Tuesday, April 01, 2008

Gas Prices vs. Profits: Huh?

I've been blogging about this for years. If I weren't so lazy, I'd link to all the previous posts. I freely admit that I don't understand the world of high finance. I have friends that have that intuitive ability which I lack.

But this oil business seems to me to be straight supply and demand (and maybe this is where I'm fucked). Granted there's a scarcity factor, but I don't know how deeply it's inolved in this play.

So I'm willing to be educated. But I smell collusion at the pump. And here's my rationale:

OPEC is setting prices. So the raw material cost, so to speak, is the same. I don't think any refiner has such a techonlogical advantage over another that would lead to markedly cheaper refining costs. Transportation costs are also about equal. And therefore, the prices at the pump are about equal give or take a few cents on the gallon that may vary on location marketing and upstream efficiencies.

But the kicker is that they're all making humongous profits. While raw material costs are as high as they've ever been, they're all making out like King Farouk

How can this be? Given a basic business like making spark plugs (I'm no economist by a long shot), but if raw material cost rises, it will cause a rise in prices, but no rise in margin. Producers will raise prices but maintain profit and pass the increased raw materials cost to customer. Some customers will be unwilling to pay the increased price and look to other vendors, who may reduce margins to gain business. This is the free market.

But on the street, when people need gas there seems to be little separation between gas prices. Every oil company is recording record profits when oil prices are at an all time high. This makes me think that I'm being taken advantage of. Surely, there is some oil company that's willing to lower their margins, and thus reduce gas prices, to gain volume business. But this never seems to happen, which, to me, flies in the face of the free market.

We live in a cut-rate, dollar-store universe. Everything is price-sensitive. People will go to Wal-Mart (despite the smell) to buy their Pringles for ten cents cheaper. Tightwads and coupon clippers abound. So why can't the oil company that's made the lowest, yet windfall, profits cut their margin by a few basis points, which would surely drive all the cost-concious consumers to their door?

This is not even Harvard Business School thinking, it's Biz 101 at TCC. Unless....there's collusion. And we've got to find a competitor to stop this collusive monopoly.

1 comment:

MikeD said...

Collusion feels good and I think there are plenty of reasons to bash big oil, but I do think this one just boils down to supply and demand. China's demand (and India to a lesser extent) has gone through the roof. Higher demand = sell more at a higher price = windfall profits, baby!

I think that where you see the shaving a a few points of margin is at the retail level. That is apparent by driving down the street and seeing what you're getting charged at the pump (there's also some differentiation due to long-term contracts which lock-in prices for retailers, but again, that probably affects the retailers margin more than anything). At the wholesale level, it's just a commodity like gold ($1000/oz!) or pork bellies.