http://news.yahoo.com/s/ap/20050926/...washington_hk3
Bush said he may tap in to the national oil reserve to help us relieve some stress at the pumps. I'll believe it when they do. I say they won't but who knows.
http://news.yahoo.com/s/ap/20050926/ap_on_go_pr_wh/rita_washington_hk3
Bush said he may tap in to the national oil reserve to help us relieve some stress at the pumps. I'll believe it when they do. I say they won't but who knows.
Believe what? That crude will be released from the S.P.R., or that additional S.P.R. releases will have any impact on the price at the pump? There have already been significant releases this month, but it's not crude supplies that are causing the price increases so much as lack of refined product availability and delivery. Of course, with several refineries not in production due to the hurricanes, that supply/demand balance for refined product is not likely to change soon. Unfortunately, the dumb masses believe what is gov't or media fed to them more often than not and think pump prices will fall with increased crude supply. But not if you can't refine and deliver it!
For the best indication of which way gas and diesel prices at the pump (as well as natural gas and home heating oil) are headed, look at the commodity futures market. The futures market looks to offset price risk for both producers and consumers by establishing a value for supply at a later or “future” delivery date through hedging activity, as well as by speculation. The futures trading action won’t tell consumers everything they need to know, but it will offer price direction and momentum.
Unfortunately, a few years ago the Energy Information Administration suggested that it takes as many as eight weeks for the full impact of price changes that occur at the spot level to be passed through to retail pump prices. In an August '05 update, the EIA said that it now takes two weeks for spot gasoline prices to reach retail levels, with the price change fully passed through in four weeks. It appears even prior to the current supply disruption, there is less swing supply to balance against rising demand, with restricted slack in the supply chain triggering greater price volatility.
Further, suppliers looking to protect their profit margins are moving price risk further downstream through just-in-time inventory scheduling that allows for tighter control on their costs. Therefore, station inventory is a key factor. Stations base their posted prices on how much they paid for the gasoline they're selling. If that gasoline was purchased at higher wholesale prices last week than the gasoline on hand across the street, then the station is at a disadvantage. They're stuck with a little high priced product.
Another big factor is whether a station has a long-term contract with a big refiner. When prices jump, wholesale prices for independent operators rise faster than for stations affiliated with a big refiner like British Petroleum. The unbranded stations go up first and farther. Often, independent stations end up paying as much as 40 cents a gallon more than their branded competition. When wholesale prices fall, unbranded stations reduce their prices more slowly to recoup losses incurred during price spikes. Thus prices differ on the way down with the varying financial condition of individual stations.
That helps explain, in part, why prices at the pump generally rise faster than they fall!
I don't believe that the prices will go down because of exactly what you said. I heard that the refining capabilities in the US is really behind and they have yet to upgrade.
I think it's mostly gas company BS. Yes they may not be able to run at 100% capacity, but I think if we were to be able to open their books, their profit margin is much higher than they are alluding to.
In other words I think the gas companies are playing hide the sausage and the consumer is finally getting the idea of where the gas companies are sticking their sausage.
__________________
Now I'm just laid bad - G35Princess
R.I.P. MBC
Well, according to auditing rules companies can't falsify the amount of profit on any given product. They can, however, indicate different profit at different levels, i.e. for gas they could show a profit at the production level, at the shipping level, and the refining level, at the distribution level and at the station level.
With fuel prices going up, I'd not want to be a fossil-fuel executive; they're looking at a big bottom line and wondering when consumers are going to make a mass move to something much cheaper. It looks good for right now, but the long-term sustainability of high fuel is simply not there.
I'm all for increased prices, maybe people will purchase cars that are more economical. I'm absolutely sick of people driving their SUVs 30 miles to work then complaining about the cost to fill their tank. If you don't want to pay for the gas, get something that doesn't cost as much to operate.
I'm all for increased prices, maybe people will purchase cars that are more economical. I'm absolutely sick of people driving their SUVs 30 miles to work then complaining about the cost to fill their tank. If you don't want to pay for the gas, get something that doesn't cost as much to operate.
K-
Well, I suppose that might make sense if they just bot their SUV, but many SUVs were purchased during the past several years when prices were less than 1/2 of what they are today. SUV owners are entitled to feel the pinch of rising fuel costs just like everyone else. Heck, I heard my neighbor complain how much he spends to commute daily... in his Corolla! It's all relative!
I'm all for capitalism, but I can't understand why the major oil companies haven't been investing some of the billions of dollars profit that they make per year on new refining plants and updated equipment.
Pharmaceutical companies sometimes make a lot of profit, but much of the profit is reinvested into R&D efforts for subsequent years. I'm not an expert on the petroleum industry, but it sounds like there is little growth in the refining capabilities of the oil companies through building new sites and/or updating technologies.
A lot of the reason why is most peoples NIMBY feeling toward them. They're great out there where I can't see 'em, but don't let them anywhere near me. Same reason nuclear power isn't more prevelant despite the increase in safety since 3 Mile.
__________________
Everyone is finally equal. No one is smarter than anyone else. No one is stronger than anyone else. No one is better. Everyone is worse.
- NIMBY...
- multi-year federal and state permitting process costs hundreds of million$...
- environmental regulations...
Agreed these are real concerns, however, I suspect the real issue is (surprise!) money. More specifically, insufficient R.O.I. (return on investment). For example:
- additional refineries would increase the supply of gasoline in the US... which would help to lower gasoline prices... which would impact the bottom lines of Integrated Oil Companies in a negative way...
- the cost to permit and build a new refinery would exceed the reduced profits on the increased refined products sales in the US...
