Price gouging or fair pricing?

Oil Company Execs Defend Huge Profits

An interesting article about the sudden increase in the recent price of gas.

It looks like the Senate [at least on the Democratic side] is out for blood: the oil company’s blood.

http://news.yahoo.com/s/ap/congress_oil;_ylt=ArT_cL1GBbR.hz7KlDC6D1Gs0NUE;_ylu=X3oDMTA2Z2szazkxBHNlYwN0bQ--

 

Yes.

 

"At the pumps" tells us little about "oil company" profits. Oil companies are a varied group and what you pay at the pumps may be the price of the station owner.

As many here must know, the extraction industries are given an accounting cycle of multiple years and for good reason. A good gauge of oil company profits would be a ten-year average and not some short-term measure.

 

Unless the station is corporate-owned... which many, many of them are.

The problem of price gouging is, in largest measure, a distribution phase problem, not an extraction phase problem... although, there are probably some extractors who do it, too. But extractors are much closer to government regulators than are distributors; and are, therefore, a tiny bit less likely to do it. Distributors, on the other hand... oy!

Makes total sense...

...except that if it's so, then how do we explain the fact that all that needs to happen is a news report related to something that might be only remotely connected to fuel supply -- and which might not actually end-up affecting said fuel supply at all -- yet that very night the prices shoot up?

That's price gouging.

Fuel paid for at the pre-news-report price and which was sitting in the station's tanks as the news was breaking, and which should, therefore, remain at the pre-news price goes up as if it were suddenly scarce.

That's price gouging.

Fuel already paid for at the pre-news-report price sitting in fuel tanker trucks, or in distribution tanks; and which, therefore, should remain at the pre-news-report price goes up as if it were suddenly scarce.

That's price gouging.

What you tell us professes that only over time -- a significant amount of time -- can we really determine any of it; and suggests that it's a sluggish behemoth whose microscopic and tansitory deviations should be ignored in favor of the larger slope of the curve. That's all well and good...

...except that distributors can, in just minutes (and do, with shocking regularity), make station owners go out with their aluminum sign-letter-adjustment-poles and up the price to hundreds or even thousands of consumers on their way to work the next morning.

That's price gouging.

And it happens all the time!

 

Paraphrasing Tip O'Neill, "prices are local."

Yeah, but I was addressessing the "big verticals" as they may be known to detractors.

Back in the '70s we (me, at least) learned that the price of the oil in a tanker can change many times as the tanker is enroute.

I've forgotten the term used but the oil industry, like much of business, has gone from a replacement pricing scheme to an immediate pricing scheme. That explains the immediate price rises but not the reluctant price drops. There's no question that money is being made but it's hard to pinpoint who is making it.

I can't pretend to know the ins and outs of the oil industry but here's a reply to the charge of windfall profits by "An underpaid Reason intern moonlighting as a janitor"

 

In Australia, numerous investigations were done into petrol pricing and the oil companies, and the oil companies have came out 'clean'.

In fact the Director of the Industrial Commission, who is a close friend of mine, that did such a major study at the behest of the federal government said, at the end of the study, that he actually 'felt sorry' for the oil companies!

I think another measure to to look at the profits over a period of time. In relation to their asset base, turnover and amount spend on exploration, their results are nothing startling.

 

What were Uncle Sam's profits on gas sales this year? That's where the true gouging is coming from.

 

Re: It's nonsense

The law of supply and demand only works perfectly for nonessential items. Fuel is a needed commodity so people will pay the price whether they like it or not. They may cut back on frivolous use but they still need to travel for work etc. so there is a limit to how far they can cut back. 90% of my family's fuel use is to get to work. More of the same for heating oil, you can turn down the thermostat but you cannot cut it off. No choice there.

Also, the fuel system is a big pipeline with a lot of players in the stream. In this case I think almost everyone in the stream is gouging and there is really nothing that can be done about it with current laws unless somebody comes forward and testifies to price fixing. Otherwise, we are stuck.

As for taxes, the Fed tax is pretty much a fixed rate. Many states, however, base their sales tax on a percentage. Illinois fuel tax revenues have almost doubled but I don't hear our esteemed governor saying anything but "the fed's are in bed with the oil companies". He proposed a budget based on expected fuel tax revenues and the rest is just windfall but I don't hear him cutting back. Just about everybody is jumping on this bandwagon......

 

Re: It's nonsense

It's not that simple. Many companies, governments, families, and individuals are required to purchase fuel to function. Literally, fuel fuels the economy; it isn't a matter of choice.

