$100 A Barrel Oil is on the Way

#151
#151
oklavol said:
Govt surely can buy oil and refine it cheaper then the oil companies do it now. Growing up, the utilities like water, electric, were provided by muncipalities, and cooperatives, I think they same could be done for refining petroleum.
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I don't see how the govt. could do it more efficiently (which is the key to being cheaper).

Utilities are a different entity. The government was in the the production (electricity), processing (water) and mostly distribution (pipes, power lines, etc.) business with utilities. It is the latter that provided the economic efficiencies for government involvement. No private entity could get the land rights and make the infrastructure investment for water and electricity like the government could.

That distribution advantage doesn't exist in the oil production and processing of oil.

I see no indication that the government could do this cheaper. If you take the oil company profit margin and make it zero, we'd still only see about a 20 cents or so reduction in the price of gasoline (or similar reduction in other oil products). The bureaucratic costs of government involvement would easily trump that.
 
#152
#152
MG1968 said:
socialism hasn't solved supply and demand problems for any needed commodity.

Not every municipality is sitting on top of a natural oil reserve and the cooperative approach would never work either.

The US does need to end it's dependency on foreign oil and it does need to more fully exploit it's own oil resources, up to and including ceasing export operations. Government control is not the answer though, if anything, there's too much government control already and that's why we're paying $3 per gallon for gas.
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Socialism? Who's advocating socialism?

I grew up in Tennessee and we had water supplied by the city, and electricity supplied by a cooperative. You consider the city and cooperatives socialism?

I think it would work better then what we have now. The way a cooperative works, all the money a cooperative goes back to the people who did business with the cooperative based on how much they spent. To me that's a lot better model then the oil companies making new record profits every quarter.
 
#153
#153
You advocate socialism when you say that the government could control the distribution and refining of oil better than private companies. You preface that with the usual talking point of the oil company CEO's sky high golden parachute.

There is no way oil could be managed in the same way a local utility could.
 
#154
#154
oklavol said:
The way a cooperative works, all the money a cooperative goes back to the people who did business with the cooperative based on how much they spent. To me that's a lot better model then the oil companies making new record profits every quarter.
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At the risk of being to elementary, profit is simply the excess of revenues over profits. For the coop to lower total costs to the consumer, they would have to not incur costs higher than that incurred by the current system (equivalent to the profit margin).

For-profit incentives are proven to incentivize cost reducing activities. On the otherhand, not-for-profit systems are not associated with efficiency. In the end, if the increased inefficiencies (and impact on cost of capital) is not less than the profit margin of current systems, total costs to the consumer will not go down.

I see nothing in oil production (extraction) and processing (refining) that suggests a government or cooperative entity could lower costs.

Again, utilities are a different entity since they serve a defined geographic region with controlled distribution to each member of that geographic region. Unless you are advocating control of distribution (eg. gas stations or direct distribution to homes) the situation is quite different.
 
#155
#155
volinbham said:
At the risk of being to elementary, profit is simply the excess of revenues over profits. For the coop to lower total costs to the consumer, they would have to not incur costs higher than that incurred by the current system (equivalent to the profit margin).

For-profit incentives are proven to incentivize cost reducing activities. On the otherhand, not-for-profit systems are not associated with efficiency. In the end, if the increased inefficiencies (and impact on cost of capital) is not less than the profit margin of current systems, total costs to the consumer will not go down.

I see nothing in oil production (extraction) and processing (refining) that suggests a government or cooperative entity could lower costs.

Again, utilities are a different entity since they serve a defined geographic region with controlled distribution to each member of that geographic region. Unless you are advocating control of distribution (eg. gas stations or direct distribution to homes) the situation is quite different.
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Why is when the volume of sales increases why isnt there a reduction in price? The more volume they sell they should be able to drop the unit price. Why does that never happen?

To me oil would be a perfect commodity to be controlled by a utility, since just like water and electricity, its something people use every day and cant function without.

I don't care if they lower costs, a cooperative would return all the profits to the people who bought the gasoline, instead of to the corporation, executive, etc.
 
#156
#156
Why is when the volume of sales increases why isnt there a reduction in price? The more volume they sell they should be able to drop the unit price. Why does that never happen?
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This occurs when increased volume results in lower production costs. Lower production costs come from either lowered materials costs or more efficient processes (or both).

Crude prices are rising with increased demand so material costs are going up rather than down.

Since refineries are operating at capacity, there is little room for lowering of processing costs (economies of scale have already been realized) and investments in process control constrain supply which puts upward pressure on prices.

In short, volume increases do not always lead to price reductions.

