Irony and Gas Price

19 thoughts on “Irony and Gas Price”

1. Robert,
   You’re having way too much fun with gas prices and the clueless media. And people who believe $1/gal gas is a birth right.

   How is the promised story on biobutanol coming along?

2. How is the promised story on biobutanol coming along?

   Every day I tell myself I need to finish it. It just didn’t turn out like I thought. Here’s a preview: The major problem with biobutanol is that the fermentation only gives 2% butanol concentrations, which are incredibly energy intensive to purify.

   Cheers, Robert

3. The major problem with biobutanol is that the fermentation only gives 2% butanol concentrations, which are incredibly energy intensive to purify.
   Gotha! Would liquid-liquid extraction be an option?

4. The Gatorade reference is funnier if you have seen Idiocracy

   Gas is $1.13/L in Regina, Canada (~ 3.80 USD/USG). Both of our vehicles are 4cyl and we don’t drive very much. We usually spend less than $100/mo on gas for transportation, even with the higher prices. We spend much more on electrical and NG on an annual basis.

   Inflation, especially in heavy materials like cement and drywall is very high with the diesel price increases and that has affected the new housing, which trickled down through all residential real estate.

   Everything in the economy is tied to petroleum, including developing new petroleum, as they are finding out in the Tar Sands. I can drive even less to make up for the price increases, but we can’t change our family grocery, shelter, heating, etc very much.

   Inflation in “everything else” is the real problem.

5. I think oil folks get a little bit too much of a kick out of the “irony” of inappropriate comparisons.

   On one level I get you, but I feel I also have to be pedantic and rational and say that it would only be valid if gatorade (or milk, etc.) were sold from a hose by the gallon.

   Do I need to explain how the distribution and material handling costs might vary? I don’t think so.

   I don’t actually think there is a good analog to gasoline, because I don’t think there is any other product that is mass-distributed in the same fashion.

   (and I don’t particularly care about price … well, as a Prius owner I take higher price as confirmation/affirmation 😉
   ‘
   – odogprah

6. On one level I get you, but I feel I also have to be pedantic and rational and say that it would only be valid if gatorade (or milk, etc.) were sold from a hose by the gallon.

   On the other hand, Gatorade is over 99% water. The raw material cost of water is very low. The raw material cost for gasoline is $1.50 a gallon. So, which one has the higher mark-up? Gatorade, by a long shot.

   Cheers, Robert

7. You don’t want to go there.

   I might have to tell you what water costs, by the gallon, coming out of the tap.

   resources … hoses … much closer (and appropriate) a comparison than a bottled beverage, and one that is no doubt kept in the refrigerator case at the mini-mart.

   – odograph

8. I might have to tell you what water costs, by the gallon, coming out of the tap.

   You don’t have to tell me. I used to work at a refinery, and we used a fair amount of water. I know what our city water bill was. Not much per gallon.

   Are you asserting that the profit margin on Gatorade is not far greater than the profit margin on gasoline?

   Cheers, Robert

9. I started off playful, but now I’m worried about you there, Robert.

   What do you feel you need to me to assert, or what do you need to assert?

   I hope this “irony” stuff doesn’t have any deep meaning for you … because it is meaningless, in the strict sense of the word.

   There is no product packaged and sold like gasoline. There is no useful comparison.

   So get over it, and just accept the price as what it is.

   That’s what we do in a market economy, right? We see a price and take it or leave it.

   (or buy a hyrbid, and leave more of it than we used to)

   – odograph

10. There is no product packaged and sold like gasoline. There is no useful comparison.

    I am less interested in the packaging, and more in the bottom-line. The profit margins. Because, say all you want about packaging, people aren’t building floating cities in the ocean to extract Gatorade. They don’t have to build and maintain multi-billion dollar complexes to make Gatorade. So, we don’t compare raw material versus raw material, or packaging versus packaging. We compare mark-up to mark-up.

    The irony for me is that people feel that $3.00 gasoline with a 10% profit margin is expensive and that they are being ripped off, but they don’t complain about $12 Gatorade with a profit margin of 100% or more(?)

11. If you are going to compare across industries, why not to the movie business and Spiderman 3?

    I worry that this gallon-to-gallon stuff tries to hide the fact that tis is very much a cross-industry comparison.

    They are all gallons, so it must be fair … is that the subtext you are selling?

    If so, you can return again to tap water .. but it bores me.

    I don’t know that there is any rule that Industry A and Industry B must have the same profit margin.

