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KingPriest2
04-18-2006, 10:44 AM
Fear drives oil to all-time high
Iran worries and Nigeria supply disruptions igh
push up prices of crude and Brent; fund buying provides support.
April 18, 2006: 11:23 AM EDT


NEW YORK (Reuters) - Crude oil set an all-time high Tuesday as worries over supply persisted in Iran and Nigeria.

Light sweet crude for May delivery, which expires on Thursday, traded as high as $70.88 per barrel on the New York Mercantile Exchange, surpassing the previous record of $70.85 set last summer after hurricanes devastated the Gulf Coast.


Iranian President Mahmoud Ahmadinejad.

Special Reportfull coverage

Fear drives oil to all-time high
U.S.: Price at the pump jumps 10 cents
Uncle Sam's hand in high gas prices?
Bernanke: Energy inflation effects to fade


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CNN's In the Money asks oil analyst Peter Beutel why we are buying our oil from countries that don't seem to like us. (April 15)
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In London, June Brent crude was 25 cents higher at $71.71 per barrel after trading as high as $72.20.

NYMEX May gasoline was up 0.63 cent at $2.1722 per gallon, with May heating oil up 0.12 cent at $2.023 a gallon.

"Fear is the driver and remains so," said Kyle Cooper, an analyst at IAF Advisors in Houston. "It is not considered likely that any oil flow from Iran is disrupted, but it is possible."

Iranian President Mahmoud Ahmadinejad declared his country a nuclear power last week, saying it had enriched uranium to the level used in power stations. On Tuesday, he delivered a warning to any nation considering attacking the Islamic republic.

"Today, Iran's army is one of the most powerful armies in the world and it will powerfully defend the country's political borders and the nation," Ahmadinejad said in a speech during an armed forces parade.

"It will cut off the hands of any aggressors and will make any aggressor regret it," he added.

The U.S. has said it wants a diplomatic solution to the standoff but has not ruled out a military option.

It meets with world powers on Tuesday to consider targeted sanctions against Iran and has said it wants the U.N. Security Council to be ready to take strong diplomatic action.

Meanwhile, more than 500,000 barrels per day of production remained shut in Nigeria amid militant threats, increasing traders' worries about gasoline supply over the peak summer driving season.

In a preliminary Reuters survey for U.S. petroleum data due Wednesday, nine analysts forecast on average a 2.2 million barrel decrease in domestic gasoline inventories for the week to April 14.

The survey also showed an average forecast for a 1.4 million barrel drop in distillate supplies, which include heating oil and diesel fuel, and a 1.9 million barrel rise in crude inventories.

Some ministers from the Organization of the Petroleum Exporting Countries, who will gather informally this weekend during an International Energy Forum meeting in Doha, have said there is nothing the group can do to bring down prices, although Indonesia has suggested boosting output.

"OPEC does not have the capacity to increase production. Right now, it is not the time to discuss such issues," a senior Iranian Oil Ministry official told a newspaper.

Rain Man
04-18-2006, 01:59 PM
It would be cool if we could power cars on fear rather than oil. Any time it looked like you were running low, you could just pick up a couple of hitchhikers and then cross the yellow line a few times.

munkey
04-18-2006, 02:01 PM
It would be cool if we could power cars on fear rather than oil. Any time it looked like you were running low, you could just pick up a couple of hitchhikers and then cross the yellow line a few times.

Or just drive when your really tired....

drift off the road a little than wake up....

~thoughts of dumb and dumber~

MOhillbilly
04-18-2006, 03:14 PM
It would be cool if we could power cars on fear rather than oil. Any time it looked like you were running low, you could just pick up a couple of hitchhikers and then cross the yellow line a few times.

yeeaaahhhhh....

http://www.depponline.com/imgs/fear1.jpg

kcfanXIII
04-18-2006, 03:16 PM
oil prices at an all time high. oil companies recording record profits. does anyone else see the connection there? we're getting it up the ass with no lube.

jidar
04-18-2006, 04:31 PM
oil prices at an all time high. oil companies recording record profits. does anyone else see the connection there? we're getting it up the ass with no lube.


and yet margins are still the same... it's some kind of voodoo magic.