I don't care if they lower costs, a cooperative would return all the profits to the people who bought the gasoline, instead of to the corporation, executive, etc.
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Your fundamental assumption here is that a cooperative could extract and refine petroleum at the same cost as current oil companies. I'm challenging that assumption. If a cooperative is in anyway less efficient, then those profits don't exist and the total cost to the consumer doesn't change much.

Oil extraction and processing is incredibly capital intensive. Without the return potential of profit (in a risk-intensive business) the cost of capital is high. As discussed earlier, the geographic market make-up is quite different for oil compared to electricity or water. I can see no indication that a cooperative could do the job at in a cost neutral manner relative to a private company. Accordingly, the true cost to the consumer would be relatively unimpacted (or would likely rise due to the cooperative's inefficiencies).
 
#157
#157
volinbham said:
This occurs when increased volume results in lower production costs. Lower production costs come from either lowered materials costs or more efficient processes (or both).

Crude prices are rising with increased demand so material costs are going up rather than down.

Since refineries are operating at capacity, there is little room for lowering of processing costs (economies of scale have already been realized) and investments in process control constrain supply which puts upward pressure on prices.

In short, volume increases do not always lead to price reductions.



Your fundamental assumption here is that a cooperative could extract and refine petroleum at the same cost as current oil companies. I'm challenging that assumption. If a cooperative is in anyway less efficient, then those profits don't exist and the total cost to the consumer doesn't change much.

Oil extraction and processing is incredibly capital intensive. Without the return potential of profit (in a risk-intensive business) the cost of capital is high. As discussed earlier, the geographic market make-up is quite different for oil compared to electricity or water. I can see no indication that a cooperative could do the job at in a cost neutral manner relative to a private company. Accordingly, the true cost to the consumer would be relatively unimpacted (or would likely rise due to the cooperative's inefficiencies).
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Cooperatives don't have to extract the oil. They can buy it on the free market and refine it. There's no need for them to get into that part of the market, that can left to the oil companies. It would be too difficult for a cooperative to engage in drilling wells overseas.

I'm simply talking about the process of refining the oil that takes place in the United States. There's no reason this couldn't be done by a cooperative, and cooperatives will return their profits to the consumer not to the company. I think I get a fairer deal that way. There's not enough refineries in this country to keep oil companies from taking advantage of being so to speak, the only game in town.
 
#158
#158
oklavol said:
Cooperatives don't have to extract the oil. They can buy it on the free market and refine it. There's no need for them to get into that part of the market, that can left to the oil companies. It would be too difficult for a cooperative to engage in drilling wells overseas.

I'm simply talking about the process of refining the oil that takes place in the United States. There's no reason this couldn't be done by a cooperative, and cooperatives will return their profits to the consumer not to the company. I think I get a fairer deal that way. There's not enough refineries in this country to keep oil companies from taking advantage of being so to speak, the only game in town.
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By limiting this to refining, you further reduce the potential for cost savings. Assuming refining represents about 25% of the cost of a gallon of gasoline and a 10% profit margin - your realized savings come in around 6 to 8 cents/gallon of refined gas (assuming the coop is cost neutral in refining).

Refining is extremely capital intensive - I still don't see anyway that a cooperative could match the efficiency of a private company in operating a refinery. Even if they could, the cooperative would need to hold back profits for investment in plant upkeep and enhancements and sell their refined product on the open market. Accordingly, there are less (no) profits to return to the consumer.

Greater refining capacity could put downward pressure on gasoline prices but that is true regardless of ownership structure.
 
#159
#159
volinbham said:
By limiting this to refining, you further reduce the potential for cost savings. Assuming refining represents about 25% of the cost of a gallon of gasoline and a 10% profit margin - your realized savings come in around 6 to 8 cents/gallon of refined gas (assuming the coop is cost neutral in refining).

Refining is extremely capital intensive - I still don't see anyway that a cooperative could match the efficiency of a private company in operating a refinery. Even if they could, the cooperative would need to hold back profits for investment in plant upkeep and enhancements and sell their refined product on the open market. Accordingly, there are less (no) profits to return to the consumer.

Greater refining capacity could put downward pressure on gasoline prices but that is true regardless of ownership structure.
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Cost savings isn't the point of doing it. Its these enormous profits oil companies make, that the cooperative would make instead, who would give the profits back to the consumers, not to the company and the CEO. Thats the reason for the cooperative, not cost savings.

Refineries are enormously profitable. I doubt it would be dificult to find lenders for such a business that a cooperative would need for start-up capital.
 
#160
#160
oklavol said:
Cost savings isn't the point of doing it. Its these enormous profits oil companies make, that the cooperative would make instead, who would give the profits back to the consumers, not to the company and the CEO. Thats the reason for the cooperative, not cost savings.

