Meet the Press was pretty bad yesterday. The topic was oil prices, and Tim Russert just couldn’t get the concept of supply and demand even though Energy Secretary Sam Bodman talked him through it:
MR. RUSSERT: Mr. Secretary, if, if demand is up but supply is down, why are the profits so high?
MR. BODMAN: For that reason.
MR. RUSSERT: No, think about that.
MR. BODMAN: You know?
MR. RUSSERT: Play it out.
MR. BODMAN: Demand is up.
MR. RUSSERT: Correct.
MR. BODMAN: Right?
MR. RUSSERT: Right.
MR. BODMAN: So you’ve got more demand, you’re going to force price up.
You’ve got, you’ve got limited supply, and you’re going to have…
MR. RUSSERT: But that’s a decision by the oil companies.
MR. BODMAN: No, it is not. That is a decision–those are–oil is traded every minute of every day, and it’s traded basically 24-by-seven. And it’s, it is determined in marketplaces in New York and London and Tokyo, all over the world. That’s the, the–the oil companies do not determine the price of oil; the producers determine the price of oil.
Ugh. Did Russert sleep through Economics 101?
But Senator Dick Durbin was even worse. He said the oil companies made too much of a profit. I’d like to know the definition of too much profit.
SEN. DURBIN: Am I the only one of your guests here that think that profit taking is a problem? I mean, I understand the basic laws of supply and demand. I understand that if the input costs have gone up, it’s going to reduce your, your profitability. But here we have the most enormous profits in the history of the United States of America in business. The equivalent of $1,000 per household in America for profits. All of the market factors you described may suggest that the product is going to be more expensive to sell, but they don’t forgive what I think is an outrageous profit taking by this industry.
And let me also say to Mr. Cavaney, to suggest that these are average, average profits–they’re the largest profits in the history of American business. And to suggest that Mr. Lee Raymond’s retirement gift is an average gift of $400 million for his service to the company? That’s $3 for every household in America that they paid for Mr. Raymond’s going-away gift.
Senator Durbin said this later in the program:
I mean, the bottom line is this: If you do not tax these corporations at this level they will continue to run up the profits to sky heavens.
Let’s take a closer look at the profit Senator Durbin was so upset about. This is the break down of the price of gas:
Based upon a $3.00 gallon of gasoline, the average break-down is as follows.
Gasoline Retailer $.01 cents per gallon
Oil Company $.08 cents per gallon
Refining $.29 cents per gallon
Marketing/Distribution $.32 cents per gallon
Taxes $.59 cents per gallon (state and federal)
Cost of crude $1.71 per gallon (delivered)
The value of 8 cents per gallon profit for oil companies is an average. Exxon Mobile made 9 cents per gallon profit the first quarter of 2006. So, I’d like to ask Senator Durbin: who’s actually making the profit here? Perhaps we need to implement a windfall tax on the government.
The big money in the oil business is not from refining, transporting, or retailing the products such as gasoline, diesel and other fuels, it’s from the production of crude oil. In the U.S. it costs less than $15 per barrel to produce crude from existing wells on land, but it’s sold for over $70 a barrel in the current market. The cost of production is relatively stable, so when high demand drives up the market price of oil, the results are windfall profits. The question is are windfall profits good or bad? Well that depends on what companies do with the extra money and that depends on the projected demand for oil.
In an era of growing demand those companies who can supply more crude oil will make more money, but to supply more they have to invest more in exploration and production. Even so, companies have to have areas available for exploration and production, otherwise no new supplies can be found. The U.S. government has a stated goal of reducing dependence on foreign oil. To accomplish that goal the government must let oil produces keep the windfall profits and open more areas to exploration and production.
A windfall profits tax and continued restrictions on oil exploration only hobbles domestic production and increases our dependence on foreign oil. I guess some would rather use the windfall profits tax revenue to fight future wars for oil rather than see a few oil company executives become stinking rich. Yet it seems ok with them if the leaders of leftist and terrorist nations become stinking rich selling us oil.
I support repeal of the special tax breaks that were enacted to entice oil companies to invest in exploration and production of domestic crude; as those incentives are no longer needed. However, the same bill should also open up new areas to exploration and production.
How is it possible for me to both SELL a barrel of crude oil AND to refine it into gasoline AND sell the gasoline?
ed, this is a great question that I don’t know the answer to and it also gets back to a point I raised as well. Who exactly are the traders buying the for? If I want to invest in oil, what the hell am I gonna do with a barrel of it.
