Oil of Ipecac

by Hal_10000

Posted by on 05/21/08 at 02:30 PM from

There are two things anyone with a brain can see needs to be done in such a situation:

1) Drive something with better fuel economy than your monster truck on your daily commute to work

2) Buy stock in oil companies

Posted by dwex on 05/21/08 at 03:23 PM from

Please mail this to the senators and have it read into the record.

Posted by on 05/21/08 at 03:35 PM from

Are we still subsidizing these comapnies, I can’t remember…

That’s my only issue with it, although I don’t think it’s really a plain old supply and demand thing.  There are definitely market manipulations on an unprecedented scale, it seems to me, but Congress’ grandstanding is ridiculous.

Posted by on 05/21/08 at 03:40 PM from

Are we still subsidizing these comapnies, I can’t remember…

I’ve heard this refrain used a few times.  I’m still waiting for someone to point out exactly how they’re being subsidized.

Posted by dwex on 05/21/08 at 04:11 PM from

This is probably pure propaganda, given the source, but the title was amusing enough for me to link it: Oil industry subsidies for dummies

Posted by Ed Kline on 05/21/08 at 08:21 PM from

Let’s see.  Prices go up.  Demand goes up.  Supply stays levels

That being said, supply does not have to stay level. Our buddies the Saudis, who exist in the capacity they do because we are so solidly behind them without any good reason besides oil, wont budge on production. Exactly why do we continue to support them militarily is a question I cant answer?
Eventually the American people are going to demand that the restriction we have on drilling in this country and on the Atlantic continental shelf be dropped. This isnt going to help Quickly, and the longer we wait, the longer it will take beofre we see any relief at the pump if ever. Me, I am considering purchasing a Honda that runs on compressed natural gas. The mileage is good ( 35ish), and the gas is much cheaper. The only knock on the technology is the range of the car( about 200 miles). But I hardly ever leave Vegas ( by driving) anyway so no big deal.

Posted by on 05/21/08 at 09:42 PM from

Let’s see.  Prices go up.  Demand goes up.  Supply stays levels.  Hmmm.  What other explanation do you need?

There is another possibility: there isn’t enough competition in the oil industry to keep prices down. Monopolies, or near monopolies can set their own prices without regard for the consequences.

Now, given that there don’t appear to be a whole bunch of new oil companies leaping into the business, wouldn’t this mean that there is an argument for government intervention to break up the monopolies and ensure the viability of a free market?

Posted by on 05/21/08 at 10:26 PM from

monopolies = oxymoron

Posted by on 05/21/08 at 10:36 PM from

monopolies = oxymoron

Only if you are assuming that there is only one thing/area/product that can be monopolized.

Posted by on 05/21/08 at 11:59 PM from

Now, given that there don’t appear to be a whole bunch of new oil companies leaping into the business, wouldn’t this mean that there is an argument for government intervention to break up the monopolies and ensure the viability of a free market?

Firstly, you would have to demonstrate that the oil companies were colluding to keep prices high.  Considering that oil companies have one of the smallest profit margins of any major trade commodity, due in large part to the increased cost of finding new sources, it’s pretty clear that these oil prices are driven largely by the fact that a LOT more people are using this resource than there were 10-20 years ago.  Those uses aren’t just automobiles, either--as the standard of living has gone up, the number of people using poly-carbon based products has gone up dramatically as well.

Secondly, breaking up the supposed monopolies won’t do shit for oil prices because this is a world-wide commodity, not a nationwide service like AT&T;was in the early 80s.  There’s little evidence that breaking up the oil companies will have any effect on oil prices at all--in fact, it could very well drive them up, especially during the period when the government conducts their witch hunt.

This basically boils down to people expecting the government to wipe their ass for them, instead of taking the responsibility to either 1) find alternate means of transportation; or 2) trading in for a vehicle that gets better gas mileage.

