How are oil prices determined?
Wednesday May 23, 2007
Another day, another record high for gasoline prices. Our comments section has seen several heated discussions about the cause of record gas prices. Kimberly Amadeo, About.com's Guide to U.S. Economy, unravels some of the mystery with her article on how oil prices are determined. She also has an entry on her blog about where oil prices are likely to go this summer (hint: the answer ain't "down").
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Comments
Very easy answer. You pile oil company CEO and management greed on top of middle-east oil baron greed, then sprinkle a heap of extreme taxes on top and you get our fuel prices!
Refinery capacity is max’d. There is absolutely no incentive for oil companies to spend $Ms for additional refineries so prices can go down and reduce their profits (go figure…!)
The formula that was described by Kimberly is exactly correct…however, what also is significant is how any/all of those factors can be manipulated artificially for excessive profits for the principal players(oil companies,producing countries, refiners,etc)…remember, you’ve got a oil backgrounded President, an oil infrastructure backgrounded Vice President(Haliburton/KBR), a oil corp. backgrounded Secretary of State(board of directors of Chevron)…at no time in the future shall the oil companies be able to gouge like now, with such an outgoing administration as this one, that won’t lift a finger to stop them from pillaging our pocketbooks…so they’re going for it all! Unashamed, with full greed ahead! Even if the next administration charges them windfall profit taxes, the interest made on those billions in the interim is staggering.
yea lets blame it all on the bush adm. if the people on the left or the green ones would let us build some more refinerys mabe the price would go down a bit.
After such an eloquent and dynamic rebuttal by Rex, I guess I sheepishly stand corrected!
Don,
You may have read Kimberly’s reasonings but obviously did not understand them. Or, like others on this and many other boards, you are incapable or do not want to understand. Making comments about Bush/Cheney without any facts simply undermines your credibility as a reasoned thinker. You don’t reason, you emote. And you emote without the facts or truth. But that’s what emotional people do isn’t it?
We live in a market economy. You and similar ilk would like to see us move towards socialism and have the government mandate how much money we make and earn. Like in the old U.S.S.R., Cuba and soon Venezuela?
Get a clue Don.
C
Chuckie and I will never agree. His thinking is not wide enough. Move toward socialism?? Open your mind Chuck. Fuel is a monopoly, not a free market commodity. I don’t know the exact number but there are basically around 5 companies that control all our auto fuel. How many companies make shampoo? And even that isn’t a fair comparison because we can get along without shampoo. When you have a limited resource controled by a limited number of companies/personnel, you have an unlimited potential for abuse. When those abusers have “friends” in high places, they can get away with more than might happen at other times. Believe it or not, most “politics” don’t happen on CNN or even in Washington. It is covert and never seen or rarely found. You don’t see any inconsistencies in someone saying I’m not gouging the public so just leave me alone and let me count my billions? As a former business owner, I set my prices for a reasonable profit. But then, I had to with competition. The oil companies have no real competition. Lets take a fictitious event where Shell decides their gas is better than Mobil so they will charge 5 cents more. Chevron, seeing Shell make 5 cents more profit, decides they can get away with 2 cents more than Shell and reap profits too. Mobil, on the low end of the totem pole sees Chevron and Shell making all this money so they raise their prices to match Chevron. Now Shell is on the low end so they say, again, their gas is better so they go 5 cents over Chevron. And it goes on and on with none having any incentive to stop as long as their pockets are getting fatter and the car companies don’t give us alternatives to gas driven cars. Add in that the top people in the government are profiting from those same companies and who is going to say stop? But is this “market” driven or greed driven??
Mike, if you mean by “His thinking is not wide enough” that I don’t create unreasonable and unsupportable assertions, I agree with you.
“When those abusers have “friends” in high places”
I’ve seen this silly argument everywhere and always by someone emoting rather than thinking. Of course there’s never any facts to make the connection other than Bush/Cheney were once in the oil business so it must be true. LOL Conspiracy theories give simple answers to simple minds for complex problems. Covert operations? I think you’ve seen too many George Clooney and Michael Moore movies Mikey.
After seeing your example on how gas companies hike up their prices it’s obvious why you are a “former business owner”. This is how it went in my opinion. Shell was charging a low price and exxon was 5 cents higher. Shell sold more gas and therefore started to run out of product to sell. So, they raised their prices to balance the supply with demand. Exxon’s demand kept increasing and the only way to keep the pumps from going dry was to charge more than their neighbor. And so on and so on.
Here’s a econ101 concept Mikey. Lower fuel prices create more usage right? With limited resources and limited supplies we could overwhelm our supply with another increase in demand.
I hate to be the one to tell you this Mikey, but raising gas prices decreases demand and that’s exactly what needs to happen. If you want lower prices decrease demand by consuming less. Thats’ how our market economy works and this is a perfect example. Government is hardly capable of balancing supply and demand. Government does virtualy nothing well. Keep the government out of it. And please, stop making up silly unsupportable arguments.
c
Hey Bob and Hawaiian Don,
I bet you don’t know the difference between profit and profit margin. If I’m wrong and you do, I bet you don’t know that *many* other industries have much higher profit margins. Just a thought.
Hawaiian Don’s and Mike J’s assertions about price manipulation and monopolies are just plain wrong and they know it. If that was what they really thought, they would go out and start their businesses to supply us with gasoline.
Hell why not? There are billions to be made - all they have to do is sell their gasoline at $1.30 per gallon like the oil companies did three years ago, before they started with all of this price “manipulation” and “gouging”. I would bet they could sell every last drop of gas they could get their hands on. Heck, it should be easy to get banks and investors lining up for that deal.
So bottom line boys - why don’t you do this? Surprisingly to you I’m sure, there isn’t any law against doing that here in the Bush/Cheney run USofA. Wouldn’t you be able to get some investors or banks to lend you some money for this? Why not?