Skip Towne
04-18-2006, 04:35 PM
oil prices at an all time high. oil companies recording record profits. does anyone else see the connection there? we're getting it up the ass with no lube.
Donger will be along to explain to you how this is all just fine and dandy.

ct
04-18-2006, 04:39 PM
Until we stop buyin it, they'll keep sellin it. Not that complicated.

bkkcoh
06-13-2006, 10:48 AM
http://66.70.86.46/test.gaschart?Country=Canada&Crude=t&Period=1&Areas=Columbus,,&Unit=US $/G

Gas went up yesterday between 20 and 25 cents a gallon...

I am not sure as to what caused the spike in prices this time. I can only assume that it is the tropica storm. But it is slated to hit Florida, didn't think there was any refineries in northern Florida. :hmmm:

StcChief
06-13-2006, 10:50 AM
It's summer time Vacation time driving season...
Year in year out. SSDY.

Bootlegged
06-13-2006, 10:51 AM
Oil falls below $70 on rate fears

Tuesday, June 13, 2006 Posted: 1337 GMT (2137 HKT)

YOUR E-MAIL ALERTS

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Manage Alerts | What Is This? LONDON, England (Reuters) -- Oil fell more than 1 percent to below $70 a barrel on Tuesday as risk averse investors fled from commodity markets, spooked by fears of rising interest rates and higher inflation.

Prices of industrial and precious metals also fell sharply and equity markets dropped. A flow of money from investment funds has helped send oil and some other commodities to record or decades-highs in 2006.

"The broader market concern is about growth and inflation," said Craig Pennington, global energy portfolio manager at Schroders. "From the oil market's perspective, the concerns are that if you see slower economic growth you'll see slower oil demand."

U.S. crude for July fell $1.02 to $69.34 a barrel by 1315 GMT, extending Monday's $1.27 slump. London Brent crude lost $1.06 to $67.87 a barrel.

Oil also slipped on expectations U.S. gasoline inventories rose for a seventh week and as the season's first Atlantic storm, Tropical Storm Alberto, weakened along a route that will miss U.S. energy installations.

"It was clear yesterday morning that Alberto was not going to hit the installations in the U.S. Gulf," said Deborah White, analyst at SB CIB in Paris.

"It just became a reminder that the hurricane season is back."

IEA on demand
Oil in New York has still risen 14 percent this year and remains within sight of the $75.35 record high reached in April, supported by Iran's reluctance to give up its atomic work, violence in Iraq and growing world demand.

A monthly report from the International Energy Agency on Tuesday said a robust world economy is underpinning oil demand growth, but high prices are slowing consumption in the U.S.

"Strong economic growth is an important counterbalance, but on the whole we're seeing evidence of high price effects coming through," said Lawrence Eagles, head of the IEA's oil industry and markets division.

The adviser to 26 industrialized countries cut 2006 global oil demand growth by just 10,000 barrels per day to 1.24 million bpd, and traders said the report could be seen as supportive.

"The IEA report this morning was neutral to slightly bullish," said Rob Laughlin, a broker at Man Financial.

A rise in U.S. fuel inventories in recent weeks has helped counter the impact on oil prices of tension over Iran's nuclear work and supply losses in Nigeria, where attacks by militants have shut down about a quarter of the country's output.

U.S. gasoline inventories stood about 2.4 percent below year-ago levels a week ago but are expected to have risen by 1.4 million barrels in the week to June 9, a seventh consecutive build, a preliminary Reuters poll shows.

Crude stocks were seen rising by 400,000 barrels and distillate inventories climbing 1.6 million barrels. U.S. government stock data is due out on Wednesday.

