AS the gas prices climb to $4 per gallon, Americans are wondering how will they make ends meet – Government refund check or not. If you didn’t get a check, you didn’t file your income tax. The amount is anywhere between $300 to $2,000. Tax free and not taxable on 2008 income tax returns.
Adam Kemp writes in his article Economics and Oil – Exxon is not Evil …
Every time Exxon releases their quarterly results showing record profits a debate erupts about what we should do about Big Oil. There seems to be a consensus among the masses that companies like Exxon are gouging customers for profit. We pay ever-increasing prices for gas while they’re raking in the money. It sure sounds like it’s their fault, but is it really?
First of all, let’s shed one big misconception: profit margins for oil companies are NOT abnormally high. According to Exxon’s latest SEC filing, its profit margins actually decreased year-to-year:
“Higher crude oil and natural gas realizations, driven by record worldwide crude oil prices, were partly offset by lower refining and chemical margins, lower production volumes and higher operating costs. [Source]
According to Yahoo! Finance, Exxon’s profit margin is about 10.82%. That means that for every dollar that Exxon makes, only about 10.82% is profit. That’s not much compared to other industries. For instance, Microsoft’s profit margin is about 28.33%. [1] Who is going after them for “excess profit”?
The real reason that Exxon is making so much money is not that they’re gouging consumers. The real reason is right there in the quote above: “record worldwide crude oil prices” (emphasis added). That brings us to misconception number two: Exxon does not set the price of oil.
This is the most important thing that people need to learn. The price of oil works much like the price of any other commodity in a capitalist, free-market society: supply and demand. Let’s review what that means.
We can analyze the market for a product by studying two curves. The first is the supply curve. It looks like figure 1 … As you’ll notice, the supply varies according to price, and vice versa. Likewise, as supply goes down, price goes up.
The other curve is the demand curve, seen in figure 2. This curve goes the other direction. As demand goes up, price goes down. Demand and price are directly related.
Notice that neither supply nor demand is fixed. Each varies with price. A lower price increases demand, which in turn decreases supply. A higher price decreases demand, which in turn increases supply.
You can more easily see the effects of changing the supply or demand by moving the lines relative to each other. [Figure 3] …
This is true in almost every industry. However, there are two more features of the oil industry which make it interesting. Most markets we think of are what you would call “elastic”. This means that producers can easily increase supply and consumers can easily decrease demand. This can be true of either supply or demand or both. The oil industry is different. Both supply and demand are inelastic.
Oil companies cannot merely decide to cut prices and increase production. They are limited to prohibitive cost of finding and producing oil, which (as we all know) is a finite resource. Thus Exxon cannot turn into Wal-Mart. They can’t simply play the high-volume, low-margin game. They sell what they can produce and no more. They are limited by conditions outside of their control. …
Remember Katrina? A hurricane knocked out 10% of the refining capacity in the US for a while (Source) and gas prices jumped by as much as 40 cents in one day (Source). Even then some were blaming oil companies for “gouging” consumers, but the reality is that supply dropped and demand did not. In fact, after Katrina the FTC did a study:
“The Federal Trade Commission said Monday there was limited evidence of gasoline price gouging. In the weeks after Hurricane Katrina, with soaring prices due mainly to market factors.” …
So we can’t blame the oil companies then who can we blame? Why is the price of oil so high, and why does it keep rising? There are several reasons.
The most obvious is that demand is continually threatened by violence in the Middle East. We are heavily dependent on the Middle East for our oil supply, and every time the stability of that region is threatened so is our oil supply. Our heavy-handed, interventionist foreign policy must be held partly to blame for this. Remember that price of oil was around $30 per barrel when Bush took office. Now, after Afghanistan and Iraq, it has rise to around $120 a barrel. [Source]
The effect of the threatened supply is exacerbated by the fact that oil is traded on the futures market. This allows people to purchase oil at a set price and collect it later. Likewise, it allows sellers to sell oil at a given price and deliver it later. … The market is betting on a grim future.
