Gas Prices and You!

[grantboston]

It should be noted that Exxon's profit MARGINS are actually really low. They won't post anything near that large a profit next quarter (you know, when demand cratered and the price of oil halved). Oil is an EXTREMELY cyclical business that has big ups and big downs. Anyone trying to read massive conspiracies into profits always seems to ignore the bust part of the cycle.

[Tnekster]

Meanwhile, ExxonMobil just made another $15 billion PROFIT (revenues minus expenses equals pure profit).

How much did they pay in taxes?

[grantboston]

How much did they pay in taxes?

Their 8-K tells us that they paid $32,510,000,000 in total taxes in just the third quarter alone. Approximately 11 billion of that was in income taxes.

Also:

"The American Petroleum Institute, the industry's trade association, has said Big Oil earnings are not out of line compared with earnings in other industrial sectors. For the second quarter of this year, it says, oil and natural gas companies earned 6.8 cents for every dollar of sales -- only slightly above the 6.5 percent profit margin for all U.S. manufactures.

Exxon Mobil said its profit margin was 10.8 percent -- or 10.8 cents on every dollar of revenue in the third quarter. The amount includes proceeds from the $1.62 billion sale of a natural gas transportation business in Germany."

http://biz.yahoo.com/ap/081030/earns_oil.html?.v=2

If there's one big gripe that I share about Exxon, it's that it spends far too much money buying back its own stock. It does help to protect shareholder value, but a lot of analysts seem to think they're in a slow liquidation process. For instance, they spent $8 billion this quarter alone buying back their own stock, reducing the outstanding shares by roughly 2%.

[AeroD]

Anyone trying to read massive conspiracies into profits always seems to ignore the bust part of the cycle.

Say what you will, but oil is probably one of the most politicized commodities being sold today. There are probably enough artificial market intrusions in oil - ranging from OPEC to national oil companies such as PEMEX and ARAMCO - that they are more likely to be subjected to the whims of individuals, governments and bureaucrats than the market.

[FoUTASportscaster]

I figure just about $3 by Christmas. Please quote me when it's $1.49 instead.

Just because people think I am wierd for being a conspirasist, doesn't mean I am wrong.

[grantboston]

Say what you will, but oil is probably one of the most politicized commodities being sold today. There are probably enough artificial market intrusions in oil - ranging from OPEC to national oil companies such as PEMEX and ARAMCO - that they are more likely to be subjected to the whims of individuals, governments and bureaucrats than the market.

There certainly is a lot of politics surrounding oil; you'll get no argument on that point here. Are there cartels at work? State owned monopolies? Yep and yep. The problem is that they're not very competent or good at what they do. OPEC has proven time and time again that it is almost entirely unable to put a floor under oil prices, and at best, can only abet rising prices while cheering on from the sidelines.

PEMEX, Petrobras and the whole ilk are among the worst run companies in the world because their profits are used as political footballs. (Or in Mexico's case, the Constitution prohibits foreign ownership over oil resources, which in turn prohibits much needed infrastructure development) So while these companies and the oil they work with are most certainly subject to political and individual whims, the people working behind the scenes are too damned incompetent to force the market to do (over the long term, and on a sustained basis) what they want it to do.

Iran and Venezuela need oil to be at least $90-95/bbl to balance their budgets. Saudi Arabia is around $55/bbl. Each has a different interest to protect. While Saudi Arabia may not object to oil costing $95/bbl (or even $147/bbl, although I think they do object to that kind of price), they realize that sustained high energy costs only serve to accelerate their own demise as oil sands and other alternative technologies become more cost effective v/v crude oil. All of this means that even amongst the 'oil rich' there are competing agendas and often even internally inconsistent ones. In the end, I think the combined efforts of all the individual players typically cancel each other out. Of course, if you add a bunch of speculative bubble money, the calculus is thrown off and the system breaks down (cf: $147/bbl).

Of course, if you buy into peak oil theory, these types of production declines, volatility and price fluctuations are entirely expected.

It's tempting to believe there is some massive conspiracy at work here, I understand that. But, in the end, none of the parties are willing to sacrifice any of their interests to come together to work toward a common goal. In my opinion, I'm not entirely sure it's even desirable, but that's another post.

[Tnekster]

^Great post

[AeroD]

It's tempting to believe there is some massive conspiracy at work here, I understand that. But, in the end, none of the parties are willing to sacrifice any of their interests to come together to work toward a common goal. In my opinion, I'm not entirely sure it's even desirable, but that's another post.

There may be no "massive conspiracy" taking place. But "conspiracies" do take place and have taken place. Just look at Iran circa 1953. Governments did conspire to overthrow another government because of oil. IJS.

[psukhu]

There certainly is a lot of politics surrounding oil; you'll get no argument on that point here. Are there cartels at work? State owned monopolies? Yep and yep. The problem is that they're not very competent or good at what they do. OPEC has proven time and time again that it is almost entirely unable to put a floor under oil prices, and at best, can only abet rising prices while cheering on from the sidelines.