Iran's signals on a Western offer to defuse the stand-off over its nuclear program have whipsawed oil markets. Tehran first sounded a positive note on the incentives last week but later cited some problems.

Pressure to give a clear reply to the offer mounts this week as the 35-nation board of the International Atomic Energy Agency meets in Vienna.

Iran, which began a new round of uranium enrichment only last week, reiterated its right to continue such work, but did not reject the offer outright.

bkkcoh
06-13-2006, 10:52 AM
It's summer time Vacation time driving season...
Year in year out. SSDY.


But the cost was cheaper around Memorial day @ $2.60 or so..... it is now $2.85+........

BigMeatballDave
06-13-2006, 10:52 AM
It would be cool if we could power cars on fear rather than oil. Any time it looked like you were running low, you could just pick up a couple of hitchhikers and then cross the yellow line a few times.
ROFL

Bootlegged
06-13-2006, 10:52 AM
Oil today; $68.75 Down $1.61

Donger
06-13-2006, 10:53 AM
oil prices at an all time high. oil companies recording record profits. does anyone else see the connection there?

Here we go again.

Yes, I do. Crude oil is their primary raw material. It is presently quite high. Yet, their refining costs do not increase based on the price of crude. So, that equals greater profit.

It's simple economics.

BigMeatballDave
06-13-2006, 10:53 AM
oil prices at an all time high. oil companies recording record profits. does anyone else see the connection there? we're getting it up the ass with no lube.It is also coated with 80-grit sandpaper...

Donger
06-13-2006, 10:53 AM
and yet margins are still the same... it's some kind of voodoo magic.

Actually, their margins have increased, naturally. See above.

Donger
06-13-2006, 10:54 AM
Donger will be along to explain to you how this is all just fine and dandy.

Heh. Happy to help out, Skippy.

Donger
06-13-2006, 10:55 AM
http://66.70.86.46/test.gaschart?Country=Canada&Crude=t&Period=1&Areas=ColumbusHello - commatard on the loose.&Unit=US $/G

Gas went up yesterday between 20 and 25 cents a gallon...

I am not sure as to what caused the spike in prices this time. I can only assume that it is the tropica storm. But it is slated to hit Florida, didn't think there was any refineries in northern Florida. :hmmm:

Where did the retail price of gasoline go up 25 cents yesterday?

BigMeatballDave
06-13-2006, 10:55 AM
It's summer time Vacation time driving season...
Year in year out. SSDY.I wanna go back to the year 1986 when gas was around .60/gal. Seems like a dream...

bkkcoh
06-13-2006, 11:00 AM
Where did the retail price of gasoline go up 25 cents yesterday?


for some strange reason, i couldn't get the columbus price/crude oil price chart to link.....

I went to work Monday morning and gas was $2.70 and when I went home, it was $2.89 - $2.98


http://www.columbusgasprices.com/retail_price_chart.aspx

Donger
06-13-2006, 11:01 AM
for some strange reason, i couldn't get the columbus price/crude oil price chart to link.....

I went to work Monday morning and gas was $2.70 and when I went home, it was $2.89 - $2.98

At the same station?

http://www.columbusgasprices.com/

It's not uncommon to see a $.20 difference around major metro areas. They really like to jack it up near airports, for example.

bkkcoh
06-13-2006, 11:04 AM
At the same station?

http://www.columbusgasprices.com/

It's not uncommon to see a $.20 difference around major metro areas. They really like to jack it up near airports, for example.


Those price updates are from Monday morning or sunday..... the prices that were updated monday afternoon are $2.89+

Donger
06-13-2006, 11:05 AM
Those price updates are from Monday morning or sunday..... the prices that were updated monday afternoon are $2.89+

So, not from the same station?

And, some of them are from Monday afternoon.

$2.69 = Mon 2:50 PM
$2.69 = Mon 5:38 PM

Etc.

bkkcoh
06-13-2006, 11:11 AM
So, not from the same station?