Refineries are enormously profitable. I doubt it would be dificult to find lenders for such a business that a cooperative would need for start-up capital.
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Refineries have been quite profitable in the last 2 years but prior to that they yielded little to no profit.

About 40% of refining capacity is owned independent of Big Oil.

Finally, the huge profits you believe will go back to consumers are largely from margins across all aspects of oil production and delivery. The percentage from refining is just a fragment of that.
 
#161
#161
volinbham said:
Refineries have been quite profitable in the last 2 years but prior to that they yielded little to no profit.
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That's not consistent what I've read:

Boosting Big Oil Profits, Bush Administration Cites Lack Of Refineries For Energy Shortages - CBS News

(CBS)
While the Bush administration cites a lack of refineries for energy shortages, internal oil industry documents show that five years ago companies were looking for ways to cut refinery output to boost profits.

It takes about four years to build a large refinery so any substantial additional new capacity from new plants would have had to begin by the mid-1990s, energy experts acknowledge.

Internal documents from some of America's biggest oil companies suggest higher prices at the pump may, in part, be a result of a deliberate strategy to limit domestic gasoline production, reports CBS News Correspondent Bob Orr. Sen. Ron Wyden, D-Ore., who has been investigating oil prices for two years obtained the documents.
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#163
#163
overseasorange2 said:
Nobody wants to have a refinery next to their home, but everybody wants cheaper gasoline. It is quite the dilema...
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If the choice is more refineries or higher gasoline prices, that is a no brainer. Of course I can understand why the oil companies want to limit capacity.....
 
#165
#165
oklavol said:
That's not consistent what I've read:

Boosting Big Oil Profits, Bush Administration Cites Lack Of Refineries For Energy Shortages - CBS News

(CBS)
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Your source suggests that companies were taking steps to boost profits at the refinery level. Until very recently, refining has been the least profitable part of the business.

Further, refining accounts for about 20% of the cost of a gallon of gas - even if you could squeeze all the profit out of refining (which I strongly disagree you'd be able to do) - you would see gas price reductions in the single digits (cents).

Further, if increased capacity puts downward pressure on pricing then refining margins go back to being very thin and financing a $3 billion investment in a high-fixed cost operation with thin and variable margins will be difficult.

Finally, the opportunity for cooperatives is there. Why haven't any emerged if these great savings are available? What's stopping these cooperatives?
 
#166
#166
volinbham said:
Your source suggests that companies were taking steps to boost profits at the refinery level. Until very recently, refining has been the least profitable part of the business.

Further, refining accounts for about 20% of the cost of a gallon of gas - even if you could squeeze all the profit out of refining (which I strongly disagree you'd be able to do) - you would see gas price reductions in the single digits (cents).

Further, if increased capacity puts downward pressure on pricing then refining margins go back to being very thin and financing a $3 billion investment in a high-fixed cost operation with thin and variable margins will be difficult.

Finally, the opportunity for cooperatives is there. Why haven't any emerged if these great savings are available? What's stopping these cooperatives?
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Again, what your saying is not consistent with what I read. Refinery profit margins double in West / It's one reason price of gas in state is up 44 cents since Feb. 1

Refinery profit margins have more than doubled since last fall, according to one rough measurement, and now stand at $39 per barrel on the West Coast. That's more than double their average of $17 for the last five years.

Why the jump? The refineries that make California's unique, pollution-fighting blend of gas have cranked out 7.8 percent less gasoline since the start of February than they did in the same period last year. That smaller supply brings higher retail prices.


Consumer advocates call many of the refinery problems a sham. The oil companies, they say, are limiting gasoline supplies to drive up prices and profit margins, just as power companies did during the state's electricity crisis six years ago. "What this industry needs to make big profits and what consumers need to have reasonable prices are very different things," said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights.


"It comes down to this: There's a scarcity, and the question is whether it's a real scarcity or if it's being constructed," said Severin Borenstein, director of the University of California Energy Institute.
Figuring out the answer is practically impossible, he said. All the maintenance delays and production problems could be real. Or refineries could be doing little things, bit by bit, to limit California's gasoline supply, he said. "If somebody told them, 'Use your market power,' this is how they'd do it," Borenstein said.
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$39 a barrell profit for each barrell they refine is closer to 50% then 20 %. It sounds quite profitable to me.

The reason cooperatives cant be created is no refineries have been built since 1976. Environmentalist have put a stop to new refineries.
 
#167
#167
oklavol said:
Again, what your saying is not consistent with what I read. Refinery profit margins double in West / It's one reason price of gas in state is up 44 cents since Feb. 1



$39 a barrell profit for each barrell they refine is closer to 50% then 20 %. It sounds quite profitable to me.