Normally, I'd prefer the markets to work these things out. But we don't have a market approach when it comes to fuel; the companies are acting as an oligopoly and settting the price where they want it. That's why you don't see a very strong correlation between the price of fuel and either (a) the price of oil or (b) the costs involved with exploration.

The fuel companies used the hurricaine disasters as an excuse to jack up their prices to the next plateau, hoping they could get away with it long enough so consumers would find a slightly lower price to be acceptable. (Imagine gas at $1.75 per gallon. That would seem cheap!)

The more the fuel companies suck from the economy, the more the rest of the economy suffers. Some very directly, like GM (selling Hummers and the like) and the airlines. Some over time. Exxon/Mobil and the rest are a bunch of leeches.

Finally, the station operator is really feeling the squeeze. They have a pretty small margin--pennies, really--and it doesn't increase with gas price increases. But what does go up is the price they pay for credit card transactions, which are based on a percentage of the overall purchase.

Competition in the marketplace might settle prices into some semblance of similarity--but not to the exact freakin' penny! If you see 3 gas stations at an intersection, they've all got gas at the same price. You know why? Because the fuel companies all sell it to the station owners at the same price. And the station owners can't cut prices to compete because (a) their margins are razor-thin and (b) they're pressured by the fuel companies.

When gas was $1.75 or so a gallon until recently, it was about as cheap (adjusted for inflation) as it had been in history. And I"m all in favor of fluctuations in prices. But the prices we see today are not a function of demand, nor are they a function of rising costs (not completely, anyway). Rather, they're a result of an oligopoly foisting its pricing strategy on a captive public, all while the oil industry's whore sleeps in the White House.

 

After reading this, I now feel sorry for the oil industry.

time lapse: one nanosecond

Okay...I'm over it now.

 

Re: Re: It's nonsense

Carter is back in the White House? The Democrats are again in control of Congress?

That must be what you mean if gas prices are the measure of whoreness.

 

That picture in today's paper of the 5 top oil executives sitting in a row saying the same thing is so reminiscent of the seven tobacco top executives at the same table a few years ago, declaring, one after the other, that they did not believe cigarettes were harmful to health.

John Bear, who really
really misses his EV-1
pure electric, all of which
General Motors recalled
and destroyed 4 or 5
years ago

 

Re: Re: It's nonsense

An oft stated, false belief. In the Senate hearings it was revealed Exxon raised their price $.24 the day after Katrina. Gouging yes, but it doesn't justify the $.75 increase over the same period around here. There was also as much as $.30 difference between stations on the opposite sides of town so your theory the distributors were controlling prices is unfounded. Some came down the next day but they all headed right back up to eventually end up almost $2 higher. I also noticed when they interviewed the Petroleum Retailers rep he failed to mention the $.05 a gallon profit he used to tout in the past. He knew who was gouging and it wasn't just the oil companies.

A gas station manager, not owner, was interviewed by our local station during the 1998 increases. He said he had instructions from the owner (an independent owner) to match his neighboring competitors prices. This means that while there was no actual collusion (that is illegal) one owner can raise his price and at the same time be reasonably sure his competition will follow.

In your urge to point the finger at Bush you are ignoring the big picture. The president may very well be a friend of big oil, but even if he wasn't there is naught he could do about it. We don't have the laws for it and Congress passes laws, not the president...

 

He he he! Those poor oil companies!



Abner

 

'Huge profits'!!!!

Check the facts!

For example:

Caltex - Australia - half year profit 2005

Sales: 7,616,000,000
Net profit: 150,000,000

Net profit / sales = 1.97%

I think the service station may have a better margin!

 

The five companies whose CEOs testfied (not under oath) did better than CalTex, averaging about 10% profits to sales -- e.g. ExxonMobil, $100 billion sales, $10 billion profits (for three months).

They seemed to suggest they really didn't need the $14 billion subsidy congress voted them earlier this year. But they didn't offer to give it back either.

 

ExxonMobil average net profit/ sales return over 5 years = 7.52%

c.f. say, Microsoft = 25%

 

"Okay, your industry's profit margins weren't as good as Microsoft's recently, so go ahead and do some colluding and price gouging to catch up."

Please.

 

At the request of the originator of this thread it has been returned, minus the escalating posts. It is now locked. While the topic may be continued in another thread I hope that the earlier mistake can be avoided. Thanks,
Jack