And, some of them are from Monday afternoon.

$2.69 = Mon 2:50 PM
$2.69 = Mon 5:38 PM

Etc.

Donger,

I am comparing the exact same stations. There was a 20 - 25 cent jump in price from when i went to work and when I went home from work.

Donger
06-13-2006, 11:15 AM
Donger,

I am comparing the exact same stations. There was a 20 - 25 cent jump in price from when i went to work and when I went home from work.

Okay. That's quite a jump. They must be anticpating something, such as a supply issue.

BigMeatballDave
06-13-2006, 11:25 AM
What bothers me is a neighboring town is always lower than the town I live in. Usually around 8-10 cents lower. I don't get it...

BigMeatballDave
06-13-2006, 11:27 AM
How the hell can 2 Citgo stations, 6 miles apart, have a difference in price of a dime? Aren't they getting their fuel from the same supplier?

StcChief
06-13-2006, 11:27 AM
What bothers me is a neighboring town is always lower than the town I live in. Usually around 8-10 cents lower. I don't get it...Local sales tax higher?

Could just be a collusion/gouge condition...

:banghead:

BigMeatballDave
06-13-2006, 11:31 AM
Local sales tax higher?

Could just be a collusion/gouge condition...

:banghead:Maybe. I could see a few cents, but a ****ing dime? Sounds more like gouging to me...

Donger
06-13-2006, 11:33 AM
What bothers me is a neighboring town is always lower than the town I live in. Usually around 8-10 cents lower. I don't get it...

Probably a tax issue.

Demonpenz
06-13-2006, 11:40 AM
When is this country going to realize it's not our fault. It's bush and his oil minions.

Donger
06-13-2006, 11:40 AM
When is this country going to realize it's not our fault. It's bush and his oil minions.

ROFL

KingPriest2
06-13-2006, 11:45 AM
Maybe. I could see a few cents, but a ****ing dime? Sounds more like gouging to me...


Also different owners as well.

BigOlChiefsfan
06-13-2006, 12:12 PM
"Reformulated" gasoline, otherwise known as 'designer blends', the EPA decides there's too much X,Y or Z in the air in Yourtown, USA. They mandate a blend of gasoline with less sulfur or more ethanol, whatever. Many towns have to have their own 'blend', and that means the local gas stations can't just buy 'spot' gas, or 'whatever's in the truck', they have to buy the mandated formula. That means the refinery has to run a special batch, and that batch has to be delivered to Yourtown, USA, without stopping to sell some to Neighborstown USA. This makes for higher prices for you, the consumer. Cleaner air, and a roomful of EPA guys with dayjobs, we think of that as a bonus.

BigMeatballDave
06-13-2006, 12:22 PM
Also different owners as well.Gouging

Donger
06-13-2006, 12:26 PM
Gouging

How do you define that activity, in this case?

StcChief
06-13-2006, 12:28 PM
"Reformulated" gasoline, otherwise known as 'designer blends', the EPA decides there's too much X,Y or Z in the air in Yourtown, USA. They mandate a blend of gasoline with less sulfur or more ethanol, whatever. Many towns have to have their own 'blend', and that means the local gas stations can't just buy 'spot' gas, or 'whatever's in the truck', they have to buy the mandated formula. That means the refinery has to run a special batch, and that batch has to be delivered to Yourtown, USA, without stopping to sell some to Neighborstown USA. This makes for higher prices for you, the consumer. Cleaner air, and a roomful of EPA guys with dayjobs, we think of that as a bonus.

We got that in STL area because of the EPA red days in the Mississippi/MO River valley holds pollution/ozone in the dead air of Summer....

Yet another reason these TreeHuggers are causing gas price problems

Leave the metro area N or W and $0.10 cheaper.

BigMeatballDave
06-13-2006, 12:31 PM
How do you define that activity, in this case?I don't know. I'm just babbling....

bkkcoh
06-13-2006, 12:35 PM
How do you define that activity, in this case?