    – odograph

12. BTW, if you want to strike at why people complain, I think it is because that they find themselves unprepared for higher prices.

    They “feel” it wasn’t part of the deal.

    They bought their car, their home, planned their commute, under one price regime and suddenly face another.

    So they say things like “I can’t stop buying gas.” And “feel” that their pain must be someone else’s fault.

    I don’t know. Should someone have warned the general public that they could see higher prices? The press maybe?

    I think that’s the serious question. In a market economy every sale is an agreement between buyer and seller. If consumers don’t like prices they don’t have to buy.

    People understand that, but just feel trapped, and unprepared.

    – odograph

13. I guess if I want to press this, I could ask to what degree the oil and auto companies sell “happy futures” while raising prices.

    What do you, Robert, think gasoline will cost in the summers of ’08 and ’09?

    And do you think the industry is preparing their customers for those prices?

    – odograph

14. Gas prices are probably where they belong, although one might wish for $1 federal tax increase used for mass transit.
    But the good news: “Peak Demand.” Check out BP’s website, the statistical review. Oil consumption is falling in Earsia and North America, and that is before recent price run-ups. It is still increasing in the Far East, but that will likely change at $60 a barrel.
    2006 may mark history’s “Peak Demand” for fossil fuels, unless the price comes way down. It is far more likely we have seen Peak Demand rather than Peak OIl.
    If any other industry posted the numbers oil has in the last 20 years in the US and Europe, it would be called a “declining” industry. Instead, we get hysterical headlines when demand increases 2 percent. Many countries, such as Germany, Great Britian and France, use less oil today than in 1979. We are close, and we may get there soon. Demand is even going down in India! So much for the “Chindia” scare stories.
    China is the big problem. But at $60 a barrel, we probably have witnessed “Peak Demand” globally nonehteless. If demand goes up from here, it will be due to….lower prices. And that means glut.
    This reality should change all the scare stories about running out of oil. World fossil oil demand likely will not double in the next 32 years as routinely predicted; indeed it may fall. Plug-in cars and ethanol, and bio-diesel will likely sink OPEC and the oil industry.
    The big worry is that prices will fall so much we will go back to our profligate and polluting ways.

15. I’m with Odograph. Comparisons across industries can be fun but kind of meaningless. Profit margins:

    Microsoft – 26%
    ExxonMobil – 12%
    Walmart – 3%

    Is Walmart a poor business? Does a higher profit margin make Microsoft more “evil” than ExxonMobil? Do people unfairly hate ExxonMobil? Google search for company name and the word evil:

    ExxonMobil – 387,000
    Walmart – 1,470,000
    Microsoft – 31,400,000 (!!)

    How about pricing? I just came from an HEB grocery store that happens to sell gas. Here are prices for a 3 liter bottle:

    Cola – $0.99
    Gas – $2.20 (bring your own bottle)

    Both are produced in large factories using a primary ingredient that’s pumped from the ground. Did I just conclusively prove the oil companies are gouging?

    If you compare entire industries instead of cherrypicking a monopoly provider, overall software profit margins are lower than the oil industry’s. ESPECIALLY if you include the national oil companies.

    Odograph correctly notes the hue and cry over gas prices is mostly due to the near tripling over the last 8-9 years. Prices for other liquids (even Gatorade!) have not seen a similar increase. Since yesteryear’s lower prices hardly bankrupted the oil industry, people suspect they’re now being gouged. And they’re right. Should people focus most of their anger on the NOCs (and their own consumption) instead of ExxonMobil? Sure. But ExxonMobil puts their name is in large, illuminated letters directly above the offending price, so what do you expect?

    Bottom line, gas is not the incredible bargain the industry would have us believe. $1000 invested in a wind turbine produces enough energy to drive a plug-in hybrid 10,000 miles annually, displacing $1000 worth of gas. That’s a $1000 one-time investment for wind vs. $1000 EVERY YEAR for gas. Include the massive indirect costs (environmental, military) and the numbers become even more lopsided.

    Do the oil majors catch some undeserved flak? Sure. But they do sell an overpriced and polluting product, often on behalf of corrupt and hostile regimes, so some degree of vilification seems appropriate. At any rate, I fail to see how efforts to sanctify them by tossing around arbitrary statistics from completely unrelated industries can play any role in a serious discussion.

16. Did I just conclusively prove the oil companies are gouging?

    You failed to address raw material costs, taxes, and profit margins. So, no. Where I come from, water is a lot cheaper than crude oil, and taxes on gasoline are a lot higher than taxes on water.

