P.J

Interesting analysis by RustyJC, I can see that making sense.
Everyone, ask yourself this question: What other industry do you know that posts RECORD PROFITS after their core material price skyrockets?
This is like a Baker having his best after his flour prices doubled?
The lesson is, there IS no sense in this situation. Name one other industry, I dare you that can pass on every penny (and add a little each time for themselves) of a raw material price increase to the customer?

RustyJC

No one said that raw material costs have increased. Oil that sold for $10/bbl last year could sell for $50/bbl this year and have the same lifting cost - that's the cost to bring that barrel of oil out of the ground and put it into a pipeline. So, in the purest sense, if we say that the lifting cost is $5/bbl and the oil is selling for $10/bbl, the profit is $10 - $5 = $5/bbl. If this year it's selling for $50/bbl, then the profit is $50 - $5 = $45/bbl.

Can I name another industry with this characteristic? Sure - just about any commodity. Gold - does it cost more to bring an ounce of gold out of the mine when the price is $500/oz versus a price of $300/oz? No, it doesn't. When the price is $500/oz, the owner of the gold mine makes more profits. Ditto copper, diamonds, coffee, cotton, soybeans, beef, pork bellies, corn........ When the price of any of these increase, the suppliers' profits increase. Think of the farmer or rancher - when cotton, soybean, beef, milk, pork bellies, wool, corn, etc. have high market prices, the farmer or rancher makes more profit.

With a commodity such as crude oil, prices are driven by market forces - future perceptions of supply and demand considerations. That's what the traders speculate on in the energy commodity markets such as the New York Merchantile Exchange (NYMEX) where the prices for crude oil and key refined products are established.

The challenge for the oil company is to keep lifting costs as low as possible to maximize their profitability whatever happens with the market prices, and that's the problem today - lifting costs are increasing as the older production fields with low lifting costs play out. So, no, we're not running out of oil. We're running out of cheap oil. The law of supply and demand says that, eventually, if prices stay this high, other sources (higher lifting cost production such as the Canadian tar sands, ultra-deep offshore plays, etc.) will be developed to meet the demand.

Rusty

P.J

Uhhh, so can I still sum it up thinking that we are getting ripped, right?

My point was that back in the day, if you were in service of manufacturing you couldn't just pass 105% of a raw material increase on to the customer.
There should have been some "fluf" room in these big oil copmpanies pockets to cushion gas/diesel prices for a minute. Are we really going to believe that oil cost THAT much more? (day by day!) Come on, $70c higher than in Janurary of this year, (20c of that in the last two weeks alone??? It's almost like, "let's see what these fool's are willing to pay"?
I've never seen the cost of cotton, soybean, beef, milk, pork bellies, wool, corn, etc. spike like THAT???

RustyJC

Perhaps, but why not direct your wrath at the ones who establish the price - the worldwide oil traders? Crude oil is a global commodity - if you don't want to pay $60/bbl, the Chinese and Japanese will.

Rusty

P.J

True, True.
Guess we are just the "Stupid Americans" as usual.
BTW, I have no "wrath", I just go to the pump and pay, then burn diesel like the rest of the free world.
So, when do you think China will be done building their nation, any time soon?

RustyJC

Man, if I knew that, I'd be playing the futures market!

I will say this, though. If energy prices push the worldwide economy into a recession, then demand will crumble and prices will fall like a rock - crude oil was $10/bbl in the late 1990's when the Asian economies were in the drink and the dot.com bubble burst in the U.S. So, prices will probably eventually fall, but we may not like what it takes to make that happen!

Rusty

P.J

OoohLala, when i started driving ('94) gas was $.99 and diesel was a little lower.

Thank's for the exchange Rusty, you are one smart cookie.

Iron Mike

This sounds like communism to me. Do you really want to pay companys based on the price of production? If so, then companys can start squeezing oil out of rocks again out West. Then oil will cost about $120+ a barrel. There would be no incentive for company's to keep their production costs down. Yes, oil companies make huge profits when oil prices are high. That's the only reason they are willing to go out on a limb and invest several billion dollars in a single project, that by the way is not guarranteed to produce. I've seen many $30 million dollar dry holes. By the way at $10 a barrel the last thing any oil company wants to do is spill oil. For one thing it is lost revenue and then it also costs to clean it up and pay the fines. The fines usually far outway the lost revenues.

If the Baker also grew his own wheat and made his own flour then yes he would make record profits as well. Wise up folks, all the junk we have been buying from China since Clinton gave them Most Favored Nation Status, has made their economy boom. I don't see it slowing down anytime soon. Sorry to tell you folks, but oil prices will probably hit $90 bbl. As the libs and conservers will both tell you, it is a global economy.

Mixer Man

So now the off the chart oil prices are Clinton's fault uh ok ....... I think the comedian Lewis Black summed it up the best ............ The Republicans are a party of BAD ideas ............ and The Democrats are a party of NO ideas !! Blame who you want but this whole nasty mess is just our own capitalism at it's finest !! Where do you think the oil goes ...............to the highest bidder of course .

herb

if it because of the libs why doesn't the majority conservative party now in office change things and get more refineries built ? they can pass any bills they want without the libs being able to out vote them ?

MikeyB

Because the liberal enviromentalists would file lawsuits after lawsuits to stop it in Federal Courts. It's has taken place already in California.

MikeyB

12valve@heart

Well, probably not at least until after the olympics over there in '08. From what I hear, that's where much of the steel and concrete is going.

Mixer Man

That refinery excuse is just plain BS .......... right across the river from me in Hartford ,Ill are 5 different refineries and 2 of them were bought out and have been IDLE for years !!! They just started refining again recently due to enormous $$$$ being made now . I agree we need more refineries to keep up with demand but come on EVERYONE ,liberal , conservative ...whatever throws a fit when ANY industry wants to build next to them . Kind of reminds me of the electrical mafia that took California and other states to the cleaners not so long ago ..........remember that ? Same excuse not enough power plants ,blah ,blah blah when ENRON was selling it to the highest bidders out of state !! We just need to take our country back from these thugs no matter WHAT FREAKIN POLITICAL PARTY they belong to !!

MikeyB

Mixer Man,
That is great news if they are really refineries. People are hired to run the place and hopefully increase the stockpile of gasoline, jet fuel, diesel, etc...which will eventually drive down the cost of fuel.

MikeyB

Mixer Man

Actually they are secret laboratories for Area 51 .............ssssshhhhhhhhhhhhh don't want my family to disappear !!