Another thing that influences the price of oil is the increasing weakness of the dollar. Exxon pointed out in their latest filing that they benefited from the weakness of the dollar. …
So how can we stop the price of oil from rising or make it go down? I can tell you that a “tax holiday” will not work. As many economist have pointed out (Source), the price is dictated by the supply and demand in the market today. Cutting the taxes will artificially drop the price, which will increase the demand until the price rises again. …
Clinton’s proposal to make the oil companies pay doesn’t work for the same reason, but it would be worse. However, there are two legitimate, fundamental ways to decrease the price of oil. Neither is easy.
The first is to decrease demand. This means buying less gas, through whatever means possible. …
The second is to increase supply. This means opening up more areas for oil exploration and building more refineries. Again, this is not easy, and it will take a long time as well. It also has the problem of being politically unpopular. …
Still, if we can do both of those things, there are two more things we can do to improve the situation. First, we need to stop stirring up trouble in the Middle East. Invading Iraq was a huge mistake, and invading Iran will only cause the price of oil to surge even higher. We must avoid conflict in that region, and we must find a way to restore stability.
Second, we need to stop destroying the dollar. That means that Congress and the President must stop excessive spending. …
Those are our options.
[1] Wal-Mart’s net profit margin is 13.8% for every dollar made and that profit is shared by the associates on a quarterly basis.
Keith………..
As long as the major media keeps hammering the oil companies as gougers, people will continue to think irrationally
on the subject of gasoline prices.
Moreover, as Bush said last week, if the Congress was serious about solving our dependence on foreign oil they would authorize drilling in the ANWR, the Gulf, and developing the oil shale in the west. Then they would reduce the corporate tax level, and provide incentives to immediately begin development of new refinerys.
Nuclear and clean coal fired power plants would be authorized for electric power generation, and that industry would be given incentives to start rebuilding our power transmission grid, which is in shambles as we speak.
On top of all this, they would authorize wind turbine construction anywhere that has good winds, and ignore Mr Kennedy and his rich buddies.
Then, they would stop subsidizing farmers for growing corn that is going to ethanol production instead of to the world’s tables for food. Rather, they would subsidize farmers in the Gulf states to grow sugarcane for ethanol production……..a much better source of sugar for turning into alcohol.
But, alas, you and I both know that none of that will happen or even start until the American people wake up.
EF Curzi
Hartville, Ohio
EF Curzi:
Thanks for sharing your enlightened thoughts …
Alternate energy is in progress and has been attempted, just as you said. The uneducated environmentalists and organizations who do not compromise in common sense have also stood in the way. Because these organizations now represent money (mostly from funding of ignorant masses) – they have lobbying power and use the funding to elect those politicians who do not use common sense when it comes to energy versus environment. Instead, we are led to believe that it is the energy companies who are persuading politicians, et cetera. And the Bush attachment to this is old news because the Bush family sold out to another company and is now only indirectly involved with oil companies. Yet, despite the cry to Congress to do just as you described – it falls deaf upon socialist-minded ears. When alternate energy is found (wind turbines), members of Congress like Kennedy say – in your backyard, but not mine; and despite studies that show otherwise, wind turbines have been nulled by local governments because of the plight of an occasional bird being caught in the turbine blades. If they would investigate, in a Mediterranean resort town in Turkey, the entire town gets its electricity from one large turbine on a cliff overlooking the sea, and coupled with solar energy to warm their housing waters is one of the most energy efficient places in the world. The local sea gulls have learned to stay away from the large turbine on the cliff – and are flourishing as they always have.
Meanwhile in one of the best known nation with its own natural resources, we are subject to the government’s insistance (Congress) in punishing our oil companies that search for oil to drill here, when we could be using it and trading it. And corn also has been found to be able to produce plastics. In the town of South Clinton an historical section of the river there was torn down so just such a factory could be built – utilizing the corn supply from local farmers – Iowa = corn; instead of using, as you stated sugar cane. However, like the corn, sugar cane would also rise in price, but at least the government doesn’t still continue to pay them to raise or not to raise certain crops. Corn can always be surplus because of the starving folks in the world and trading with other nations. Surplus can also be used in the new technological manufacturing ventures described above – but food stuff should come first. We are behind in our agricultural legislation, and in most cases, government needs to back off from being involved with it.
Thanks for your comment and please visit again and share your thoughts.