The way it seems to work is that the investors are “buying” the oil from oil companies, not to actually get their hands on the product, but to ensure they keep pumping; they’re essentially buying the next barrel that has yet to be pumped. Just like investing in a company, you don’t invest to get the product, you invest because you believe the company does good work and you want them to continue making their product. They get money from you, the investor, and then they sell the product and get money from the consumer.
And that raises another point. You can invest in oil companies and computer companies and health insurance companies, etc. but there are very few products that can be invested in like oil, and there’s the rub. Hell, I wish you could invest in “computers” and we’d all make big bucks cause you know computers are keep selling. But oil is different, you can trade oil even though you, the investor, never actually do anything with it (in its crude form). And the oil companies are making bank cause they can pump it for $X/bbl, sell it for $X+Y/bbl and never let you touch it.
So I don’t think this answers your question, but I was essentially asking the same thing. The oil companies have a good racket and pretty much have a stranglehold on the market by controlling the flow of oil from platform to pump.
“The cost of production is relatively stable, so when high demand drives up the market price of oil, the results are windfall profits. The question is are windfall profits good or bad? Well that depends on what companies do with the extra money and that depends on the projected demand for oil.
Ding! You win the prize for actually admitting that there are windfall profits being made.
“To accomplish that goal the government must let oil produces keep the windfall profits and open more areas to exploration and production.”
I disagree. I say trax the winfdfall profits, and incent the development of alternatives. We’re running out oil, the job we have in front of us is getting off the oil teet and into alternatives. Windfall profits should be subject to a windfall tax to further this goal.
“I support repeal of the special tax breaks that were enacted to entice oil companies to invest in exploration and production of domestic crude; as those incentives are no longer needed. However, the same bill should also open up new areas to exploration and production.”
Ah, the “Alaska is pristine so let’s rape it” argument. You suggest that the windfall profits should be reinvested, but want to do away with exploration incentives. Doesn’t your neck hurt from the whiplash?
…but regardless. Everyone saw right through the “here’s $100 for each of you — can we give our oil buddys billions in return?” Republican push – and American sentiment is certainly still far away from draining more Alaskan oil. Americans want long-term solutions, not excuses to allow oil companies even greater profits.
Instead of pumping more dinosaur juice from the ground, the political juice in this country is going into pushing the dinosaurs out of Washington, and rightly so. This thread clearly demonsrates the extent to which Republican idealogy is concerned not with the welfare of the American people, and not with the economy either (Which I find surprising), but lies solely with the big money interests that grease the political wheels in Washington.
As others have pointed out, the high price of gasoline is here to stay. Finding ways for oil companies to sell us more high-priced gasoline isn’t the answer.
Russert is an obvious idiot!
You’re betting the government can wisely direct future energy development, but history shows that’s a sucker bet. Too many players pulling in different directions with no long term consistency. The result is the U.S. would likely become even more dependent on foreign oil and energy prices would be even higher.
If you want to solve the energy problem just get the government’s fat ass out of the way and let the market and free enterprise handle it. If you also want breathable air, drinkable water and farmable land, then government must set some limits. However, the limits we have now on places like Anwar and the continental shelf are political, not scientific. No extremist view, left or right, is going to work. It’s going to take a pragmatic view to provide this nation with energy and protect the environment as well.
As oil prices continue to rise, market forces will automatically spur conservation and the development of all viable energy alternatives. What those alternatives are depends on the political landscape, which itself will be greatly influence by high energy prices. Politics may prevent development of hydroelectric and oil shale resources, but I expect will allow more nuclear, coal, and yes, oil exploration along with wind an solar. Science may eventually give us nuclear fusion, but until then we will likely need to use all available resources to meet this nation’s energy needs. Politicians who take the pragmatic view are the ones who will be elected.
You don’t have to rape a woman to have a relationship with her. Same for Alaska. With windfall profits and a strong market for oil there’s no need for government tax incentives to spur exploration. I don’t see the sense in imposing a windfall profits tax and then giving companies back some of their own money to entice them to explore. Big oil didn’t get big by being stupid, but stupid is the hallmark of big government programs.
If the oil companies are getting 9cents/ gal of profit after all costs, and if sales are basically static, their net profits should remain relatively stable, regardless of the raw material costs if that is all they are passing thru.