Basically, I believe the IOCs don't want to invest in refineries because they are unwilling to accept a lower rate of return, and don't care to invest today for (unquantified) profits many years down the road. In fact, they are probably scared to death that if they were to commit to building today, by the time their new refinery came online, continued escalation of refined product prices in the interim will have re-invigorated the alternative fuel markets and caused a notable drop in gasoline demand.
So, from their point of view (and their actions), it appears they believe R&D $$$ are better spent on finding ways to get more crude out of the ground to sell at today's inflated prices. They are doing quite well for their shareholders by that business strategy, never mind doing the right thing for America. Just look at their long streak of rising, record quarterly profits.
Every year, Fortune Magazine, in its Fortune 500 issue, calculates the rate of return on shareholder equity for each major industry. Last year, when oil prices were a lot lower than they are now, the average return for both independent refiners and integrated majors was 23.9 percent. This year, it's been even higher. And over the past decade, according to Fortune, the return on equity in the sector has averaged 16 percent, well above the investment hurdle rates in most other sectors of the economy.
Also, look at Valero. Since 1997, it has bought up lots of lousy refineries, fixed them up and run them right, in the process adding the equivalent of two refineries' worth of new capacity. Essentially, it has put the lie that there was no money to be made from refining and from other downstream operations made by the self-serving integrated majors to the test and thoroughly debunked it. So the IOCs are lying when they say not enough profit is to be made. Quite enough reason for us to blame big oil companies for the high price of gasoline, IMO.
BTW, the IOCs have been updating technology and adding capacity to existing refinerys regularly, but demand has eclipsed their capacity.
Agreed, dHolly, it's all about money. I always find it ironic that in times of uncertainty (war in Iraq, Hurricanes, OPEC meetings), there always seems to be a refinery in California that gets taken down "for maintenance" as if the entire freakin facility has to be shut down to allow for a little preventative maintenance. What other industy operates like this (most schedule their maintenance efforts to happen during slow periods, holidays, etc., so as NOT to interrupt production)? The oil industry really has no competitive need to increase or even maintain a stable production level (other than too much interruption could cause massive economic problems).
As for investing in new facilities, the cost of new refineries is indeed enormous. And, as was said before, increased oil production has generally led to lower gas prices which would lead to lower profits for the Oil companies.....blah blah blah...we all know the story now.
And, as was said before, increased oil production has generally led to lower gas prices which would lead to lower profits for the Oil companies.....blah blah blah...we all know the story now.
Well, as a business owner, I can assure you lower that ROI is THE big issue. Still, while no business wants to see that spreadsheet, I just don't embrace the 'lower profit theory' excuse.
For example, assume I sell 1 million widgets at $1 ea. and enjoy a 10% net profit margin. I will make $100,000 in net profit. But, because demand for widgets has increased beyond global manufacturing capacity by, say 20%, all good capitalists decide to utilize existing capacity and ramp up production to meet that goal. So I now sell 1.2mil widgets at $1 ea. and 10% margin for $120,000 net profit with no additional capital costs. Econ 101 says the market price will NOT fall until the increased production catches up with demand. Don't know how long that might be, certainly it wouldn't be overnight, therefore my bottom line IMPROVES for a period of time until supply and demand equalizes.
Once the demand is satisfied, the price will of course decline. In the above example, my selling price per 1.2mil widgets would have to decline to $0.84 ea. at the same 10% margin to have my original pre-production, pre-price increase net profit of $100,000 violated. But, SO WHAT? Like all good capitalists, once demand wanes I can either take excess capacity off line or participate in traditional American unspoken but blatantly obvious industry collusion in an effort to manipulate market prices back up. The point is... all this occured with little to no additional capital investment on my part. No risk. And therein lies the rub...
On the surface, it would make sense that if I made capital improvement investments equal to or less than the $.016 price parity risk spread above (ie., risk 16% of todays profits to gain a 20% increase in market share potentially worth the same or more in future profits), it makes economic sense. But, frankly, I doubt if I would risk significant corporate capital for that potential, PARTICULARLY if the price of widgets was increasing FASTER putting an acceptable amount of real money in the bank. At some point you simply say "a bird in hand is worth two in the bush".
But, even if there is not enough economic incentive for the big IOCs to invest in new refinery assets, I am certain smaller players would be happy to fill the void at those profit levels if there was less bureacratic boondogle. Problem is, anti-trust Feds continue to let the big Co's gobble up the little Co's, effectively eliminating any competitive ability to compete with the big oil. Stupid, stupid, stupid IMO...
I agree with your arguments and in fact, your very last point about lack of competition (largely driven by unchecked mergers and acquisitions) is essentially what I was trying to say, that there's less incentive to match supply and demand (which, in your example, would eventually lead to a "normalization" in the price of a widget) which is what is supposed to happen in a free market economy.
The fact that it costs billions of dollars to create new refining capacity also works against us in that, as you pointed out, why invest that kind of capital given the risk of an adequate return (especially when there's pleny of profit to be extracted from existing assets). Also, the cost of the investment and the lack of access to crude oil will keep smaller independent companies from ever wanting to play in that sandbox, hence keeping competition at a minimum. We went through this about 90 years ago with the Standard Oil Company. When you control the process from raw material extraction to delivered good, its kind of difficult to entice new competitors into the process.
So, while economic theory would suggest that supply will be increased to meet demand, in the case of crude oil refining, this seems unlikely to happen, especially given the difficulties the oil industry faced in the 80's when supply increased dramatically, prices dropped (or rather, stayed very flat for a very long time) and oil company profits were in the tank, pun fully intended
AutoForums.com is the premier network of enthusiast-owned
enthusiast-operated automotive communities.
We operate more than 100 automotive forums where our users consult peers for shopping information and advice, and share
experiences and opinions as a community.
Gas reserve