Best Regards …
K
OK – so what other seller of limited resources makes a record profit during “hard times”? Supply/Demand curves make sense where there is full competition. When not – then other factors come in to play. Seems like Exxon must have plenty of supply in order to make those record profits….
Can you say Oligopoly – and ‘cartel’
http://en.wikipedia.org/wiki/Oligopoly
GregF:
In the case of oil, supply and demand is always the factor. However, remember that the price of oil is caused by more than one factor:
* Government intervention in the form of legislation or not approving legislation to increase supply in America’s wealth of oil sources – western United States, as well as other terrestrial locations in United States, as well as offshore drilling.
* Despite increase of demand for processed crude oil, Congress will not allow an additional refinery built, although I understand that a refinery or two has been authorized an upgrade.
* The public is also not including the factor of the result of Hurricane Katrina, which shutdown refinery operations there for a time.
* Speculators and commodity investors have caused the problem as well.
Regardless of the ridiculous price of a product that can be found readily around the world in sufficient quantities, we and other folks of other nations need to create and produce alternate energy sources and technology that allows alternative energy sources besides crude oil. For example, the recent marketed small automobile that sells for about $24,000 and runs on a tank of air for about 125 miles before filling. Propane has been used as an alternative fuel for decades, most vehicles running it as an alternative until the small propane tank runs out and then switching over to gasoline until the propane cylinder can be refilled. It is safer than one may think, and it produces less toxic emissions than gasoline or diesel.
In other articles, I discuss the myths (established by the politicians and media) about the way oil products, specifically fuel, is priced at what it is. Congress is the key factor in the problem, and continues its misinformed rhetoric, basically putting the blame on the oil companies. Politicians are swayed by the ever-growing ecology and environment entities that are careless about their research or just plain lie to further their cause. Oil companies hate oil spills that everyone is concerned with when discussing environment because it costs them a lot of money to clean up, plus any fines that are presented if there were any factors of negligence (as in the case of the Alaskan oil barge hitting rocks and spilling oil – ruining the shores and killing wildlife before it was contained and cleaned up). In addition, oil spilled is costly in itself because it is something that they could have sold. All businesses are in business to make money and profit. Every time the price goes up (usually up and then back down) congressional members demand an investigation – and it happens. And every time oil companies show their accounting records and nothing illegal is found. It is because it is not the oil companies themselves – it is mostly what I have described above. Oil companies have to answer to profit sharers and investors. Speculators have been shown to be the most corrupted entity in this endeavor of “Big Oil” operations. The same sort of thing happened concerning railroad speculators in 1873, which, in large part, caused an American depression as bad as the Great Depression of the 1930s. In the early history of American oil companies, one can readily see why regulations were established concerning monopoly, fair trade and other business practices. It was a new business at the time and pretty much a maverick operation.
Even if oil prices come down considerably, we must endeavor to provide an alternative energy to run our vehicles and “fossil” fuel burning engines. In reality, the oil producers are running a monopoly of sorts – from those that pull it out of the ground to the folks selling it to run machinery. There are no alternatives, and thus no freedom of choice for those who wish efficient and cost effective means of travel.
Therefore, it is not the oil companies one should be pestering, but Congress. Congressional legislation properly put together by real research and with the help of scientists, investors and those looking for new markets of investment can provide alternate sources that everyone can afford. Personally, I hope to see the day when the world can tell the oil sheiks to drink their oil because we don’t need it any longer.
As for just plain and ordinary every day folks like me, we are not only feeling the pain of the high cost of fuel, but the results of the high price remaining so long – for whenever fuel prices remain high for a time, so do other things rise with it. It is a fact of economic life.
And, one final question – Why pick on Exxon? Are they the only oil company in the world? Despots and tyrants in history have used oil as a factor for their oppression and warmongering as well. And, contrary to leftist propaganda – the Bush family, traditionally in the oil business (of sorts) is not part of this problem – in fact, much of their direct involvement in Big Oil has been sold to diversify into other investments. This was recently announced in the news when a journalist provided answer to the usual leftist rhetoric about Big Oil. For those politicians who provide that sort of rhetoric and dissemination of misinformation, one should endeavor to see where these wealthy people got their fortunes. To date, the Democrats in Congress make up the wealthiest folks in Congress. They shouldn’t throw stones at Bush while living in a glass house.