On this basis, while product cost might increase radically, profits would only increase wildly if there was a wild jump in demand at any cost and the number of gallons sold jumped radically from the Q before.
This is not the case, because consumption is up on a y-o-y basis about 1.6%. Oil’s profits are up wildly beyond a sales increase of 1.6%.
You’d have to be David Copperfield to pull off their profit increases while not gouging thru some back-door mechanization.
Think of it, the largest profits ever, based on a piddly margin on relatively static sales. If it looks like, smells like and shits like price-gouging it just may be so in spite of an over-simplified law of “Supply & Demand.”
So you see Kim, your knee-jerk slams at Russert & Durbin are a tad oversimplified because you are prepared to parrot a simplistic S&D excuse for any profit increases.
Given your impaired sight & smell, I’d have to decline any dinner invites. When they say ” we’re having shit on a shingle,” it must mean dinner at your house.
Hmmmm.
@ sean nyc/aa
What I was trying to point out is that there is a logical hole in what you’re trying to say. If you sell the barrel of crude oil then you cannot profit from refining it and selling the gasoline. Not without buying back that barrel of crude oil for even more money than you sold it.
Now this might be what you’re trying to describe but I’d suggest the field of oil futures, risk management and commodities trading is a bit more complex than that.
Many say we will see $3.50/gal this summer. If you factor in Iran, who knows how high it could go. Everyone knows America MUST get off the oil. After September 11, 2001 I expected our President to call on Americans to GET OFF THE OIL. I was expecting a speech like the one JFK gave that motivated us to reach for the moon. As you know, this never happened. Eventually I realized that the only way this is going to happen is for us to do it ourselves. To that end I created this idea and have been trying to make it a reality..
The EPA is offering a research grant opportunity that I believe is a perfect fit for this idea. I have sent an e-mail to a hand picked list of university professors who have experience with government research projects. I’m looking to form a research team to apply for the EPA grant, conduct a social-economic experiment and surveys to determine to what extent the American public will support it, project the economic potential of WPH, and identify logistical, social and political obstacles as well as opportunities.
All government grants are awarded based on merit of the proposed research. I believe WPH has merit but your help is needed to verify it. You can help by posting your feedback. Let the professors and the EPA know what you think about WPH. Do you think this idea is worth pursuing? We need to know if Americans will support a plan like this.
Do you have any ideas to improve the plan?
Share any and all of your thoughts.
Tell your friends and family about this Blog post and ask them to post their thoughts on WPH
http://wepayhalf.org
Thank you
Craig
If the oil companies are getting 9cents/ gal of profit after all costs, and if sales are basically static, their net profits should remain relatively stable, regardless of the raw material costs if that is all they are passing thru.
Okay, lets try this:
Oil companies make GASOLINE from the OIL.
Gasoline profits are approx $.09/gal of GASOLINE.
Oil Companies also sell the oil they produce. Often times they sell it to a company/division they own in part or completely. This is called VERTICAL INTEGRATION. (Now someone will scream “UNFAIR, NO COMPETITION”, but that is complete BS. Why should an oil company sell its oil to its own division for less than the market price? Just so you can have cheaper gas? That is creating an “artifical price” that cannot be sustained because of a lack of SUPPLY.
With the increase in the market price for oil, which is determined by the traders based on supply & demand AND the potential for a disruption in supply, the oil companies make an additonal profit selling the oil (produced in the USA) to the refineries and then they make a profit selling to BASF for use in plastics or ADM for use in food or make, etc. Each division MUST make a profit or they will be phased out, shutdown or sold off.
The oil companies are not making as much of a profit on the oil bought from the middle east. There is, of course, a mark up for risk, insurance, transportation, profit, CORPORATE TAXES, accountants, and the Cost of Doing Business ie, salaries, exploration, leasing rights, royalties, (who pays the shipping company, the truck driver, etc).
The demand for oil BASED products have increased every year. The more oil-based products the higher the demand.
Everyone is keying on the cost of a gallon of gasoline and that is not where the oil companies are making these so called windfall profits. I don’t care how you look at it a profit margin of 8 to 15% is not a windfall!
And for those of you who say the 80s were a survival of the fittest time for oil companies, you reap what you sow. Oklahoma’s economy was clobbered by the elimination, through closure, bankruptcy or mergers, of these companies. And guess what? No one cared at the time. Gas was cheap and it was “survival of the fittest”. No need to support the little oil company. Now you bitch because there is “no competition in the oil industry”. (I say BS, but continuing that thought..) Gee, how’d that happen?
