Fuel Prices

[Capri306]

Just imagine if we could get everyone, or at least those to whom it would be practical, to ride a bicycle instead of driving to work. Instant price drop.

Oh, not to mention the drop in pants size, too!

[82 GT]

Originally Posted by Capri306

Just imagine if we could get everyone, or at least those to whom it would be practical, to ride a bicycle instead of driving to work. Instant price drop.

Oh, not to mention the drop in pants size, too!

Well...that will never happen because we Americans, are lazy!
Sad but tue

[Unit 5302]

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.

[MEDIK418]

I agree we see things differently and I wish to point out a couple of things you mentioned that are simply not as it happened.
First was step three: Nothing has changed in the refining process in the past few years? This is ludicrous. I refer you to the last post I made. Consider the cost of refining gasoline. The utility cost, natural gas, electricity, water, has gone out of sight over the past few years.

As I said, the refiners pay the same price you do for all of these things. This winter harbors an approximate 50-60 percent hike in natural gas and the past two years have seen these prices skyrocket. To say this hasn't affected the cost of refining gasoline is simply wrong.
And yes, the refining processes themselves have changed in many states due to state and federal legislation for "beautique fuels" that California for one has seen fit to force on the refiners. The capital investments alone for our company number in the billions in the last few years just to lower the sulfur content in gasoline and diesel.
These are facts and you cannot ignore them. ConocoPhillips made 13 billion dollars last quarter. A good chunk of change indeed. They also invested more than 13 billion in capital projects that will go toward finding more crude outside the OPEC countries in hopes of not having to depend so much on them.

Transportation to refineries hasn't changed much? Did you know that the oil companies are building safer double hulled tankers soce the Exxon Valdeez decided to dump it's load on the Alaskan coastline? They are much less prone to leaks but they haul considerably less than the older tankers and last time I checked, the price of steel has pretty much gone the way of oil and gas since these tankers were started. You can't tell me that building a dozen of these monsters in as short a time as they have doesn't raise the cost of transporting oil.


Transportation to gas stations indeed has gone up some but as you mentioned not enough to cause a signifigant rise but the major oil companies generally don't deliver their own gasoline. Jobbers do this. Yes there are a few who do own their own trucks but for the most part, distributors haul it.

Taxes. During the whole Katrina thing, the price of gas at the refinery has risen 26 cents a gallon. The American Petroleum Institute bears this out. Of that price, you failed to mention that 9 cents of that hike was taxes. Yes, taxes. Three cents a gallon was added just because of the added profit. I never said the prices weren't set rediculously high for no apparent reason but lets' be honest about who was charging what here.
Again, don't let the facts get in the way.

You mentioned that 30 percent of the nation's refining capacity was llost and you are correct, on that we agree. The only places where gasoline prices should have been affected was the deep south. As a rule we don't truck gasoline all over the country. The prices we saw for the rest of the country were rediculous BUT, look at the refinery prices. They didn't reflect the gouging levels we saw in many places.
Remember the "Beautique fuels" I mentioned earlier? You can't shift gasoline from one state to another simply because one state's refiers who have been forced to meet that state's stringent fuel requirements can't just up and change the way they refine gasoline to satisfy a neighboring market. You run out of your state's fuel, there's a better than average chance, you can't borrow some from the folks next door.

I disagree with the assertion that the Jobber feared shortages in the fuel suplies bacause of the reduced refining capacity. Remember the big oil crisis in the early seventies? There was no shortage of gasoline. Our tanks were brimming full and most of the refineries were scrambling to find places to store the stuff. I'm not making this up. The public's panic buying caused spot shortages. PERIOD!
Jobbers know that people tend to go off the deep end when a perceived threat to the supply is valid enough in their minds to cause them peoblems in the not too distant future. Jobbers know this and they bid higher bacause they know the war for supplies will heat up when the trucks can no longer get their deliveries made fast enough to keep the spot shortages down. Stations wil begin to run dry from the block long lines of cars trying to get every drop they can squeeze out of the pump. This has happened over and over again and the jobbers know the drill. It has nothing to do with decreasing gasoline supplies. True, the deep suth would have suffered before too long but the rest of the country was never in any danger.

I'll never say that the big oil companies don't know their way around the business world or the buying public. Some of the shadiest deals of the century happened in oil company board rooms. What I am trying to convey is that if you look into the prices paid at the refinery for gasoline, you will see that they didn't reflect the rediculous increases we saw at the pumps this year.

One more thing and I'll shut up. Where were all of your concerns for the past 20 years when most of the refiners in this country were running in the red? Yes they made big money but have you thought about how the money was reinvested? This year alone, our company committed to 34 billion dollars in projects that will enhance our ability to produce cheaper fuels or increase the supply of crude and natural gas. You see, they havent been able to do that in about 20 years. '99 and 2001 were good years but after that, it's been a bust for two decades.
Before you go off about the millions the CEO's make, I agree they make way more money than I think they should but even if you took half of their salaries away to offset the price of gasoline for however long it would last, the affect wouldn't last a day or two.. . we use too much of the stuff for it to make a difference.

Stop listening to politicians who don't have a clue. If you ever want to find out how completely wrong the press and the government are on a particular subject, wait until they do a story on somethng you are intimately familiar with.

I remember back in the early seventies a Texas Congressman no less made the comment for all the world to hear that "if these refineries would run 24 hours a day instead of going home at 5 o'clock, there wouldn't be any gas shortage"
You know what? The public believed him. Hell, I believed him. I had no clue how much or how long it takes to start a refinery and most of the world still doesn't.
How stupid can one person be?