20 - 25 cent a gallon increase for NO reason, expecially when the price of crude oil is going down in price.....

greg63
06-13-2006, 12:36 PM
Fear drives oil to all-time high

Why not; we'll all have to go back to horse and buggy in order to get anything done about the price of oil. Maybe the Amish have the right idea after all.

Donger
06-13-2006, 12:42 PM
20 - 25 cent a gallon increase for NO reason, expecially when the price of crude oil is going down in price.....

Like I said, you don't know the situation. Perhaps they are expecting a supply problem and are increasing their prices to discourage purchases. The one thing that stations avoid like the plague is running out.

Besides, that here's a good defintion of gouging: price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency.

Frosty
06-13-2006, 12:48 PM
Gas went up yesterday between 20 and 25 cents a gallon...

Hmmm. Ours went down a nickel, to $2.99.

BigMeatballDave
06-13-2006, 12:53 PM
Besides, that here's a good defintion of gouging: price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency.I remember on 9/11, a few stations around Cleveland shot prices up to $4/gal. Local police were sent out with cease and desist orders.

jidar
06-13-2006, 12:53 PM
Actually, their margins have increased, naturally. See above.

When I say margins, I'm speaking specifically of their profit margin, which should be a percentage of the net.. which should not have changed much if at all.

It explains why they make more money without changing anything about their business. The profits are up in a real dollar sense, but the margins are the same.

IE, they make 10% of 70 instead of 10% of 30

StcChief
06-13-2006, 02:27 PM
I remember on 9/11, a few stations around Cleveland shot prices up to $4/gal. Local police were sent out with cease and desist orders.
they did that here...
Phillips station didn't budge on old price, Conoco accross street went way up...Damn near cost him his business.

noa
06-13-2006, 02:37 PM
The idea that free market economics applies to our gasoline and other energy in our nation is laughable. We are giving a $60 billion subsidy to oil companies over the next five years (according to wall street journal) despite record profits. Moreover, they do not pay taxes when they extract oil from certain american territories. Finally, when Cheney was the head of Halliburton, they didn't pay a dime in taxes for two years. We subsidize them and we allow them to shelter themselves from having to pay taxes, yet we are willing to go to war for their interests. No free market here economics here. If there were, we would either be giving no subisidies to oil, or we would be giving equal subsidizes to alternative sources of energy, but we dont.

bsp4444
06-13-2006, 02:50 PM
Here we go again.

Yes, I do. Crude oil is their primary raw material. It is presently quite high. Yet, their refining costs do not increase based on the price of crude. So, that equals greater profit.

It's simple economics.

Do you freakin' work for Exxon?

Higher input costs DO NOT automatically translate to higher profits. Higher cost of product, yes, but since you spent more on the input, it's not all profit, is it?

jidar
06-13-2006, 03:04 PM
Do you freakin' work for Exxon?

Higher input costs DO NOT automatically translate to higher profits. Higher cost of product, yes, but since you spent more on the input, it's not all profit, is it?


It does when you understand that profit is a percentage of net, not a set dollar value.

Company A buys a barrel of oil at $30 processes and resells it, then makes their 10% profit. They made $3 per barrel at 10%

Same company buys a barrel of oil at $75 to do the same thing, they make $7.50 per barrel at 10% profit. Then everyone goes $7 PER BARREL, HOLY CRAP RECORD PROFITS!@#!!! When in fact it's the same margin.

Well people say, "well they're making more money now so why don't they just lower prices?"

But it's not that simple. My previous example fudged the reality to make it simple, but the truth is the profit is a percentage of return of Net divided by revenue. In other words, they have to make 10% on their investment, not per barrel.


For example.
If company has revenue on hand of $100, then they spend it to buy 4 barrels of oil at $25 each. They then process and sell the resulting product with say a 10% profit margin then they sell it for $27.50 a barrel (equivalent). They make $10 on their $100 investment.