Mr. Lee was fine when gas and oil was cheap and companies died off, that was a free market, but now the free market is such a great thing. Typical of those, both Demo and Repub, who don’t understand economics.
Someone posted that it costs only $15 to produce a barrel of oil domestically. This is a completely misleading statement. Does this cost factor in the orignal cost of the well? What about dry holes? Is this simply the cost of getting the oil out of the ground? What about shipping it? Disposal of saltwater? Cleanup of site after pumping dry? Evironmental spills (accidents happen)? Refining? Storage? Hell, I bet oil companies are paying several $’s/barrel in royalties alone!
See below for example:
It costs Coke about $.10 to produce a bottle of soda. Yet you pay $1.25 to $2.50 for a bottle out of the machine. Why doesn’t Coke have record profits? Isn’t that a 12-25% profit margin? Guess what, there are additonal costs associated with getting the product to the market which increases the total cost per bottle or in the case of big oil, per barrel!
Provide me some more details on this $15/bbl and we’ll see……
Cstmbuild,
All true and that’s why I gave such a high figure of $15 a barrel. Also, federal tax law allows oil companies to take a depletion allowance to offset their costs as a well is depleted. The domestic production of crude is where the windfall profits come from.
Worm :”These taxes also serve to reduce the amount of gas that is used by not allowing it to be so inexpensive that the public wastes even more of it than we already do. “
Hey, then maybe we should give MORE profit to Big Oil. Maybe we should demand that the oil companies charge us more for gas, so it’ll force us to use less. So why is everyone complaining about the price of gas and ‘windfall’ profits, if they’re so ‘good’ for us?
Senator :”You guys are paying too much for gas.”
Non-Senator : ‘So whatta ya going to do about it, Senator?’
Senator : “We’re going to raise taxes on oil companies. That’ll learn ’em.”
Non-Senator : ‘Uh, that will help get the gov’t more money, but how will that help us citizens?’
Senator : ” Er…it won’t. But it helps me look like I’m doing something!”
Gosh, I’m glad the gov’t is looking out for us. We’re so stupid. I for one welcome our gov’t overlords.
Oil prices, baseball steroid use, flag burning, the heartbreak of psoriasis, etc…, all the shit that the feds shouldn’t be poking their noses into is exactly the first thing they love to get involved with so they can look like they are doing something useful.
cstmbuild
What’s your background for all the econ analysis you gave. Most of what you outline are the costs at any given point in the process from well to gas tank or BASF or Dow or DD. Since the profits come after taxes & costs, your explanation still does not answer the question.
Regardless of all the various products XOM may produce and suppliers that are supplied, unless the volume of oil sales increased dramatically, there would not be the profits surge in the last 2 quarters. But the volume of oil moved hasn’t spiked extremely because the supply has been strained to the max for some time. Profits are not resulting from increased production of anything.
If XOM reaps some of their revenue because the oil they actually own is now priced at $75/bbl, then indeed, it is a windfall.
Moreover, I have heard one industry analyst estimate a $10/bbl premium resulting from hedge funds & speculation & another $10/bbl estimated for ME & other geopolitical instability. Sounds like a helluva a profit from risks not even realized.
If the risks materialize, one would think that there will be no outrageous spike in oil since that risk-cost has already been assigned, but that will not be the case. The current ungoverned speculation will simply use $75/bbl for a platform to $100 or $125/bbl should any of the feared risks materialize.
Just wait til the 1st tropical depression 1500 miles off the coast of Africa gets named and we’ll see another outrageous blast-up of oil prices to account for the increased risks of a potential hurricane. At what point does the upward spike cease when all the risk factors have been factored in? I suspect when the world economies have been bankrupted and the world is awash in severe economic recession.
My, how the old law of S&D can have such a beneficent effect on 6.5 billion people.
Could it be that we are at the dawn of a new age of our sacrosanct Capitalism, Predatory Capitalism?
cstmbuild
What’s your background for all the econ analysis you gave.
Answer: Degree in Ag Econ/Business and Marketing. Also, self-employed small business owner. Custom home builder, btw. High oil prices are NOT good for me.
