The oil companies are out to…what really?

Orignially posted in 2007 on MySpace.

I’ve heard a lot of complaints and outright yelling about the state of things in the US. Being a somewhat skeptical person I often question if their claims are so cut and dry. The one most recently to catch my attention is the evility of the Oil companies. While I do know they have had a hand in the inception of this war I do not believe they are actively seeking to support, aggravate or prolong this war. Another statement people make is that since they are reporting record profits they are also dishonest and wrong. I have a few points to make.

Oil Rig BlowoutFirst let me explain the record profits by using my company as an example. Our prices are based on our costs. The euro went up recently against the dollar and because the cost of our European products increased we had to raise the price of the items affected. A 20% markup on $10 ($2) is more in total dollars than a markup of 20% on $5 ($1). So with the same percentage markup we are making more money on these items than we have ever before. Unfortunately since we do not know what the euro will do next year or even later this month we are not going to change our markup. If at some future date the price seems to be stable and the dollar/euro relationship seems equally stable then we might compensate by adjusting our markup.

Oil companies do the same thing and since the cost of the raw materials (oil) went up so does the price of its products. Now this profit margin has always worked to cover their costs in the past and changing the markup would take reliable data showing that increasing or lowering the margin would positively affect their market. Reliable data is data that doesn’t have inconsistencies in change. So, if the market is unpredictable and your company is stable, then making a change in the status quo would be a mistake. Now if the price of oil and the status of the oil supply were to become much more stable, only then would a reevaluation of the profit margin would be considered and acceptable. Since this is not the case the status quo is maintained.

As to their motives. Most of their raw material supplies are linked to politically unstable areas. To continue to do business it would be reasonable to support any group that has an interest in stabilizing these areas. The more powerful the group the more likely they will stabilize these areas. Unfortunately, as with all groups you don’t have complete control of you cannot predict the methods they will use. Let’s say you support a politician who promises to help improve your community with a campaign contribution. They then tear down an underdeveloped area containing your favorite sandwich shop and your local church to build a Wal-Mart you as their supporter can hardly be blamed for supporting them.

Gas PricesAnother point on motives. Cost of production. Now the costs to refine oil have remained somewhat the same (adjusting for inflation) over the last decade, but we, the gasoline buying public, are not really educated on how this works. So, when regular gas was $1 and premium was $1.20 we bought the cheaper one because it was about 20% less. So now that gas is $4.00 the we buy it because the premium is $4.80…wait, no it’s not. Premium gasoline is $4.20. Why? Because the difference between processing oil to regular gasoline and premium gasoline has remained pretty much the same. Now they could have increased the cost of premium gasoliine to $4.80 and none of us would have complained. We would have assumed that if it was $1.00 and $1.20 then increasing to $4.00 would yield $4.80 respectively.

How is this important. They’re not trying to screw you. In all our anger and paranoia we’ve blamed this war on the greediness of the oil companies. The orchestration of the war being a very complex thing: get a puppet elected, get the congress to agree, keep the public from seeing all of this, etc. And they seem to have missed this one simple thing to screw us with? I doubt the idea that the oil companies are behind this war, I doubt they are trying to screw us out of our money and I don’t doubt that at this price difference I will be buying regular gas anymore.