Say prices go up to $50 per barrel.

Same company then buys 2 barrels of oil with the same $100 and process and sells it at their 10% margin. They sell it for $55 per barrel . That's $5 per barrel instead of the $2.50 last time, but it's still at 10% profit so they make $10 on their $100 investment.

Now of course thats with making only half as much, they still have to meet demand so they still buy 4 barrels and end up making $20, but that's on an initial investment of $200, not $100.

It's all the same, they have to make X percentage of return on their investment or surprise, it's not worth it to invest in their business! Their money would be better spent elsewhere.

In short, they are doing what they've always been doing, but people who don't understand the realities of a basic business model are bitching about numbers they don't understand.

Donger
06-13-2006, 03:04 PM
Do you freakin' work for Exxon?

No.

Higher input costs DO NOT automatically translate to higher profits. Higher cost of product, yes, but since you spent more on the input, it's not all profit, is it?

In order to maintain their profit margins...

http://blog.steverrobbins.com/bizblog/oilprofitsexplained-25/

That explains it better than I can.

KCTitus
06-13-2006, 03:05 PM
The idea that free market economics applies to our gasoline and other energy in our nation is laughable. We are giving a $60 billion subsidy to oil companies over the next five years (according to wall street journal) despite record profits. Moreover, they do not pay taxes when they extract oil from certain american territories. Finally, when Cheney was the head of Halliburton, they didn't pay a dime in taxes for two years. We subsidize them and we allow them to shelter themselves from having to pay taxes, yet we are willing to go to war for their interests. No free market here economics here. If there were, we would either be giving no subisidies to oil, or we would be giving equal subsidizes to alternative sources of energy, but we dont.

You have a link from the WSJ about those subsidies?

Regardless of when Cheney worked for Halliburton, NO company pays taxes. Companies dont pay taxes, they pass any tax levied by the govt to the consumer.

Donger
06-13-2006, 03:05 PM
The idea that free market economics applies to our gasoline and other energy in our nation is laughable. We are giving a $60 billion subsidy to oil companies over the next five years (according to wall street journal) despite record profits. Moreover, they do not pay taxes when they extract oil from certain american territories. Finally, when Cheney was the head of Halliburton, they didn't pay a dime in taxes for two years. We subsidize them and we allow them to shelter themselves from having to pay taxes, yet we are willing to go to war for their interests. No free market here economics here. If there were, we would either be giving no subisidies to oil, or we would be giving equal subsidizes to alternative sources of energy, but we dont.

I agree. I don't know what subsidies or tax breaks they presently get, but they should stop.

jidar
06-13-2006, 03:09 PM
I agree. I don't know what subsidies or tax breaks they presently get, but they should stop.


That's true, but that's a seperate issue. That problem was there all along, this "oil crisis" just kind of brought everything under a microscope.

Donger
06-13-2006, 03:11 PM
That's true, but that's a seperate issue. That problem was there all along, this "oil crisis" just kind of brought everything under a microscope.

I always find it amusing that many people don't realize that 'big oil' is not profitable every year; quite the opposite.

KCTitus
06-13-2006, 03:20 PM
I agree. I don't know what subsidies or tax breaks they presently get, but they should stop.

We can argue about subsidies--those are direct payments from the govt, but tax breaks are not a bad thing. The less the government taxes its citizens and businesses, the better off we all are.

As far as 'profits' are concerned, the Federal govt makes more off a gallon of gas than the oil company that produced it.

jidar
06-13-2006, 03:23 PM
We can argue about subsidies--those are direct payments from the govt, but tax breaks are not a bad thing. The less the government taxes its citizens and businesses, the better off we all are.

As far as 'profits' are concerned, the Federal govt makes more off a gallon of gas than the oil company that produced it.


As a person who occasionally has to cross from the KS to the MO side of the board, I think I'll disagree. The state of the roads in MO is horrendous, I can't help but think the .10 per gallon more we spend in KS is well worth it.

