Yes On 87: Oil Companies Price-Gouging?
Posted by Frugal on August 18th, 2006
I just saw a TV ad on a new California proposition 87 “Make the oil companies pay; make it illegal to pass on the costs to us”. In times like this, politicians always want to find a scapegoat, whether it’s an individual, a rogue country as part of the evil axis, or some companies or industries like oil.
I don’t really know enough about all the price-gouging investigation into the oil companies, but so far, all investigations have turned up nothing. Here is a link to post-Katrina gas price investigation that turnd out nothing. This is a capitalistic market, and the market works the best when it is a free market. Why didn’t people complain about oil price when it was at $0.99 per gallon? Or should the oil companies file an official complaint against the general public when it was at $0.99 per gallon? The best proof for capitalism at work is that price of gas was able to go down to $0.99. If big oil companies can control the price, why would they ever want to sell the gas at $0.99 if they can set their own price at a much higher price like now?
The price of commodity such as crude oil that trades freely and globally cannot be determined by USA alone. Rather it’s determined by the supply & demand of the world. But the general public doesn’t seem to understand that. The general public is more like a mob controlled by a few politicians for their own power fight. Say things that pleases the un-suspecting public, and you can get more votes. When median crude oil was at $15, gas price is obviously cheap. At that time, refining industries generated a return on investment of less than a bank CD or a 10-year treasury bond, and therefore no new refineries were built for decades. Only a stupid person will invest in billions of dollar to build a refinery or open a oil well, when the potential return is less than 5%. Will you go through the labor of oil exploration, extraction, and refining if you can just put your money in bank, do nothing, and get a better return? The business cycles are just part of the consequences from capitalism. Capitalism allows free flow of money, and therefore refining and oil industries went through a down cycle of consolidation and reduction in investment when crude oil price was down at $15.
Even when you look at the profit margins, oil companies are not the biggest percentage earners by any means. Checking at the latest quarterly report from ExxonMobil (XOM), the gross profit margin is about 26%, and the net profit margin is about 10%. This is very low margin business, as expected in a commodity-related business. What does those numbers mean? Taking from their report, it means that you buy some goods at the price of $73, and sell them at the price of $99. In order to sell them, you need to transport, process, store the goods, pay all of your employees, and pay your taxes too. At the end, out of $26 gross profit, you pay out $16 for all of those things, and end up with $10 net profit. Now if you check out Microsoft, a company much closer to monopoly, their gross profit margin is at 81.4%, 55.4% better than Exxon. And their net profit margin is 31%, 21% better than 10% at Exxon. Even McDonald’s has a better net profit margin at 15% than Exxon. And now you want to tell me that these big oil companies are gouging consumers? Why don’t people ask McDonald to give you 5% cash back for every burger that they sell, and Microsoft to give you 25% discount on all software, before you ask Exxon to give you back anything? If the annualized profit margin is just 5% of the cost of revenue involved, Exxon might as well buy 10-year US treasury bonds instead of crude oil. Just sit back and get paid, instead of getting blamed for doing all the work.
To reduce the gas prices, the easiest way is to consume less. Capitalism is surely at work, and with reduced demad of gas, the price will drop. On the other hand, for as long as the demand does not decrease, the price will simply stay high. In fact, the high gas price may simply be a symptom of the Peak Oil upon us.
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August 18th, 2006 at 7:40 am
You’ve forgotten one very important part of the equation: local gas prices. In the morning, do a quick survey of the gas stations in your area. You’ll see all of the prices are about the same. Then, come back in the evening. If there’s been any change in one of the prices, you’ll find that all of the stores have changed theirs by approximately the same amount. Do you think they all received new shipments of gas that day? Doubtful.
The problem is, capitalism is NOT at work in gas prices. Captialism does not equal screwing people for maximum profit. Gas prices are based on speculation and greed. If there’s a chance of a storm in the southern states, gas prices go up REGARDLESS OF WHETHER THAT STORM HAS AN IMPACT ON FUEL PRODUCTION! If I buy a widget and then turn around and sell that widget for a profit I typically have a set profit margin. Gas companies and stations do not follow those rules. If they buy gas, the price they sell that gas for will fluctuate during the course of the day depending on how much they think they can screw people for. If a neighboring station raises their prices, they raise their own. A simpler solution to the problem is to force them to keep their prices steady for products they’ve already purchased. Reductions in how much we consume is a great ideal, it’s also unrealistic in any immediate future.
And, I don’t know about your area, but the last time I saw gas for 99 cents was 1992 and I was happy at that price because it had been fluctuating in the high $1.30s for months prior. You can try and put a positive spin on it as much as you like, but I’m actually contemplating change jobs simply because I can’t afford the gas to get there. And that’s about as stupid a reason as I’ve ever heard for changing jobs.
