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Unit 5302 · 11-11-2005, 10:04 PM

MEDIK418, there are very few industries or major companies in this country which aren't very much like Dilbert of Office Space, IMHO.

Again, the points you raise are completely valid, but we see two completely different driving forces behind the final outcome. Let me further complicate and simplify things at the same time.

Step 1 - Oil companies bid on oil futures. They are buying oil to pick up at a future date at a set price today. Much like if you special order something from a store. You set a price now, it comes later.

Step 2 - Transportation of oil to refineries. This hasn't changed much.

Step 3 - Refining process. Again, very little changing here in the past few years, certainly no recession in technology or efficiency. It is worth noting that the amount of gasoline that can be refined from any particular type of crude or shipment of crude is different. Some types of crude yield far better supplies of gasoline than others. This is not really relevant to the ultimate price though, IMHO.

Step 4 - Jobbers bid on gasoline futures, much like the oil companies bid on oil futures.

Step 5 - Transportation of gasoline to stations. There is some additional expense here as the cost of diesel for the trucks increased along with the price of gasoline, but the additional cost is insignificant to the total price of gasoline.

Step 6 - State and Federal taxes are added to retail use gasoline. In Minnesota, this additional fee adds $0.40/gallon.

Step 7 - Station markup. Gas stations typically enjoy a small markup; however, they tend to raise and lower prices according to the largest retailer in the area. i.e. Super America largely controls market trends in Minneapolis. In Minnesota, the minimum markup is set to maintain competition. It's $0.06.

Hurricane Katrina resulted in the following issues:

1) Oil companies bid dramatically higher for crude.
2) Jobbers bid dramatically higher for gasoline.
3) People paid much higher prices at the pump.

Let's evaluate why 1 and 2 happened, since 3 is quite obvious.

1) The skyrocketing price in crude oil was created for what reason? Refinery capacity had been significantly reduced, and the oil companies have repeatedly stated that refineries in the US are already operating at max capacity, normally. This means that the actual supply of oil was suddenly much greater than demand. Except there is one other issue. The oil production in the Gulf of Mexico was significantly reduced. What impact did that have? Considering the Gulf of Mexico produces only a fraction of the approximately 30% of US oil used domestically, not enough to offset the production capacity lost. In other words, oil companies had less need for oil than they had before the storm because they couldn't refine it anyway. Yet they fought tooth and nail to dramatically raise prices of crude. Back to this in a moment...

2) Jobbers also bid much higher for gasoline, but for what reason? Since oil refineries typically store very little gasoline compared to total production capacity, it would make sense that a jobber might bid much higher to secure fuel to sell to stations. Oil companies and refineries would be rather dumb to turn away higher profits, much like a seller wouldn't cancel an e-bay auction because they were getting too much money. That being said, this is based on the assumption that jobbers felt future supplies of gasoline would be more difficult to find, especially since the US refineries were already at maximum capacity before the storm. This would imply taking 25% of the refining capacity out of the equation would create a fuel shortage, making it important to secure fuel, even at higher prices to ensure you had something to sell. This would also imply that somebody would have fuel shortages. Were 1 in 4 American's unable to get gasoline at a local station? Was gasoline rationing implemented to ensure everybody was able to procure the fuel they needed?

...This brings me back to the increasing crude prices, and why the jobbers bid so high. The oil companies used the increased crude prices as an excuse for rapidly increasing prices at the pump. Even though the oil they were purchasing would not be used in the immediate future, they passed this cost along to the consumer immediately. To be fair, the price of gasoline also immediately drops after oil prices fall, albeit not nearly as quickly. In the meantime, the oil companies painted a very dire situation regarding immediate gasoline refining capability forcing the jobbers into a high bid mode. Jobbers are also professionals, and extremely competitive, much more so than oil refineries and companies as there are many more people they're in competition with.

3) The end result was that people paid far more at the pump than they should have. The oil companies, who weren't actually refining and selling the oil they paid $70/bbl for reaped record profits as a result of the fear they intentionally created regarding fuel shortages. The reasoning they gave behind this to the US Senate? If they hadn't intentionally increased prices, there would have been shortages. How many of you decreased your fuel consumption by 25% or more? Anybody stop going to work 1-2 days a week? Maybe you didn't go to the grocery store? How many of you went to a filling station and found they were out of gasoline, not because the lines were wrapped 2 miles around the place with panicked people two hours prior or that the power was out, but seriously because they were unable to secure a reasonable supply of gasoline? There was no shortage, thus no realistic supply/demand model to apply here. Yes, supplies were somewhat reduced, but almost everybody that wanted to fill up did, and exactly when they wanted to.

This is what happens to capitalist markets when there is no or little competition. Small groups of companies can cooperate to control the price of goods and services in the market.

The truth that I see is that the oil companies knew exactly how to play the American people, while still having an alibi when it came to explaining why Americans were suddenly paying so much more to the US Government. Since the current leaders of our government have very little desire to actually attack big oil (lots and lots of soft money), they still need an explanation for their constituents, and this all worked out well for big oil.