BWillie
06-13-2006, 03:24 PM
Donger is right. People are just looking for excuses and trying to place the blame on somebody for our rising gas prices. Do you know what an oil company makes on one gallon of your gasoline? About 5-6 cents. Thats it. If they made no money, and charged you 5 cents less everytime would you really be happy? Oil is soemthing that it's demand goes up and supply goes down EVERY SINGLE DAY. WTF do you think will happen.

Do you have any idea what they pay in Europe for a gallon of gas adjusted to the US dollar? Between 5-8 dollars a gallon. I'm not making this up.

Donger
06-13-2006, 03:27 PM
Donger is right. People are just looking for excuses and trying to place the blame on somebody for our rising gas prices. Do you know what an oil company makes on one gallon of your gasoline? About 5-6 cents. Thats it. If they made no money, and charged you 5 cents less everytime would you really be happy? Oil is soemthing that it's demand goes up and supply goes down EVERY SINGLE DAY. WTF do you think will happen.

At $3.00 a gallon, it's more like $0.10 a gallon profit.

Do you have any idea what they pay in Europe for a gallon of gas adjusted to the US dollar? Between 5-8 dollars a gallon. I'm not making this up.

That's correct, but most of that is due to very high taxation.

KCTitus
06-13-2006, 03:27 PM
As a person who occasionally has to cross from the KS to the MO side of the board, I think I'll disagree. The state of the roads in MO is horrendous, I can't help but think the .10 per gallon more we spend in KS is well worth it.

What exactly in my statement are you disagreeing with?

BWillie
06-13-2006, 03:41 PM
Profits and High Prices: More Economic Nonsense

by William Anderson

[Posted on Monday, November 14, 2005]
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Anyone with even a basic understanding of economics should have seen it coming: our leaders are threatening oil companies for making money off higher prices. In the aftermath of hurricanes Katrina and Rita, gasoline prices shot up, as large chunks of US refining and transportation operations were shut down or severely curtailed. In the wake of higher prices, which already had politicians riled, oil company profits are up.

Not surprisingly, Congress has jumped on the latest earnings reports with its typical anti-capitalist stance, with Senate Majority Leader Bill Frist (R-Tennessee) demanding that oil executives appear before the Senate to explain their good fortune. As has been reported in the news, members of Congress are already introducing legislation "to outlaw oil price profiteering."

Although I believe that most members of Congress, not to mention most people who live in or near Washington, DC, are incapable of understanding even basic economic concepts, nonetheless I think it worthwhile to present a small primer on prices and profits. While I wrote a similar piece last year, the concepts are worth retelling.

Before addressing the current situation with oil and gasoline markets, however, I must present an overall explanation of what profits are and why they exist. Since most people seem to believe that profits themselves are illegitimate or at least look askance at "windfalls" I begin with that particular subject.

Karl Marx held that profits represented an "unjust expropriation" of income from labor, which had the legitimate claim to all income produced by production. (Thus, under socialism, since "labor" would "own" all of the means of production, by definition, all income had to go to labor, and, thus, no "exploitation" would occur.) Although few people, outside the liberal arts academic community in US universities, would call themselves "Marxists" today, the mentality of Marxism continues to exist, and we see it full-blown on Capitol Hill in this latest escapade.

While we tend to see profit as existing only in the business realm, in reality it is a part of all of our lives. If one measures profit as the value of an action versus its opportunity costs, then one can expand the concept of profit to many things that we do. For example, I can see my income as a form of personal profit, some of which comes from a small "windfall" of becoming a faculty member at a college seeking business school accreditation (and having journal publications to boot, which placed me at an advantage with others who applied for this job).

Any time one engages in activity in which the perceived benefits outweigh the perceived costs, one enjoys a form of profit (or what Murray Rothbard called "psychic profit"). If profits that come about via business activity are illegitimate, then Rothbard's "psychic profit" also would have to fall into that category.

