Monday, October 29, 2007

Oil Shooting Through the Roof


Oil briefly tops $93, hits highest ever

Of course, this doesn’t spell good news for gas prices. And I wonder how long it will be before we start hearing calls from the economically ignorant for the government to look into possible corporate malfeasance.

Last year, I remember have a rather pointed debate with a Conservative friend of mine about the issue of price gouging, and such. He was firmly convinced that the nominally record-setting profits earned by Exxon-Mobil (even though the company’s profit margins and other financial ratios were exactly in line with historical levels) was proof positive that the evil gas companies were conspiring to harm the public. For him, the fact that the price of a barrel of oil increased only X percent, while gas prices went up by a factor much larger than X, was clear indication that the oil companies were holding back on production to get higher, monopoly profits. His solution was to get the government involved.

I tried explaining to him that oil is just one of the inputs into the process of fuel refinery. Other are, for example, capital, labor. The availability of these other inputs can also affect the final pump price of a gallon of gas. For example, the price of a barrel of oil could drop to $1, does that mean that gas will be almost free? Of course not, because if you don’t have the means to convert that cheap oil into equally cheap gas, then the final product – gas – will be rather scarce, and in short supply. The price, inevitably, will be bid up by consumers.

So now we have oil prices going through the roof, and I’m sure gas prices will do the same. I bet you I can set my alarm clock to go off at the exact moment the first cries of "price gouging" and such will be heard.

Oh..and one other thing. Historically, Exxon-Mobil’s "net profit"would hover around 10%. This was just as true last year, during the "record setting" quarter, as it was in previous, less nominally profitable years. Currently, their net profit margin stands at 10.74% Will anyone notice that? I doubt it.


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