PEMEX, Petrobras and the whole ilk are among the worst run companies in the world because their profits are used as political footballs. (Or in Mexico's case, the Constitution prohibits foreign ownership over oil resources, which in turn prohibits much needed infrastructure development) So while these companies and the oil they work with are most certainly subject to political and individual whims, the people working behind the scenes are too damned incompetent to force the market to do (over the long term, and on a sustained basis) what they want it to do.

Iran and Venezuela need oil to be at least $90-95/bbl to balance their budgets. Saudi Arabia is around $55/bbl. Each has a different interest to protect. While Saudi Arabia may not object to oil costing $95/bbl (or even $147/bbl, although I think they do object to that kind of price), they realize that sustained high energy costs only serve to accelerate their own demise as oil sands and other alternative technologies become more cost effective v/v crude oil. All of this means that even amongst the 'oil rich' there are competing agendas and often even internally inconsistent ones. In the end, I think the combined efforts of all the individual players typically cancel each other out. Of course, if you add a bunch of speculative bubble money, the calculus is thrown off and the system breaks down (cf: $147/bbl).

Of course, if you buy into peak oil theory, these types of production declines, volatility and price fluctuations are entirely expected.

It's tempting to believe there is some massive conspiracy at work here, I understand that. But, in the end, none of the parties are willing to sacrifice any of their interests to come together to work toward a common goal. In my opinion, I'm not entirely sure it's even desirable, but that's another post.

Great post. How does currency exchange and the fact that crude oil is traded on the NYMEX and ICE factor into all of this?

I think this is interesting since the biggest consumer (The US) has falling demand for oil because, mainly because of a slowing in economic activity in the US. And then there's the fact that oil is traded in US dollars and the US is facing a fiscal crisis related to a growing deficit and continued deficit spending.

[grantboston]

Great post. How does currency exchange and the fact that crude oil is traded on the NYMEX and ICE factor into all of this?

I think this is interesting since the biggest consumer (The US) has falling demand for oil because, mainly because of a slowing in economic activity in the US. And then there's the fact that oil is traded in US dollars and the US is facing a fiscal crisis related to a growing deficit and continued deficit spending.

It certainly helps that it's all traded in Dollars. With the recent strengthening of the dollar (which is not entirely unrelated to the drop in oil prices), customers buying oil with dollars have increased buying power compared to those who are buying it in other major currencies. This cuts both ways, too. Since the Saudis have much of their foreign reserves in US Dollars, they benefit no matter which may oil moves. (Dollar down, oil price up- Saudi Arabia wins, Dollar up, oil price down- Saudi Arabia wins) This, in my opinion, further undercuts the conspiratorial arguments floating around here.

There was some news piece I read recently about some Americans returning to their old driving habits now that oil prices are down. But, as FoUTA and some others have correctly noted in other threads, once you make efficiency gains with energy use, they tend to stick no matter how much cheaper the commodity becomes. If you went out and traded your SUV for a 30mpg car (like I did), it's not the easiest thing in the world to go back and sell that car for another truck or SUV. In the long run, that will pay dividends across society and the energy markets as demand is kept in check as easily accessible supply dwindles.

That said though, just as demand begins to fall (or better, remain static year over year), we ought to look beyond the price at the pump and the price per barrel. If you look broadly at the entire energy market and understand that its biggest challenge is to ensure stable supplies of energy at prices the market can withstand, it quickly becomes evident that the price of oil is only one piece of a much larger puzzle. My concern is that lower oil prices will make planned energy technologies untenable. Just look at the new economic realities of the Pickens Plan and you'll see how much air has been sucked out of the energy balloon in just the last month or so.

Sounds peachy for the oil companies/producers, right? Well, not really. Even if the world stays addicted to oil that much longer, they need higher prices to fund their exploration and capital expenditure costs. If that money isn't there, Exxon and Venezuela's reckoning will come sooner rather than later. Even if they could bid prices up to the level they need to sustain that kind of investment (or whatever else they use the money for, if you're talking about national oil companies), sustained high prices serve to cut off the very demand they need to keep the cycle going. In the end you end up with a scenario like the one we're facing. High demand and high prices eventually beget decreased demand and lower prices. Throw in a shit ton of money leaving equities for 'safer' commodities and the fall is even harder.

Increasingly, the energy (and specifically the oil and gas) sector work a lot like grains and soft commodities in the US. Quotas, price floors, reserve stocks and all other artificial measures designed to stabilize and prop up prices and demand prove unwieldy and unworkable.

All of this stuff is complex not because there is some nefarious plot afoot, but because if you tug on one end of the rope, you move the other ends of it, too.

So what's the answer to all of our troubles? Hell if I know. I think the market should try and set the price for energy with as little outside interference as possible. That's a tall order, but something we should resist the temptation to muck up even further. (Carbon tax/ cap & trade, strategic petroleum reserve, etc)

Along side that, I would try to find some way to offer incentives to alternative energy producers. We all know that oil and petrocarbons are going to fuel the world for the near-term future. The only question remaining is at what price? By seeding the development of new technologies now, we can have a fighting chance of letting oil die a peaceful death once the supply finally does run dry.