Posted by Ed Kline on 05/22/08 at 03:34 AM from

Now, given that there don’t appear to be a whole bunch of new oil companies leaping into the business, wouldn’t this mean that there is an argument for government intervention to break up the monopolies and ensure the viability of a free market?

American oil companies arent the problem. Demand worldwide has gone up dramatically, and supply has not. You can thank OPEC for that. But who can blame them. When worldwide demand was much lower 10+ years ago, there was more supply than demand, and prices were very low. Now those coutnries in OPEC can cash in, and they are.
On top of this the housing market helped weaken the dollar considerably , so people trading in other currencies see investing in commoditites as profitable, wich also drives up prices. The U.S. has a choice. Adapt or suffer. Because China and India and other developing nations are not going to use less gas in 10 years, but more. This is going to be a hard fix. We are going to have to stop farm subsidies in their tracks. We are going to have to drill in ANWAR and on the atlantic continental shelf. We are going to have to allow oil companies to build more refineries. We are going to have to raise MPG standards in passenger cars. We are going to have to continue to pursue and improve electric car , and compressed natural gas car technology. We have got to get out of debt with China. The way things are in Washington right now, we are most likely not going to do a lot of these things, and we are gonna hurt for it even more later. Everything we eat drink or use gets delivered by someone driving a gas or diesel vehicle. This isnt going to be pretty. Not nearly as apocalyptic as the idiots out there stocking up on food, but still not pretty.

Posted by on 05/22/08 at 04:03 AM from

Everything we eat drink or use gets delivered by someone driving a gas or diesel vehicle. This isnt going to be pretty. Not nearly as apocalyptic as the idiots out there stocking up on food, but still not pretty.

Oh don’t get me wrong. I’m quite happy about it - depsite the fact that it hurts a bit. I am really hoping that the rise in oil prices will push the world towards energy alternatives, by making it just that much more economically viable.

Companies do what companies do - they make money. The extremely rapid rise in profits though to me points to a lack of competition - the price of oil hasn’t risen nearly as fast as overall profits. This is what happens when you allow too many mergers in a big industry. I would hesitate to say that it’s a cartel, but they are all certainly taking advantage of the situation. And why wouldn’t they? Can’t blame them.

Break ‘em up, I say - and it seems I am not the only one. It also seems to be a bipartisan call. Even Governor Charlie Crist is getting in on the act.

Posted by Ed Kline on 05/22/08 at 04:31 AM from

the price of oil hasn’t risen nearly as fast as overall profits

Can you prove that>?

Oh don’t get me wrong. I’m quite happy about it - depsite the fact that it hurts a bit. I am really hoping that the rise in oil prices will push the world towards energy alternatives, by making it just that much more economically viable.

Why does it please you?

Posted by dwex on 05/22/08 at 06:02 AM from

Holy crap, stogy. Go take some economics & accounting courses.

Economics - the oil industry is not monopoly, it’s an oligopoly. And one that in many areas is closer to a free market than most oligopolies (e.g. when’s the last time there was more than a penny or two difference in the price of gas in any given geographic area). It’s an oligopoly rather than a free market due to the massive barriers to new entrants, but it’s definitely nowhere near monopoly. The closest to monopoly you could find is residential natural gas delivery, which has aspects of natural monopoly to it (one set of pipes running through a neighborhood, for example).

Accounting - “the price of oil hasn’t risen nearly as fast as overall profits” is, in fact, untrue. Go read the article I linked above, and grasp the difference between profit and profit margin. Looking at Exxon-Mobil’s profits, for example, it’s clear that (at the gross scale of the data presented here) that both gross and net margin have been basically flat since 2005, with radically rising raw material costs.

Bottom line - the question is nowhere near as simple as “they make billyuns and billyuns in PROFITS!”.  Look at the corresponding cash flow statements. You will see that the actual available operating cash is pretty variable, at the same time margin is flat. Now, a decent chunk of that is due to volatility in the markets (cash flow from investing activities). But there’s also a whole lot due to capex (i.e. building/installing stuff) and Accounts Receivable.