11-11-2005, 10:04 PM	#3
Unit 5302 Registered Member Join Date: May 1999 Posts: 5,246	Re: Fuel Prices MEDIK418, there are very few industries or major companies in this country which aren't very much like Dilbert of Office Space, IMHO. Again, the points you raise are completely valid, but we see two completely different driving forces behind the final outcome. Let me further complicate and simplify things at the same time. Step 1 - Oil companies bid on oil futures. They are buying oil to pick up at a future date at a set price today. Much like if you special order something from a store. You set a price now, it comes later. Step 2 - Transportation of oil to refineries. This hasn't changed much. Step 3 - Refining process. Again, very little changing here in the past few years, certainly no recession in technology or efficiency. It is worth noting that the amount of gasoline that can be refined from any particular type of crude or shipment of crude is different. Some types of crude yield far better supplies of gasoline than others. This is not really relevant to the ultimate price though, IMHO. Step 4 - Jobbers bid on gasoline futures, much like the oil companies bid on oil futures. Step 5 - Transportation of gasoline to stations. There is some additional expense here as the cost of diesel for the trucks increased along with the price of gasoline, but the additional cost is insignificant to the total price of gasoline. Step 6 - State and Federal taxes are added to retail use gasoline. In Minnesota, this additional fee adds $0.40/gallon. Step 7 - Station markup. Gas stations typically enjoy a small markup; however, they tend to raise and lower prices according to the largest retailer in the area. i.e. Super America largely controls market trends in Minneapolis. In Minnesota, the minimum markup is set to maintain competition. It's $0.06. Hurricane Katrina resulted in the following issues: 1) Oil companies bid dramatically higher for crude. 2) Jobbers bid dramatically higher for gasoline. 3) People paid much higher prices at the pump. Let's evaluate why 1 and 2 happened, since 3 is quite obvious. 1) The skyrocketing price in crude oil was created for what reason? Refinery capacity had been significantly reduced, and the oil companies have repeatedly stated that refineries in the US are already operating at max capacity, normally. This means that the actual supply of oil was suddenly much greater than demand. Except there is one other issue. The oil production in the Gulf of Mexico was significantly reduced. What impact did that have? Considering the Gulf of Mexico produces only a fraction of the approximately 30% of US oil used domestically, not enough to offset the production capacity lost. In other words, oil companies had less need for oil than they had before the storm because they couldn't refine it anyway. Yet they fought tooth and nail to dramatically raise prices of crude. Back to this in a moment... 2) Jobbers also bid much higher for gasoline, but for what reason? Since oil refineries typically store very little gasoline compared to total production capacity, it would make sense that a jobber might bid much higher to secure fuel to sell to stations. Oil companies and refineries would be rather dumb to turn away higher profits, much like a seller wouldn't cancel an e-bay auction because they were getting too much money. That being said, this is based on the assumption that jobbers felt future supplies of gasoline would be more difficult to find, especially since the US refineries were already at maximum capacity before the storm. This would imply taking 25% of the refining capacity out of the equation would create a fuel shortage, making it important to secure fuel, even at higher prices to ensure you had something to sell. This would also imply that somebody would have fuel shortages. Were 1 in 4 American's unable to get gasoline at a local station? Was gasoline rationing implemented to ensure everybody was able to procure the fuel they needed? ...This brings me back to the increasing crude prices, and why the jobbers bid so high. The oil companies used the increased crude prices as an excuse for rapidly increasing prices at the pump. Even though the oil they were purchasing would not be used in the immediate future, they passed this cost along to the consumer immediately. To be fair, the price of gasoline also immediately drops after oil prices fall, albeit not nearly as quickly. In the meantime, the oil companies painted a very dire situation regarding immediate gasoline refining capability forcing the jobbers into a high bid mode. Jobbers are also professionals, and extremely competitive, much more so than oil refineries and companies as there are many more people they're in competition with. 3) The end result was that people paid far more at the pump than they should have. The oil companies, who weren't actually refining and selling the oil they paid $70/bbl for reaped record profits as a result of the fear they intentionally created regarding fuel shortages. The reasoning they gave behind this to the US Senate? If they hadn't intentionally increased prices, there would have been shortages. How many of you decreased your fuel consumption by 25% or more? Anybody stop going to work 1-2 days a week? Maybe you didn't go to the grocery store? How many of you went to a filling station and found they were out of gasoline, not because the lines were wrapped 2 miles around the place with panicked people two hours prior or that the power was out, but seriously because they were unable to secure a reasonable supply of gasoline? There was no shortage, thus no realistic supply/demand model to apply here. Yes, supplies were somewhat reduced, but almost everybody that wanted to fill up did, and exactly when they wanted to. This is what happens to capitalist markets when there is no or little competition. Small groups of companies can cooperate to control the price of goods and services in the market. The truth that I see is that the oil companies knew exactly how to play the American people, while still having an alibi when it came to explaining why Americans were suddenly paying so much more to the US Government. Since the current leaders of our government have very little desire to actually attack big oil (lots and lots of soft money), they still need an explanation for their constituents, and this all worked out well for big oil.