Thanks for providing your comment for an intellectual discussion. I have repeated some things here mentioned in my previous comment, but apparently I didn’t present it well enough for understanding(?).
KAL
GregF:
Can you say “be more specific” and it might help to know (if you read “About”) that rebuttals here require references from which you base your statements/opinions. Throwing key words in does not make a discussion. I provide informational and source links, I expect the same from those who disagree. Any college/university professor would be happy to explain this to you.
What a bunch of dupes. The oil corporations are making billions, and it is all ok. Ok that are economy is falling, that Bush lied about stopping “price gouging”, lied about WMD, was two days late on getting down to see the effects of Katrina. The guy has some screws loose.
One can see clearly the pro-oil dupes on this site—supporting the oil corporations, wind fall tax cuts, the national security guard in Iraq (our US troops protecting the private corporate oil concerns), denying global warming so the oil/coal and continue to destroy the environment. Its not “supply and demand” — it is profit over people. This is a Republic form of government not a Capitalistic. But seeing the Bush administraton supporting socialism by “outsourcing” our employment to 3rd world nations, Bush given big business wind fall tax write offs, bail out, perks. It is clear exploitation of the American worker. Plus, we have Bush crying in his soup over terrorism, but allows our boarders to be free — as the pour in — then he bails them out with tax payer relief money. Not to mention the Patriot Act and allowing the Telcomm’s to wiretape us illegally.
The Republican Party has really screwed up this Nation. It is time for a change.
Johnnie (?):
Thanks for sharing your thoughts…
Do you have something against a business entity making a profit? Are you against any entity that establishes employment for thousands, tens of thousands and millions? Do you realize that there is a difference between what money is made on a product or service and after subtracting overhead – what the profit really is? How does it feel to be brainwashed?
President Bush didn’t “lie” about WMDs.
Congressional committees have been, ever since the oil prices skyrocketed attempted to prove that the oil companies were doing something illegal – like price gouging. Guess what? They failed. Speculators and investors, however, are a different story.
Check any of your favorite politicians and see where their investment money is – you would be surprised.
What do you mean: “wind fall tax cuts”. Are you one of those who think that prosperity is established through taxation? Winston Churchill stated:
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
I think you should study more about political science, judging by your comments.
Global warming is a hoax – 30,000 scientists around the world said so.
Oil and coal is not destroying the continent – humans are. But, yes, we have been in need of alternate energy for decades. The fault lies in several camps – but not solely within the GOP, and one of the camps is made up of people like you.
A republic form of government should have free trade. Capitalism is a word coined straight out of the Marxist dialogue.
All the woes you describe have been caused by both DNC and GOP members.
You also need a class in Economics 101 – supply and demand is the factor in ANY commodity, and oil is a commodity.
And how, odd, how you complain about prices, but fail to see that the Democratic Party’s approach to an economic issue is to tax and tax and tax. The Bush tax cuts were a temporary fix, he failed to seek a long-term fix, such as the Fair Tax Act, which politicians are against because it takes away an element of power and a method of taxation that prevents the people actually seeing what they are actually paying – as well as allowing one segment of society to pay taxes for another segment. This is called income redistribution, or a more common term: legalized theft.
No argument about the dysfunction of the Bush illegal immigration policy; however, it is the same as your precious Democrats. Notice they haven’t been complaining?
Certain programs are required in order to seek out those whose intent is to destroy America – you have been reading too many New York Times articles and other bias sources of “information”.
Did you actually read the wording in the Patriot Act? Or are you just parroting the American socialist?
Bailing out anything with taxpayer money (like the recent mortgage fiasco) is guilt upon both sides of the political fence, more so in the Democrat camp.
Now who is a “dupe”?
Oil refineries have not been built, according to the CEO of Exxon-Mobil, because they haven’t been needed. The consolidation of the oil industry into fewer companies has had an impact on the number of operating refineries. Does anyone on this board remember that one of the reasons given for the rise in oil prices was ‘refineries have been shut down for periodic maintenance’.
