empire?"

When the price of bread hits the roof during a seige, should the good king impose price controls? Not if he wants anyone to risk running the blockade to bring in more wheat.

And high prices aren't incentive to run the blockade?

Ditto oil. If you want more supply, you simply have to keep away from price controls of any sort.

High returns are incentive to invest. You can have high returns and price controls, and therefore price controls and increased supply are not mutually exclusive.

It was price controls, after all, that caused the economic meltdown in the '70s.
And it was the lifting of price controls that was a major contributing cause of the boom that began in the '80s.

BAM

[Flubber]

Originally posted by Kidicious

Have you been reading the thread? I've repeated myself more then once already. Obviously, since there is more demand for gas than there is capacity to supply gas, there is incentive to build refineries. The problem is that there maybe too many built since the price of gas is so high.

What do you say we worry about that when , I don't know , there is ONE refinery being built. You are actually concerned about an OVERSUPPLY of refineries??

How stupid do you think the people that invest the BILLIONS in these things are. Haven't you read ANY of my comments about the detailed market and profit projections that are done for these types of investments now?

In thread after thread I have pointed out that for a multi-billiondollar multi-year investment, the current profitability is IRRELEVANT except to the extent it factors into the profitability 10 years from now.

Overall at your comment.

Originally posted by Kidicious



You're only looking at incentive to build refineries, and not looking at the whole picture. A windfall profit tax will increase consumer surplus and help the refining industry not over expand again.

Lets see --- current undersupply and ZERO new refineries currently under construction . . . yah-- over expansion seems a big issue ---

Originally posted by Kidicious




To lower gas prices!

Leaving aside whether this is desirable, to really materially impact gasoline prices , you need a lower crude price. Refiners margins have never been that great no matter how much you try to twist the last year to two.

In fact you attempt to draw conclusions about refining based on single year returns show just how little you understand the process that goes into making a amulti-billion dollar decision that won't see ANY revenue for ten years minimum

[Flubber]

Originally posted by Kidicious

High returns are incentive to invest. You can have high returns and price controls, and therefore price controls and increased supply are not mutually exclusive.

HUh ??

So you would have a "controlled" high price ?? Why is the Kidicious Price-setting Collective any better at setting the price than the market?

[Sikander]

Re: Re: Laws Against Price Gouging

Originally posted by Zkribbler


This proposal is not driven by ecomomic theory but by political pressure. The price of gasoline is soaring, people are angry and politians are frightened

A better approached would be:
(1) An investigation into any possible price fixing by the oil companies. (There probably wasn't, but who know?)
(2) End mega-mergers of energy companies. Maybe even break up a few to create more competition.
(3) Increase supply. Imran has pointed out repeatedly that it takes years (6-10) to get environmental okays to build a refinery. Although protecting the environment is a good thing, this is probably in the neighborhood of ten times the length it should take.
(4) Decrease demand. Higher MPG standards, moving govenmental autombile fleets over onto altenative fuels or convert them to hybrids. Schwartenegger's push for fuel-cell automobile technology is a good thing.

BTW: Does anyone know the practicality of converting airliners from jet fuel over to liquid hydrogen--i.e. rocket fuel?

Oil prices aren't really being driven up by large U.S. Oil companies, they are much more the result of supply / demand, the OPEC cartel and the large state owned conglomerates. So I disagree that breaking up companies is actually going to reduce the price of gasoline in the U.S., it may in fact be the opposite as the consolidation has actually increased refining capacity.

Otherwise I agree with the thrust of your post. Decreasing demand seems a lot easier than increasing supply at this point.

[Flubber]

Re: Re: Re: Laws Against Price Gouging

Originally posted by Sikander




Otherwise I agree with the thrust of your post. Decreasing demand seems a lot easier than increasing supply at this point.

I agree as well. Demand for gasoline could drop markedly and immediately if people just made a conscious decision to drive a little less. Instead people send chain emails about boycotting Company x or y beforer firing up their hummer, waving at the neighbors as they all head for the same general destination.

Increasing supply takes time. Oil companies are trying hard to increase crude production but with refining capacity, there is just no quick way to do it

[Kidlicious]

Flubber,

You're just repeating yourself and you haven't countered any of my arguments. I've showed you that oil exploration increased under price controls, but you just ignore that. Furthermore, your continued claim that refining is not incredibly profitable is ridiculous.

Here's the facts. Refining profits have grown annually by an average of 35.3% per year over the past 5 years. That's third highest industry overall. That's almost 5 percentage points over oil production. As I've already posted, and you seem to ignore, Refining profits as a percentage of shareholder's equity increased by 25.8% over the last year. That's also ahead of oil production. But here's something I haven't posted yet. Since you think this is just about 1 year the Total Return to Shareholder's Equity for the refining industry over the last ten year period is 16.1%. That's 2 percentage points above oil production.

I call your claim that there isn't massive incentive to build refineries total bullhockey. There's too much incentive. I've also posted on this Bb the historical trends to expansion in the industry that show over expansion caused by prices that were too high.

You need to drop this insistance that the market price is the right price no matter what. It's not. The price has historically sent improper signals, and there are major costs involved.

[Flubber]

Originally posted by Kidicious
Flubber,

You're just repeating yourself and you haven't countered any of my arguments. I've showed you that oil exploration increased under price controls, but you just ignore that.

No what you stated was that exploration exploded once the controls came off and seemed to draw an analogy that somehow controls would prevent construction of over-capacity in refining. Quite a leap !!

Originally posted by Kidicious
Flubber,

. Furthermore, your continued claim that refining is not incredibly profitable is ridiculous.

I am still going by the numbers you posted in the other thread that went along with numbers I had found that showed over the last 15 years or so that refining has returned around a 5% return on investment. That is NOT excessive profitability.

