We are gouging oil companies – and ourselves

Ayn Rand Institute via High Springs Herald ^ | July 23, 2007 | David Holcberg

[chrisser]

I wasn’t aware that it was a requirement to understand all the economics of an industry to hold an opinion.

You're free to hold any opinions you want. You choose to espouse them on a public forum, and they show that you don't understand how commodity pricing works. You can complain about it, and blame it on the producers, and maybe you can convince a government agent to intervene and make the problem worse, but you may as well be complaining that the sun rises in the east. Prices for commodities rise faster than they fall. Its the nature of the beast and its especially true in a volatile (pardon the pun) market like gasoline. It has to do with the nature of cost accounting, the level of inventory carried by the various agents, and the flow of information about costs, prices and future supply & demand.

The general public doesn’t know and doesn’t care about the details.

Then they will get the government (and market, and oil prices) they deserve.

The stupidity of the electorate is why we are a republic and not a democracy. Unfortunately, it hasn't saved us.

[RightWhale]

they suddenly fixed it quickly

That part of the feeder line was shut down for several months while parts were ordered and delivered. TransAlaska Pipeline oil shipments were about 1/2 normal for that time.

[Zon]

The FDA APPROVES these drugs, but when the drug is found to be unsafe they blame it on the drug companies. Typical government, never accepting responsibility for the damage it does.

Their accounting is deplorable. Consider the loss of lives versus saving of lives caused by "X" drug. Drug X on net saves twice as many lives as it causes deaths. The FDA chooses over-caution because no FDA employees wants it in their files that drug X caused Y amount of deaths. In part their excuse is that a dead person can be identified by name. Whereas the specific people whose lives were saved is unknowable. In the end the FDA rejects the live-saving drug. 

Plus, there's a ton of politics in the FDA. It banned the artificial sweetener Saccharine based on lab test using rats. They fed the rats so much Saccharine the human equivalent would require a person to drink seven-hundred cans of diet soda a day. Heck, just seventy twelve-ounce cans (over six gallons) of plain water a day would probably kill a person. 

How many people with heart conditions suffered unnecessarily or died because of FDA politics.

[Realism]

the level of inventory carried

BINGO....... Less inventory is less overhead, volatile trading, and higher prices.

[Barney Gumble]

Refineries don’t fake down time. They HATE unscheduled downtime. The prices rise, but the refinery with the downtime doesn’t win. It’s the other refineries that win.

There are two of most of everything at a refinery: two pumps per service, two filters, etc. But the few large pieces of equipment, like a coker, gas compressor, or boiler, are unspared. They are very capital intensive.

[Barney Gumble]

Less inventory is less overhead, volatile trading, and higher prices.

Higher inventory means higher prices, because there is a holding cost associated with that inventory.

[weaponeer]

I wasn’t aware that it was a requirement to understand all the economics of an industry to hold an opinion. The general public doesn’t know and doesn’t care about the details. They want the prices lower.

Which is why their opinion is basically worthless.

[Realism]

Which is why their opinion is basically worthless.

This is where consumer inspired government regulation comes into the picture.

[gunnedah]

You are soooooooooo right!

[gunnedah]

You are soooooooooo right!

[Tex Pete]

The shame is that the government makes more off of oil than the oil companies...and they don’t do a thing for it.

The problems are manifold. We need new refineries. We need to drill in Alaska, the Gulf off of Florida...

[Trailerpark Badass]

I wasn’t aware that it was a requirement to understand all the economics of an industry to hold an opinion.

No, but such a lack of understanding may reduce an opinion's value significantly.

[chrisser]

Higher inventory means higher prices, because there is a holding cost associated with that inventory.

When you're dealing in a commodity with high cost variability, the holding cost is frequently a mere fraction of the cost fluctuation.

Additionally, as is often the case with a commodity, the volume of product sold is quite large and thus the holding cost per unit is correspondingly small.

Correspondingly, with high volume, the margin per unit is often also very small.

Those factors (among others) combine and result in the fluctuations in cost becoming the overriding factor in business decisions because they far eclipse everything else.

[SAJ]

Bookwoman is quite correct, but there's an additional -- and vital -- factor she did not mention.

Refiners do not keep a large permanent maintenance staff. The bulk of their maintenance crews are hired ad hoc and as needed in the spring and autumn maintenance seasons. Due to the volatility of employment in the ''oil patch'', large numbers of temp maintenance workers have left the industry.

Refiners therefore are in the position of fighting each other for crews. If a wildcard such as Katrina comes along, it makes this problem exponentially worse, because everybody wants the workers all at the same time.

Additionally, there is, as in practically every industry, a high degree of variance from company to company in the quality of their maintenance of capital equipment. The recent AK pipe leak? BPAmoco couldn't be bothered to run the pigs. Texas City still mostly down 18 months and counting since the big explosion? BPAmoco, again (although, to be fair, they've had problems getting crews). The Whiting IN outage? You got it, BPAmoco yet again. See a pattern yet? BP, even well prior to the Amoco purchase/merger, has for decades had indifferent-to-rotten maintenance. They just got away with it for a long time, but no more.

I won't even bother elabourating on the other principal cause of price spikes, to wit, how both market and government uncertainty increases price.

[SAJ]

We can only wish. The vast majority of people won't bother to learn/understand the basics of the industry.

FWIW, there are a number of FReepers in and around the industry and the markets (pinged above, and I've surely missed several) who spend quite a good deal of time explaining the whats, hows and whys of the industry. I'd like to think their efforts are raising the FReeper understanding of the industry.

[SAJ]

Exceptionally well said!

WTG, and FReegards!

[gogeo]

In your case, it appears there may be some evidence.

[gogeo]

I wasn’t aware that it was a requirement to understand all the economics of an industry to hold an opinion...

It is, if you wish to be taken seriously.

[JackDanielsOldNo7]

I wasn’t aware that it was a requirement to understand all the economics of an industry to hold an opinion. The general public doesn’t know and doesn’t care about the details. They want the prices lower.

It seems like since, Katrina TRADERS have been using every excuse in the book. IF you are upset, you should at least be upset at the traders. The prices will eventually come down but not until after summer naturally. That is the time of the year the traders do their doom and gloom that all oil is going to be gone by the end of the summer.

[Barney Gumble]

Due to the large volume being sold, the amount of inventory needed to help smooth out the highs and lows, is astronomical. Price fluctuations will end up causing higher prices, but holding more inventory isn’t the answer.