The reason cooperatives cant be created is no refineries have been built since 1976. Environmentalist have put a stop to new refineries.
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Read deeper and you'll see that this is a limited phenomenon to the West largely due to their unique blends.

Refinery profits are definitely up. But historically they haven't been.

Big Oil owns about 60% of refineries. Other companies like Valero and other downstream companies own the rest. These companies are no where near as profitable as Big Oil (whose largest profits come from production not refining).

If you want to ease the price, ask the government to restrict all the regional blends and lower the taxes on gas (taxes represent about 20% of the cost/gallon).

Environmentalists are only part of the issue. Until very recently, entering the refinery business has been too risky. It takes about 4 years to bring one on line. You have to be convinced these current profits will extend into the furture to make that investment.

New refineries CAN be built but it is a question of risk vs. reward. This is the same for Big Oil as it is for coops.
 
#168
#168
Refinery profit margins have more than doubled since last fall, according to one rough measurement, and now stand at $39 per barrel on the West Coast. That's more than double their average of $17 for the last five years.
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I'm still trying to figure out how they came up with this number.

If a refinery clears $39 a barrel then the must charge more - let's say $50.

Assuming crude goes for $80 a barrel (and leaving out the markup) we are at $130 of costs in a barrel.

A barrel of oil yields about 20 gallons of gas (after refining).

If these numbers are correct, gas would be selling for $6.50 per gallon. Clearly it's not.

Most sources claim refining adds a total of about 20% or so to the cost of a gallon of gas.

The fact that margins doubled is consistent with a large jump in the price of raw materials (price of oil).
 
#169
#169
This link shows the % of a cost of a gallon of gasoline by component.

Check the volatility on refining. Notice also that these % are costs in a gallon. For refining this includes the costs associated with refining plus the profit. Even assuming very high profit margins (eg 20%) the profit impact on a price of gasoline is still anywhere from 5 - 15 cents/gallon.

Gasoline Components History
 
#171
#171
volinbham said:
This link shows the % of a cost of a gallon of gasoline by component.

Check the volatility on refining. Notice also that these % are costs in a gallon. For refining this includes the costs associated with refining plus the profit. Even assuming very high profit margins (eg 20%) the profit impact on a price of gasoline is still anywhere from 5 - 15 cents/gallon.

Gasoline Components History
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The point you keep coming back to is this, that oil margin on refining oil is low, you say 20%.

But when the commodity you are selling is in the millions and millions you don't have to have a large margin to make a lot of money.

If they make 1 dollar on a barrel of oil, but they sell 100 million barrells in a year, they make a 100 million dollars alone from a having a mark-up of 1 dollar. But they dont make a mark-up of 1 dollar they have 17 dollars or 34 dollars.

This is a commodity they have a guaranteed market for. This U.S. demand for gasoline has consistently went up year after year for the last 50 years. There's little risk for them in refining oil, there will be buyer.

When is the last time oil companies have lost money in a year?
 
#172
#172
In 2002, oil companies made 1 Billion dollars. In 2005, 18 billion.

Net income increased for domestic U.S. refining operations from just under $1 billion in
2002 to just under $18 billion in 2005, with virtually no change in volume of production
(called throughput in the oil industry) at U.S. refineries.​
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For what you call a high risk, low margin business, that's a heck of a lot money they are making.​
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#175
#175
More on profits:​

The increase in profits of the major oil companies through the first three quarters of this year
is huge by any standard. The oil companies are on track to have an income this year of over
$100 billion. In 2005, their income will be equal the total of 1995-1999 inclusive. Placing this
huge increase in profits in perspective is a challenge. The oil company executives like to
point to profit as a percentage of sales because in a commodity business, where raw
materials are a large part of costs, profits will look small. In a capitalist economy, however, it
is return on equity that matters, since it is the return that attracts capital. By this standard,
the oil company profits have been skyrocketing.
​

• Since 2003, when the Department of Energy offered that observation, the income of the
companies has skyrocketed. In 2004, it increased by ten billion (almost 20 percent). In 2005,
it is likely to be about twice what it was in 2003. This year will set a record for total profits and
return on equity. In fact, 2004 and 2005 each set a record. Four of the five most profitable
years since the oil embargo of 1973 have occurred since 2000.​

• Compared to the return on equity in the 1985-1999 period, in 2000-2005 the major oil
companies have enjoyed a huge windfall. If we assume the average return in 1985-1999,
compared to the S&P Industrials as the base, the increase in 2000-2005 is about $150 billion
in excess profits. That translates to over $200 billion in before tax profits, which is what
the consumer pays. Even if we assume that the oil industry should have the same return on
equity as the S&P Industrials, the excess since the start of the 21st century would be about
$100 in after tax profits, or about $150 billion in prices paid by consumers. By either​
measure it is a huge windfall.
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