[concretist]

NationMaster - Oil > Consumption (most recent) by country according to Google:


#1 United States: 20,730,000 bbl/day
#2 China: 6,534,000 bbl/day
#3 Japan: 5,578,000 bbl/day
#4 Germany: 2,650,000 bbl/day
#5 Russia: 2,500,000 bbl/day
#6 India: 2,450,000 bbl/day
#7 Canada: 2,294,000 bbl/day
#8 Korea, South: 2,149,000 bbl/day
#9 Brazil: 2,100,000 bbl/day
#10 France: 1,970,000 bbl/day
Or perhaps you favor Wikipedia...

http://en.wikipedia.org/wiki/Petroleum#Consumption

In thousands of bbl per day
1 United States 20,588
2 China 7,274
3 Japan 5,222
4 Russia 3,103
5 Germany 2,630
6 India 2,534
7 Canada 2,218
8 Brazil 347
9 South Korea 2,157
10 Saudi Arabia (OPEC) 329

If you do the math, the disparity on a per-capita basis is really blinding.

[RobertB]

The LBJ Freeway is notably more crowded, from Mesquite to the Galleria and back, than it was when gas was $4 a gallon. More wrecks, and more simple congestion when there's not a wreck. Where did all those extra cars go hide for the past few months?

[Mballar]

Well, OPEC is decreasing production. Expect prices to rise again, soon.

[grantboston]

Well, OPEC is decreasing production. Expect prices to rise again, soon.

We'll see if they actually do. A lot of the OPEC countries unilaterally decide not to abide by the cartels production quotas and pump whatever they want. Even if they do comply, just look at OPEC's history of trying to set price floors during periods of falling demand and you'll see that they aren't very good at it.

This isn't to say they won't succeed in driving prices higher. If I had to render a guess, I think we stay in a range from $50-$75, but any number of events or a sudden acceleration (or deceleration) of economic growth could change that one way or another.

[mjblazin]

Is there any good evidence that supply restrictions at global level have had any impact on price? I can understand items like hurricanes on gasoline refineries for a localized supply problem. I remember when the hedge funds were jacking up the price that every stupid story like Nigerian rebels or Iranian tests of a new torpedo (the horror!!) was pitched to show perceived supply impacts. But in retrospect, it was completely false.

Price goes up and down with demand. Our little credit induced oil frenzy established the ranges of pain. Unfortunately they stupidly blew out the top of the range, destroyed demand, and now will have to wait for demand to return with a recovery.

[FoUTASportscaster]

One of the major premises of a free market system is supply and demand. Simply, as demand falls price falls and as demand rises, price rise. Conversely, as supply falls, price rises and and supply rises, price falls. So yes, supply does have an impact on price, as equal as demand.

[grantboston]

One of the major premises of a free market system is supply and demand. Simply, as demand falls price falls and as demand rises, price rise. Conversely, as supply falls, price rises and and supply rises, price falls. So yes, supply does have an impact on price, as equal as demand.

Well this market, like all markets isn't quite that clean (or efficient as economists might put it). As I have tried to detail above, there are pressures working over the market that can sometimes throw it out of sync, at least for a while. I think the market tends to price oil correctly in the end, even if it does stretch the price a little out of whack in both directions along the way.

More to the original point, though. I think that the falling demand and supply cuts argument tends to be stated backward. While OPEC and all oil producers typically (and often inadvertently) restrict supply as demand grows, they can only play catch-up as demand falls. That is, demand tends to precede supply as prices rise and trail it on the way back down the price ladder. Or to put it another way, supply tends to be driving factor behind prices on the way up, just as demand is on the way down.

So, if we're asking if there is any documented evidence that supply cuts affect price, we probably should turn that question around. In my opinion, the very fact that OPEC and its buddies are forced to chase the market (and make an educated guess about where to place supply) demonstrates that they really have very little control of the price of oil as it falls.

Just today alone, it fell almost $4/bbl.

[tamtagon]

I remember when the hedge funds were jacking up the price that every stupid story like Nigerian rebels or Iranian tests of a new torpedo (the horror!!) was pitched to show perceived supply impacts. But in retrospect, it was completely false.

That's the most infuriating aspect of the 'free market' - a handful of investment analyst workgroups whacking out the whole process.

[Tnekster]

Energyville from the Chevron web page. Kind of interesting.

http://www.willyoujoinus.com/commitm...FQ2LDQodoSf2Iw

[RobertB]

So far, the energy companies' sudden green-ness is merely window dressing. BP restyles themselves with a sunflower logo and repurposes their name as "beyond petroleum", but their safety record is just one indication that corporate culture seldom matches the changes in marketing direction.

It's GOOD that Chevron, BP, and other petrochemical giants want to be seen as eco-friendly. But make no mistake -- if they felt they'd make higher long-term profits by holding annual Spotted Owl hunts and selling fried humpback whale blubber, that's what they'd be doing. The only ones who can make them live up to their marketing hype are us -- we, the consumers, and the government we choose to represent us. We have to remain focused on sustainable development and green technology. If that's where we are, then the companies will come to us.