    If you compare entire industries instead of cherrypicking a monopoly provider, overall software profit margins are lower than the oil industry’s.

    Absolutely false. I have seen the statistics across the entire industry a number of times. The industry as a whole does worse than Microsoft, but profit margins are still quite a bit higher than for oil companies. And my guess is that NOCs do pretty well, but I have never seen any statistics on their profit margins.

    Since yesteryear’s lower prices hardly bankrupted the oil industry, people suspect they’re now being gouged. And they’re right.

    So then I guess you would also be in agreement that anyone who sells a house in California is gouging? After all, yesteryear saw much lower prices. Is that how you define gouging?

    Cheers, RR

17. Nice job, Robert – you make some good points.

    You failed to address raw material costs, taxes, and profit margins. So, no. Where I come from, water is a lot cheaper than crude oil, and taxes on gasoline are a lot higher than taxes on water.
    You need to develop this thought a lot more. The federal government plays a central role in keeping water prices low, especially for those cities in the west that would otherwise be desert towns, and that includes Los Angeles.

    And then, of course, there are state government, local government and a host of other interested and affected parties. No wonder they say wiskey’s for drinking, water’s for fighting over. Here is a ramble about water in Southern California.

    The federal government also funds construction of dams and all sorts of other infrastructure. This means the consumer does not have to pay a market price for water, and water districts receive a lot of the infrastructure free of charge from Uncle Sam.

    In a free market, water in the western part of the US would be a lot more expensive than back east.

    Of course, Uncle Sam could bring you cheap oil, too, if you would accept MUCM higher taxes. And suboptimal oil exploration and refinery utilization.

    Odograph,
    Thanks for the humorous comparisons of oil and water. I just hope you weren’t serious.

18. Did I just conclusively prove the oil companies are gouging?

    You failed to address raw material costs, taxes,….

    I was being facetious, trying to show the silliness of such “single number” comparisons. I do not think my Cola vs. gas comparison conclusively proves anything, any more than your Gatorade vs. gas comparison. Sorry my point got lost.

    I guess you would also be in agreement that anyone who sells a house in California is gouging?

    CA house prices and oil prices shot up for similar reasons — artificial supply restrictions in the face of high demand. I’m not into putting gouger labels on anyone — homeowners and oil companies both sell at the market price. My goal is to find out why the market price is inflated and what, if anything, should be done about it.

    CA house prices are inflated because CA voters have collectively decided to restrict development. Since high CA house prices have little affect on residents of the other 49 states, I don’t see that anything needs to be done about it.

    Oil prices, on the other hand, are inflated primarily because the NOCs have not grown supply to keep pace with demand. OPEC output is at mid-1970s levels. Since that directly affects those of us outside OPEC I think something DOES need to be done, and I think that something is a rapid move away from cars that rely exclusively on oil.

    –doggydogworld

19. The correct measure for comparing 2 companies, in different industries, is *not* profit margin.

    A better measure is Return on Capital (profits adding back tax and interest/ debt + equity in the firm).

    Some industries are very capital intensive (oil!). They represent hundreds of billions of dollars invested. Because of the historic cost accounting convention, their capital employed is typically very much understated. A mine like the Falconbridge nickel mine in Sudbury is carried in the books at historic cost, yet it was opened up in 1910, when a dollar would buy roughly what $10 buys today.

    If you don’t make this calculation you are comparing apples and oranges.

    If you look at return on capital employed, my bet is the order would be:

    Microsoft – essentially a business with very little capital (if any). It’s all intellectual property rights, and the cost of developing software (which reduces the profit).

    WalMart (WMT’s genius is it pays its suppliers *after* its customers have paid it. Its so-called ‘stock turn’ or ‘innventory turn’ is that high. This significantly lowers the capital tied up in the business)

    Exxon-Mobil would be a long way down. They have billions of dollars of capital tied up in what they do.

    The replacement cost of Exxon-Mobil’s assets would be several times the cost in their balance sheet, in any case. New refineries just can’t be built due to environmental restrictions. New oil fields are deep offshore or in other inaccessible places, and would cost many times as much to develop.

    Also profitability at a company like Exxon-Mobil (or a mining company) is highly cyclical. Looked at over a 10 year average, they may have years of double digit margins and return on capital, but they also have years of huge losses.

    AFAIK Microsoft has never made a loss, nor WalMart (over a whole year, retailers normally lose money up until Thanksgiving, because their sales haven’t covered their huge fixed costs).

    Valuethinker

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