As for the "legitimacy" of profit, one needs to ask whether or not all parties in the process of producing and selling the goods in question were paid according to previous agreements and whether or not coercion was involved. If all of the activities were voluntary, all the way to the purchase of the final goods, then it is difficult to criticize the existence of a profit that came about through production and sale of said goods.

For the most part, people do not understand what profits are or how they come about. As Rothbard pointed out, in an "evenly rotating economy" where all parties involved in the transactions of producing and selling goods had access to all the relevant information and always acted correctly on that information, there would be no profits or "economic" profits, which are profits over and above their opportunity costs.

Furthermore, Rothbard wrote that profits occur because of "temporarily" under-priced factors of production. That is, the owners of the factors involved in production and sale of the good did not foresee the higher price they could have received for their particular factor and settled for a lower price, instead.

Take the current oil situation, for example. For many years, oil companies have been performing at a low end of profitability, as the market value of petroleum products has been relatively low. In fact, from the early 1980s until well into this decade, profits for oil companies lagged behind profits in other industries.

Contracts that were made with employees and suppliers reflected that low profitability, and oil firms also based their planned projects on low prices continuing indefinitely. When very real supply problems caused by hurricanes made fuel prices spike, oil companies were in the position of paying prices for many of their factors of production based upon anticipation of fuel prices that were much lower than what the markets currently command. Given that situation, it should come as no surprise that oil profits that reflect that period are high.

What people in Congress and elsewhere do not realize, however, is that this state of oil profitability is only temporary. At least one of the following two things will occur, and it is more likely that we shall see a combination of activities. First, many of the owners of the factors involved in producing fuels, seeing oil company profitability, will re-negotiate their own agreements when it becomes feasible to do so. Second, it is doubtful that the highest prices can stay aloft for very long, and when they fall, so will the oil companies' profit margins.

According to the current political rhetoric, the high prices are related to high profits, as though oil company executives suddenly thought of a new strategy to increase profitability: raise prices. If oil firms could control their profit margins with such an approach, then one wonders why they would have waited until after Katrina and Rita to do so. If they simply were myopic, then it would seem that a sharp attorney long ago would have pulled together a class action shareholder suit to sue oil companies for dereliction of duty.

While the surface rhetoric from the two main political parties seems to go in different directions, neither Republicans nor Democrats are being helpful. Democrats call for price controls or new taxes on oil company profits, both of which are downright destructive. Republicans, on the other hand, are demanding that oil companies "reinvest" their profits in new refineries, more exploration, and the like.

While the Republican "suggestions" might just seem to be good business advice, in reality it is almost as harmful as the "solutions" called for by Democrats. Oil firms will invest in those things Republicans want if and only if they perceive future profits to be made from them. However, oil executives have been badly burned before and must make investment decisions based upon the realities of the markets, not political oratory.

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For example, right after oil prices were decontrolled in 1981, oil companies chose to invest profits in new exploration, synthetic fuels, and the like, in the belief that oil prices would continue to rise. Instead, as we now know, oil prices went south and many of those same oil firms found themselves facing real crises as their original investments soured.

It would be a foolish malinvestment of resources for oil companies to invest in new refining capacity if the future prices of fuels were to fall. Now, I would not mind seeing more capacity, given that a new refinery has not been built in the USA since the presidential administration of Gerald R. Ford. However, if the long-term structure of market prices within that industry cannot support the kind of investment that Republicans are demanding, we then would see a waste of resources if executives made investment decisions under the political gun.

Moreover, if oil executives decided to make long-term investments in additional capacity just to head off draconian controls being demanded by congress, then we would be witnessing what would be, in effect, government control of a vital industry. The bills would come due later but, rest assured, they would come.

KingPriest2
06-11-2008, 03:11 PM
bump

Redrum_69
06-11-2008, 03:14 PM
NYMEX May gasoline was up 0.63 cent at $2.1722 per gallon