I missed this one, Hang, so a little more deadline procrastination on my part.
Why in hell should we let the oil companies get away with a price model that’s based on the next shipment instead of the one he's got in hand?
The vast majority of gasoline is not sold directly to the customer by an oil company, it is sold by mom and pop operators (mainly) up to chains that operate a handful of stores to maybe hundreds of stores. What if you knew the price you would have to pay for your product was going to increase by 90 cents per gallon (x 10,000 - 20,000 gallons) in two days, and your line of credit (based on wholesale gasoline at $1.50 and not $2.50) could not cover that increase. But, your bank will work with you -- for an extra price of the action, of course. And, your net margin on that gallon of gasoline is under 5 cents to perhaps negative figures for short periods during volitility? And the credit card companies are making about as much on a tank of gasoline as you are?
And if the wholesale price becomes more than what the competing wholesalers price is, I buy the product from the competition.
That model doesn't exist in downstream petroleum. Retailers buy a commodity, and the price can broadly fluctuates multiple times per day at the whim of the spot market. Branded contracts are usually 5 cents or so higher than the spot (to cover the benefits of the brand) though in a volatile “inverse” market the oil company contracts have kept those prices 10s of cents below local rack prices (reflecting local supply) for branded marketers (but they still move with the spot market) leaving independents in a really tight spot.
and that's why the oil companies are reporting higher profits than ever before. Their product is a necessity. The price is fixed by a group of major suppliers. Since the product is an absolute necessity, the oil companies can pad the margins with the result being the public is being screwed by the oil companies, plain and simple.
The core factor is the price of crude (where oil companies get exploration and production and trading profits). This, for the first time in a long time, is actually being driven by demand from places like China. OPEC and the rest are strained to meet demand, and not necessarily curtailing supply like the past.
Refinery crack spreads (another distinct, often separate layer in the industry) have been good lately, but typical refinery returns are in the 5 percent range, which is hardly robust. [edit: crack spead is the profit generated by "cracking" crude into refined products, then selling the refined prooducts as commodities which are also at the whim of the market] Gasoline and diesel prices are largely fixed by traders at 7 regional "spot" markets with additional trading conducted while moving though the pipeline until it reaches the terminal "rack" where it is purchsed by the independent retailer for market price, or picked up as part of a branded contract supply agreement for contracted branded price.
Major oil companies have generally sold off much of the refining capacity to independents since it is usually more trouble than it’s worth (compared to E&P) with refining returns typically around 5 percent and well below the S&P. And, there is no consensus that these current profits are here to stay for any length of time for either exploration and production or refining. If Chinese expansion can’t be sustained and collapses - poof. $20 bbl oil. If demand drops, refineries lose profits very, very quickly. In general, the current free market infrastructure delivers prices (relative to inflation) to the consumer that are much better than those delivered when the industry was regulated in the 1970s, with more reliable supply.
BTW, when you run at 98 percent refining capacity to demand, and you lose 30 percent of production to two hurricanes, your supply relative to demand puts you 28 percent in the hole (though that is recovering pretty quickly now, hopefully by early Dec. we will be close to normal for refining). What do you expect to happen to commodity prices in that situation? Then throw in all the speculators that play the market. I’m amazed it’s working as well as it is and prices are as low as they are.
Now if I was an oil company, I'd create the illusion of a different price model (advance price increase) and since I control virtually every step of the process from raw material to the customer I can be very creative about 'associated costs'. I can create any picture I care too because I'm in the catbird seat every step of the way from inception to consumption...
As noted above, your distribution model is not factual.
What rocket scientists in Washington has recently ok'ed the merger of the largest oil companies on the planet??
I think that’s a legitimate question. The answer, is that anything has gone before the FTC since “globalization” has received a free pass, and not just in the oil industry. It started under Clinton, and I don't think Bush is looking to turn back the clock. I don't think this is beneficial to small business or consumers.
I guess, to get somewhat back on thread track, this is the type of complexity that the broadcast media is ill equipped to handle, and that the print media takes months to grasp in many cases. And this is the simple version (I left out things like allocation impact). I saw little evidence that this complexity was anymore understood at the cable news channels than it is here, or by the various grandstanding Governors and attorney generals who you get the impression don't really want to know if it gets in the way of righteous outrage..
Charon