Another issue not discussed is the fall in the value of the U.S. dollar. Why has the dollar fallen so far in relation to the Euro, the Yen, and the Pound?
Because the U.S. executive branch has chosen to borrow money to fund a war rather than raise taxes. In this war the wealthy have sent neither their sons and daughters nor their cash.
Has anyone on this board listed the dollar value of the tax exemptions the U.S. oil industry has created for itself?
Does anyone on this board understand the definition of oligopoly? The economic model of free enterprise is: Higher prices breed more competitors. More competitors bring lower prices. This is how it is supposed to work.
It isn’t working that way.
Royal Dutch Shell is a Dutch company. British Petroleum/Arco is a british company. Exxon-Mobil is a U.S. company. Conoco-Phillips is (unless the Chinese succeed in buying it) an American Co. What happened to Sunoco? What happened to Union Oil? What happened to Occidental Petroleum? Take a look at exactly which companies compete and how they compete before defending their actions as being consistent with a ‘free market’.
The evidence isn’t there.
Lets simplify this…
Gas = a necessity
Record ‘profits’ = AFTER expenses, regardless of profit margins and demand, they made more money than ever before
Profit Margin can be offset by volume. That’s why variois manufacturers will run highly competitive discount events. Even if they are only making a couple hundred per vehicle. If they make 60-70% less profit per unit sold they are still making MORE money in the end because they may move 5-10x their normal volume.
And yes, we’re definitely getting Gouged. In my city several gas stations, owned by Exxon in fact, didn’t raise prices AT ALL this past weekend. Many others did, going up by as much as 50-75%.
But to be fair, it’s not ALL gouging.
Another big problem: Consumer ignorance and panic. Every time an ice storm comes through people run to the store and buy all the milk and bread they can find. And now with gas it is the same. They inflame a small price change by creating such short-notice demand from PANIC. People need to realize it’s not the end of the world if a hurricane shuts down fuel production for a week or two…unless demand TRIPLES during that time because everyone goes nuts at the pump.
Mad Dog Fargo:
Thanks for stopping by to share your thoughts …
Let me simplify this:
Government (US-Federal) makes more profit on gasoline then the oil companies. Profit is usually put back into any business entity that is successful to further improve and make more profit, if the economy allows. What we need is a refinery that will not be subject to Hurricane disasters – we have needed one extra refinery for thirty years. Not only does our government elected officials point the finger the wrong way, but continues to not allow improvements like expansion of present refineries, domestic drilling to be self sufficient.
Quit paying attention to the political propaganda. Congress in its efforts to prove their finger pointing has a special committee (at taxpayer expense) to “investigate” the “profits” and check to see if there is “price gouging” and each and every time they do (usually when the people cry out that the gasoline and diesel is too high, and remains high) – they come up with a clean record on the part of US oil companies. As far as shenanigans concerning crude oil – OPEC is the one who causes price increases by cutting back production sold worldwide.
And, if you think our gasoline is high – we are paying now what Europe has been paying ten years ago.
Fuel IS a necessity, no argument there; however, it has been quite evident for two decades (or more) that we need an alternative form of energy. We have the technology – why hasn’t it happened?
In regards to the short analysis you present of the automobile industry – it is more complex than that. But to make that simple, use the following rule: follow the money. It leads once again to government. The government puts its face in just about everything they can – and when they do, everything costs more.
Businesses provide jobs – through services, products and manufacturing. People go into business to MAKE a profit. Quit following the propaganda that anyone or any entity that makes a profit is evil; but if you do, put our government with its present elected officials at the top of THAT list.
You are not being “gouged” by the oil companies or any other industry – you are being “gouged” by the morons that you help put in office.
So, to be”fair” – point the main problem to the person you see in the mirror in the morning.
Start voting responsibly and don’t let the elected officials run rampant in the halls of Congress in the period in between. Take the time to send letters (short, and one page) that expresses this …
And, most of all – be armed with facts. Not one thing you have presented here is based on any statistics or fact – it is something you read in Left media or some dysfunctional blog. The last paragraph isn’t worth an answer.
Read LPJ rules on rebuttals, et cetera – make your statement and back it up with where you got your sources. If this were a college/university grading, you would receive an “F”.