Reading through the 10-K’s would provide a lot more details behind the numbers from yahoo finance/edgar.

Only way any of this changes - change the supply curve and/or change the demand curve, or prices stay high and (absolute) profits stay high, while margins stay flat.

There is the issue of subsidies. It’s quite clear they are extremely healthy, and should be weaned off of them, but it’s also unclear what actual subsidies the industry actually gets at this point.

Posted by on 05/22/08 at 09:32 AM from

Holy crap, stogy. Go take some economics & accounting courses.

Thanks Dwex. I am perfectly willing to concede that economics is not my forte. I’ll have to come back to this tomorrow.

Posted by on 05/22/08 at 02:01 PM from

change the supply curve and/or change the demand curve, or prices stay high and (absolute) profits stay high

Not according to the President of OPEC.

Posted by on 05/22/08 at 02:07 PM from

Companies do what companies do - they make money

Not all the time. In 2007 US oil companies made a collective 8 cent profit on every dollar invested. somebody here has already pointed out that other industries have a much higher profit margin. Some years the oil companies made less, and some years they lost money.

Even Governor Charlie Crist is getting in on the act.

The job of politicians is to feel your pain, when they don’t have a clue what to do, they commssion an investigation, big deal.

Congress at least ordered the government to stop buying oil to put in the Strategic Petroleum Reserve. Taxpayers currently pay for 70,000 barrels a day to stash away for use in an emergency such as a disruption in oil supply from a natural disaster or a war. (The reserve currently has 703 million barrels. The U.S. uses about 19 million barrels a day.) They are also deciding whether to make the new Saudi arms deal contingent on them opening up their oil spickets (not sure if this is a good idea or not, France or Russia will readily step in with their stuff).

Its never a good idea to be dependent on someone else for your needs, it gives them too much leverage.

Drilling in ANWAR would go a long way towards this end. Only 2000 acres out of the estimated 19.6 million would be affected and according to The U.S. Geological Survey ANWR contains between 5.7 billion and 16 billion barrels of crude. There’s an estimated 86 billion barrels of oil in our outer continental shelf, according to the Department of Interior.

Posted by on 05/22/08 at 02:28 PM from

the price of oil hasn’t risen nearly as fast as overall profits.

No, but the cost at the pump *has* risen in correlation with the cost of oil.  If anything, the increase of oil prices might actually be a *higher* percentage than the increase at the pumps.

I think that you’re correct to be looking for a boogeyman, stogy, but I think that you’re looking in the wrong closet.  (see the link that I posted above)

Posted by dwex on 05/22/08 at 02:36 PM from

Not according to the President of OPEC.

That doesn’t change my point in any way. The price of oil isn’t relevent - unless the corresponding rise in the price of gas exceeeds the price elasticity of demand. The oil/gas companies will raise prices to cover the increase in price of raw materials, keeping their gross (and likely net) margins reasonably constant. As they have for the past several years.

If the rise in gas prices does exceed the PED, then the demand curve will shift, and the oil companies will be forced to reduce their margins, or increase supply. This point has been predicted at $55, $75, $100, etc, etc per barrel of oil. Bottom line is that no one really knows what the PED of gas is, because all the predictions have been wrong so far.

Posted by dwex on 05/22/08 at 02:41 PM from

No, but the cost at the pump *has* risen in correlation with the cost of oil.  If anything, the increase of oil prices might actually be a *higher* percentage than the increase at the pumps.

There is a theory, that when looking back to the early-mid 90’s, the upward trend of the price of gas is slower than the upward trend of the price of oil, because the price of oil was artificially low for 6ish years in the 90s, with a corresponding reduction in the price of gas. In other words - they were gouging then far more than now, when gas was ~$1.50/gallon. I’ve looked for raw data or charts to demonstrate this theory (i.e. correlating the price of crude and a gallon of regular). The only ones I’ve found are either too short a time window (3-5 years) or too long (historical from the early 1900s). If anyone has a data source for this type of plot, I’d love to see if this theory holds any water.