Most of what you outline are the costs at any given point in the process from well to gas tank or BASF or Dow or DD. Since the profits come after taxes & costs, your explanation still does not answer the question
Answer: Actually, it does. First, I was pointing out that there are additional costs associated with oil, not just the hard costs from 1 well that is producing. (Again, exploration, dry hole, overhead, improved technology, etc)
Second, you said it your self, low supply/high demand. Demand has increased greatly because of China and India. If China is bidding at a premium, then China gets the bid. The “premium” becomes the new “going price” and everyone starts paying more and more. The cycle continues until the end user says “I’m not paying that!” That point has not been reached. (I do apologize for this being over-simplified, but if you want highly detailed analysis then look for an economist’s paper on oil supply and demand.)
Moreover, I have heard one industry analyst estimate a $10/bbl premium resulting from hedge funds & speculation & another $10/bbl estimated for ME & other geopolitical instability. Sounds like a helluva a profit from risks not even realized.
Then why aren’t you asking for a windfall profits tax on hedge funds, speculators and various mutual funds? (They are adding NO value, while adding roughly 15% to the cost of oil/bbl, but you aren’t screaming for their heads! If you look at the supposed $25 cost/bbl produced in the USA, then you are talking about an increase of 40% for these speculators!) That comes to $35/bbl, counting the $15/bbl mentioned earlier, FOR oil produced in the USA. How much additional for oil produced internationally? What happens to investments (RISK) if Venezuala or Egypt or Saudi Arabia or Mexico nationalizes the oil equipment and investments in their countries? It has happened before…and you say for risks never realized! What about storms? Terrorist attacks (lose of an entire tanker of oil for example)? Nationalization? Kidnappings? Bodyguards? Hazard pay?
If the risks materialize, one would think that there will be no outrageous spike in oil since that risk-cost has already been assigned, but that will not be the case. The current ungoverned speculation will simply use $75/bbl for a platform to $100 or $125/bbl should any of the feared risks materialize.
Wrong. The risks that materialize take care of the current “risk ratio”. An additional risk ratio is added for the current/preceived risks.
All risk factors are never factored in. That isn’t realistic. Do you want to factor in a nuclear attack by Iran on Egypt? How about $300/bbl, you willing to pay that to have all risks factored in?
Oil and gas is still cheaper, in inflation adjusted dollars, than it was in the 80s.
A side note: Are the copper and wire industries making ridiculous profits or are they price gouging? The cost for electrical wire has increased by 100% in the last 2 weeks! Can you contact your senator for me?
cstmbuild
I can imagine that for you the cost of copper is an issue.
For most people, that cost is one-time issue, at least on a rather extended periodic basis for most home owners.
Fuel for transportation is an ongoing daily requirement that never reaches an end point. Next to oxygen, it is as nealy necessary for 21st survival.
I can imagine that for you the cost of copper is an issue. For most people, that cost is one-time issue, at least on a rather extended periodic basis for most home owners.
So, as long as price gouging effects only a small number of people or at least not mak44, then it is okay? (BTW, I was just being sarcastic on the copper thing, but you really proved my point. I don’t think they are gouging.)
Fuel for transportation is an ongoing daily requirement that never reaches an end point. Next to oxygen, it is as nea(r)ly necessary for 21st survival
Yes, mak44, this is called DEMAND. You have two choices:
1) Reduce demand
2) Increase supply
There are different ways to do both, but neither will occur quickly and this is why conservatives keep bringing up the obstructionism of the liberals, environmentalist and democrats over the last 30+ years. We could have increased production, in the USA, of both crude oil and refined products. But new refineries were blocked, no drilling on government land, no drilling in the ocean, no drilling in ANWR, etc.
As the public demands more fuel efficient cars the auto makers will begin producing more of them, thus reducing demand. The government has tried to force the issue, but it is ALWAYS demand that determines what and how much gets produced.
There are very energy efficient (EE) ways to build new homes (my specialty), but the general public is not willing to pay the extra $’s required. Even though I can have their total monthly outlay less when compared to Mortgage payment plus utility bills of an inefficient house versus an efficient home.
Strictly an example of how the public drives what is built/manufactured/produced, even though the government is offering a $2,000/home tax CREDIT for every EE home (must be 50% more EE than an IRC home) that is built in ’06 and ’07. There is no limit to the amount of credits that can be claimed in a year. Why isn’t Pulte homes building every house this way? Because the DEMAND isn’t there.
Now, if utility bills keep going up…well that is a different story.