August 18th, 2006 at 8:05 am
Price gouging by local gas stations have nothing to do with the big oil companies. In fact, the storm situation that you described at local gas stations I believe are TRUE price gouging examples.
However, in the first example that you described where all local gas prices are about the same, I think that’s just capitalism. In a capitalistic society, obviously you always sell for the maximum profits among competitions. Do you think there is any local gas station that can charge you $5 a gallon and still have booming business? That’s the power of capitalism from competition. Without competition like monopoly, profit margins tend to be very high, which is not the case here.
I’m sorry to hear about your job situation. But I think US has a very tough adjustment ahead. In many other countries where oil taxes are very high and their gas price is somewhere from $4 to $6 a gallon, they have developed their economy using more mass transit transportation infrastructure. Capitalism adapts, and their countries adapt to a high gas price. US will need to adapt slowly too. Certainly the pain of going from $2 to $3, a 50% increase, is much bigger for $5 to $6, a 20% increase.
In any case, prices at all local stations cannot have too much difference, based on the crude oil factor. Crude oil fluctuate only some 2% maximum a day, and usually about 1% or less. That’s about 6 cents difference in the $3 gas. I don’t think you can see any big differences, unless it’s the real estate price or rent that these stations are sitting at. Just my two cents.
And if you want to lock in your gas prices, you can always buy USO right now. You can get close to all the price increase back.
August 18th, 2006 at 8:38 am
My favorite part of the ad you mention is “Oil companies pay millions in drilling fees to Alaska and Texas, and nothing to California” (or something similar).
Well, yeah. That’s because Alaska and Texas make it easy for companies to drill, and can thus will pay the fees. If you make it nearly impossible to drill, you don’t gather the fees.
Maybe they meant something else by it, but that’s the message I got.
August 18th, 2006 at 8:43 am
In a capitalistic society, gas stations can and should be able to screw consumers. If consumers don’t like it they can a.) buy less b.) change their driving habits c.) create an alternative d.) purchase a car that uses less gas e.) ride a bike. It’s not the gov\’t responsibility to regulate prices. Just like Frugal said, no one was stomping their feet when gas was cheap and you didn’t see Exxon CEO and other execs crying for the gov\’t to make it change.
August 18th, 2006 at 10:54 am
EROCK,
I will edit your \’ to boldface later. Looks like that’s what you were trying to do.
To all,
1. I don’t know how many percentages of the local gas stations are owned by small business owners, but I did have a relative who opened a Shell gas station. He told me that selling gas is really very low margin business. He gets more profits from the convenience store at the gas station than from selling gas.
2. On 87, I don’t really have any problems taxing big oil companies. It’s a capitalistic society. Every state is free to do whatever they want. But restricting passing the cost is not capitalistic. It’s like saying you come here and do all the cleaning for the house, but I will pay you at less than below minimum wage. Two things may happen for a very high tax imposed:
Either it’s no longer economical to drill oil from California, in which case, no further drilling will happen, and therefore drive up the prices even more because of the decrease in supply, or
They continue to drill and pay taxes, but instead ship these oil to other states where they can legally pass the cost to customers. Now California will still end up paying more, because the gasoline will come from out-of-state, and with additional shipping cost, gasoline will be more expensive for both California, and states near California.
Again, it’s capitalism. No one will do free work. If it’s truly free work or not making any business sense, companies or individuals will simply STOP doing business in California. And that will mean again reduce supplies and then increased price.
Most of the government regulations end up increasing consumer prices. Regulations are like additional hidden taxes which at the end the last guy in line will need to pay.
By the way, California is very environmentally conscious, and has LOTS of red tapes on drilling and refining business. (Hint: reduced supplies because of that = higher prices)
August 20th, 2006 at 4:34 pm
Great topic, frugal!
I agree 100% with you, that the market has to remain free in a capitalistic sense or you’ll lose the ability to control supply and demand.
What spoonman doesn’t realize is that there is a speculation aspect to the oil and gas market not only on a global stage, but a local stage as well.
Gas station owners are setting prices today based on what they speculate they will pay for a shipment tomorrow. So if a hurricane threatens the gulf coast again, you can be sure gas prices will rise all over the country as the market speculates on what the effect will have on the supply.
I suspect that while spoonman feels he needs to change jobs just to pay for his gasoline, he probably has a few other luxury items/habits he could cut back on first.
-Grant
TheCornerOfficeBlog.com
August 21st, 2006 at 1:00 am
Gasoline is like a regressive tax. It’s more painful for the people with less income. I wish government could reduce its effect by providing more mass transportation infrastructure. Unfortunately, those things really take time to build up.