Oil Companies & Gas Prices

Today, I was watching Hillary Clinton on BOR from last night. They got into the whole oil company profits and gas prices. Since my grocery store also has a gas pumps, I hear about it all the time. Here's a few things contributing to higher gas prices.

Supply & Demand-The recent industrial growth of China and India have caused DEMAND for oil to increase, while the supply remains the same.

Weak Dollar- the oil cartel known as OPEC don't get as much for the American dollar as they used to.

Boutique Gasoline- Too many states have different blend requirements of gasoline. It's just common sense that when you mass produce the same product, instead of 20 or so different products, its more efficient and cheaper.

Old refineries- The newest refinery was build 20+ years ago. Sure they've done what they can with them, but it comes to a point where the benefits of improvements far outweigh the costs.

Now on to oil company profits. Lots of people are complaining that we're being gouged by the oil companies. It's a possibility, but the more realistic thought is it's as simple as gross profit. Gross profit is a percentage above cost. The gross profit is determined by the expenses the company incurs.

The oil companies are no different from my grocery store when figuring gross profit.

Here is a very simple explanation:

If a barrel of oil costs $1.00 and Exxon wants a 10% gross profit, they charge $1.10. If oil is $1.50, with the 10% GP, they charge $1.65. So when figuring gross profit, just like almost every other business in the world, you see that even though cost increased 50 cents, the gross profit increased 65 cents.

This is why, as oil prices go up, the oil companies profits increase. Gross profit is figured the same way no matter if its a barrel of oil, bananas, or a loaf of bread.

So stop whining and elect congress-critters that will allow drilling in ANWAR and off-shore, and allow for recovery in oil shale. The only way to drop gas prices is to increase our domestic supply. Suspending the gas tax is not the answer.

 

***UPDATE 11:55PM 05/01/08***

No, Ethanol from corn is not a viable alternative fuel. This eco-craziness is causing a worldwide food shortage and an increase in food cost.

Corn is one of the least efficient crops to use in ethanol. Sugar cane is the best.

Less farmers are planting wheat and instead opting to cash in on corn. Back to supply and demand. 30% of corn grown in the US goes to ethanol production.

Increased demand for corn and decreased supply of wheat causes everything from flour (wheat) to eggs, meat, dairy, (feed corn) to increase in price.

Add the increased food cost to the rising transportation cost, and things are going to get a lot worse.