Do you believe the oil companies' explanation for high gasoline prices?

Question

What I don't understand is this: the oil companies claim the price of gasoline fluctuates along with the price of crude; they say that the proportions of what goes into the cost of a gallon of gasoline - refining costs, profit margin, delivery costs, and so forth - are fixed percentages of the price, just like the cost of the crude. So if the cost of crude doubles, all those other things double too.

This seems suspicious. How can, say, refining costs be that volatile? Do ownership and maintenance costs of a refining plant double when the price of crude goes up? Does labor suddenly cost twice as much? It doesn't make sense to claim that everything stays in proportion. Some of these things should be fixed costs that don't vary with the price of the materials.

Also - if everything is proportional to the price of crude, then how is it that the price difference between grades of fuel almost always stays at ten cents per gallon? Two years ago the three grades of fuel were around $1.50, $1.60, and $1.70 per gallon. If all the costs are proportional, now that regular is $3.00, the other grades should be $3.20 and $3.40. But they're still ten cents apart. How is it that this seems to be the only fixed cost in an otherwise volatile pricing scheme?

To Brodie - I have been a laissez-faire capitalist all my adult life, and two years ago if I were answering this question instead of asking it, I would have answered as you did. But what is going on with gasoline right now is shaking my belief in the free market. Yes, in a free market sellers can charge what the public is willing to pay; but their explanations for the sudden price jumps seem false and full of holes. Also, in a free market, with oil companies enjoying record profits, why haven't any of them decided to forgo a little profit and reduce the price to gain market share against their competition? In a pure free market, margins drop from competition; but in this market, margins are magically remaining constant. It smells like collusion.

Answer 1

Oil and gasoline are two different markets. Profit margins in the refining business have traditionally been rather meager. Only a few times were oil prices at such high demands. The 1920's, early 40's, late 70's and the 1980's. The 1920's because of the growing demand for vehicles. The early 40's because of the war and bottleneck of delivery. The 1970's because of failed diplomacy in the Middle East. In the 1980's because of the Iran-Iraq War and a bottleneck in the Straits of Hormuz. Today we are seeing a changing of the guard. The U.S. is losing ground economically and developing countries are picking up the loose change. China is the culprit to the increased cost of oil. China is predicted to be the largest consumer of oil by 2017. Fear is also causing the rising the price of oil. The world only has 90 to 100 years of oil remaining. Nations are gathering all the oil resources at any means possible.

Yes, the oil companies spend more to produce oil. However, proportionately the ratio between profit and cost of goods sold is out of balanced. Light Crude has increased from $17 in 2000 to $75 currently, a 414% increase. Price of production and delivery of light crude in six years has only increased 40 to 45%.

And it’s the same for gasoline. The ratio between profit and cost of goods sold is again out of balanced. U.S. avg. national gasoline prices were trading near .90 a gallon in 2000 to $2.98 currently, a 331% increase. The price of production and delivery in six years for gasoline has increased 35 to 40%.

Oil companies profit on increased demand and slowing the supply. The companies can produce less and make more money. So why should they improve production?

Answer 2

I have never heard the oil o's say that ALL costs of production rise along with a rise in the price of crude.
As I understand it (and I am an economist) crude is the largest pricing component in the product (refined gasoline), thus it remains a simple matter that when the price of crude increases, the price of refined crude will increase.

Do they take advantage of the fluctuation? Of course, they are for-profit enterprises! Just the same way the banks are quick to raise rates when the fed raises rates but slow to lower them on the way down.

Answer 3

We live in a free and open market. The oil companies have the right to charge whatever they want for their product. If people are willing to pay a high price for gas, then the price will be high!! It's high school economics!!!

By the way, the oil companies make about 9 cents out of every gallon of gas. How much does the government make? Around 60 cents depending on which state you live in.

The government and liberal media love to turn your attention away from how they take money out of your pocket. Why not blame the oil companies? After all giant corporations are "greedy" and "evil". B.S. At least you get something from these companies when you give them your money, the government just takes it.

Answer 4

Very good point .10. I have another, if their reasoning holds, why is it every year during vacation season or peak travel periods does the oil price peak?

It is greed and I'll go a step further and say that Osama Bin Laden is no more missing than I presently am. He was a business partner with Bush and something went sour between them (maybe Bush got too cocky or too greedy and Osama raised the stakes. When Bush tried to use his false bravado, the Sept. 11th tragedy hit.

Is it possible that a giant chess game is being played with world leaders, we are the pawns and it is over revenue. Simple greed. Well, the gloves are off in America and everyone is getting their cut no matter who is found at peril. The rich are getting richer and those who can't tread the water will simply drown.

Answer 5

The price of gasoline is set by the market, the largest being the New York Mercantile Exchange (NYMEX). Believe it or not, oil companies actually work to depress the price by supplying as much as possible as prices increase. It is when oil companies deliberately limit production that we have to worry. When pumping and refining are going full steam (capacity nearing 100%) then the price is as cheap as it gets. To increase profits, capacity must be increased. But therein lies the problem; politics and environmental considerations work to limit increasing the supply, thus raising the cost. The moral of the story is don't shoot the messenger.

Answer 6

Every week its something new
Either shortages in supply
Or refinery output
Or refinery refitting
Or trouble in the middle east
High Demand
Trouble in south america
Hurricanes
Transportation system breakdowns
Yesterday oil went up because of the situation in North Korea
HOW MUCH OIL DO WE GET FROM NORTH KOREA FOR PETES SAKE!!!!!!!!
Supply is at its highest level since the seventies.
Noone drives because of the price..... demand has got to be down.
Whats it going to be this week?
Theres only one constant in the whole affair.
The oil companies are a bunch of thieving bastards who continue to rob us blind for only one reason
BECAUSE THEY CAN.
They need to be regulated immediately.
The oil companies in this country have proven that they cannot be trusted to do business fairly
They have this country over a barrel ( pun fully intended)
Some kind of overseer must be put in place to keep them honest.
Edit
And dont even get me started on the oil commodities market and speculators, who guess how much oil will cost six months from now.
They guess that oil will cost more then so they charge us for this more expensive oil now.
We are paying sky high prices for gasoline THAT ISNT EVEN OUT OF THE GROUND YET !!!!!
Its unbelievable how they get away with this

Answer 7

agree with you i do .every time there's a holiday it goes up.its gotten to the point that it goes up for the weekends.

Answer 8

IT'S ALL A HOAX BY THE GOVERNMENT. AS WITH MANY OTHER THINGS GOING ON! (GREED!)

Answer 9

i C ANGER!

i AM YESHUA!

i will SOON make Storms. earthquakes, floods,and Asteriods come to KILL OIL COMPANIES!

OIL is GREED!

GOVERNMENTS are GREED!

ALL are soon going to C me on t.v.!

smileS & LOVE!
YESHUA!

Answer 10

i believe it exists