You seem to be switching to measures like returns on equity or revenue. Why ??

Personally I find return on revenue to be a pretty useless measure for refining since it does not measure the necessary investment at ALL. Return on equity can be manipulated by the debt-equity ratio common in a given industry.

Thats why I (and the people I work for) seem to like rates of return on investment. Reagrdless of how it is structured , what is the profit rate if x dollars are tied up in a project.


Show me some reputable ROI numbers showing "high profitability" in refining over a 10-15 year period and then I might drop my assertion that it is not "incredibly profitable"

[Flubber]

Originally posted by Kidicious
Flubber,
Here's the facts. Refining profits have grown annually by an average of 35.3% per year over the past 5 years. That's third highest industry overall.

Not suprising. Obviously an industry that has had some of the crappiest profits out there would have little problem leading in profitability growth percentages. Its a bullcrap stat. Next!

Originally posted by Kidicious
As I've already posted, and you seem to ignore, Refining profits as a percentage of shareholder's equity increased by 25.8% over the last year. That's also ahead of oil production.

Again -- a poor profit industry will almost always be able to post better profit growth on a precentage basis than a more profitable industry.

Originally posted by Kidicious
But here's something I haven't posted yet. Since you think this is just about 1 year the Total Return to Shareholder's Equity for the refining industry over the last ten year period is 16.1%. That's 2 percentage points above oil production.

THat one surprises me and its totally out of alignment with the return on investment numbers I have seen . SOURCE?? If this number is accurate, something isn't quite right.

Originally posted by Kidicious


I call your claim that there isn't massive incentive to build refineries total bullhockey. There's too much incentive. I've also posted on this Bb the historical trends to expansion in the industry that show over expansion caused by prices that were too high.

.

There's TOO MUCH incentive ?? Then why are you the only one seeing this. Why if it is so massively incredibly over-incentivized are there not dozens of players clamouring for the right to build refineries. If there are , please advise.

Originally posted by Kidicious


You need to drop this insistance that the market price is the right price no matter what. It's not. The price has historically sent improper signals, and there are major costs involved.

I need to drop nothing. I have very very little faith in any government set price control. Lowering gasoline prices artificially prevents any reduction in demand that SHOULD come with increased prices thereby keeping demand artificially high. A set gasoline price also runs the risk of supply going elsewhere.

[Kidlicious]

Those stats come from the Fortune500 link that Kontiki provided.

[Kidlicious]

Here's another stat. Valero's profits increased by 99% in 2005. Small base? I don't think so. They made quite a bit in 2004 also. 99% is amazing. They are projected to have a very large increase in 2006 also.

[Kidlicious]

Originally posted by Flubber
Personally I find return on revenue to be a pretty useless measure for refining since it does not measure the necessary investment at ALL. Return on equity can be manipulated by the debt-equity ratio common in a given industry.

Thats why I (and the people I work for) seem to like rates of return on investment. Reagrdless of how it is structured , what is the profit rate if x dollars are tied up in a project.


Show me some reputable ROI numbers showing "high profitability" in refining over a 10-15 year period and then I might drop my assertion that it is not "incredibly profitable"

I call bull****. I'm looking at the CRS (Congressional Research Service) report for Congress on the profits in the energy market and I see that they us the return on equity numbers as opposed to the return on assets numbers.

Link

[Kidlicious]

Originally posted by Flubber


No what you stated was that exploration exploded once the controls came off and seemed to draw an analogy that somehow controls would prevent construction of over-capacity in refining. Quite a leap !!

I showed you that exploration increased despite the controls. It appears that the controls prevented an boom/bust.

[Flubber]

Originally posted by Kidicious


I call bull****. I'm looking at the CRS (Congressional Research Service) report for Congress on the profits in the energy market and I see that they us the return on equity numbers as opposed to the return on assets numbers.

Link

Do you read the stuff you link??

First off -- that document reads like an "idiots guide to", it is so simplistic they find it necessary to tell people what various measures mean-- Oh and they do cite return on assets as "another common measure of profitability"

But as I explained REPEATEDLY when assessing a "project" like a new refinery, the test is the return on this specific investment. return on assets or equity are company-wide measures--Just try to apply it to a single project and come up with meaningful numbers.


Oh and their conclusion was that profitability "could " lead to investment in increased capacity in the US. there were also a few comments about the cyclical nature of the industry and how you shouldn't read too much into a year or two

[Kontiki]

Originally posted by Kidicious
Those stats come from the Fortune500 link that Kontiki provided.

To be clear, Fortune categorizes the totality of Exxon et al as "Oil Refining", not just their actual refining operations. So any data presented for such companies is inclusive of their production, refining, retail and all other operations.

[Kidlicious]

Originally posted by Flubber


Do you read the stuff you link??

First off -- that document reads like an "idiots guide to", it is so simplistic they find it necessary to tell people what various measures mean--

So what? He is addressing Conress. They aren't experts. Is this suppose to be your reason why he doesn't use ROA? I don't get it.

Oh and they do cite return on assets as "another common measure of profitability"

But he doesn't use it, so obviously using ROE is fine.

But as I explained REPEATEDLY when assessing a "project" like a new refinery, the test is the return on this specific investment. return on assets or equity are company-wide measures--Just try to apply it to a single project and come up with meaningful numbers.

We aren't talking about a single project. We are talking about a general tendency to invest in new capacity.

Oh and their conclusion was that profitability "could " lead to investment in increased capacity in the US. there were also a few comments about the cyclical nature of the industry and how you shouldn't read too much into a year or two

Er... So what? Did you expect him to say that it "will." That's not the type of language you use when you make economic reports to Congress. Did you notice otherwise?