Someone please explain....

[kaorder1999]

If the gas companies are charging more for gasoline because THEIR cost is going up then why is Exxon constantly close to record profits?

[LH Panther Mom]

And there's the $64,000 question. And that's also the same amount that it will take you to fill up your vehicle in another year. :eek:

[Blastoderm55]

Higher costs, higher revenue, higher profits. But at what margin? :thinking:

[Adidas410s]

Let's break it down into a hypothetical (so look at the story...not the hypothetical numbers) math problem. For the purposes of this problem, we're assuming that the oil company is operating at optimal efficiency levels and nothing else can be done to improve their per unit cost.


Say they're getting 100 barrels of oil per day from drilling and exploration. It costs them $30/barrel to refine the oil into gasoline. So their production/refining/etc cost to get the oil into a sellable product is $3,000. Now they take their oil to market and the market price is $40 barrel. They sell their oil and earn $4,000. That gives them a net profit of $1,000. Now see the market price rise to $120 barrel. They earn $12,000 in revenues and $9,000 in profit.

That is the simple math behind rising prices and rising profits.

Now let's look at what happens when costs rise due to the US Dollar devaluation.

You have your 100 barrels of oil. Now the dollar devalues to a point where your refining costs go up by 50%. So it now costs you $45/barrel to take your product to market. The market price is $120/barrel. You now earn $12,000 in revenues but only $7500 in profit.

Moral of the story...as long the price is increasing at a right greater than your cost of production is increasing...you have a larger operating margin and thus greater profits.

As far as how all of that relates to the price of gasoline...an oil company does the same thing that a steel company is doing right now. When the cost of raw materials goes up 5%, that 5% extra that the manufacturer is paying is passed on to the service center of fabricator...who ultimately passes (or maybe shares) the increased cost with the consumer of the steel. So the price goes up...but the manufacturer is still able to pass along the price to their customers...who ultimately have to either pass it along to the end consumer or split the burden with them. For a nice graphical impression, consider the stock price chart below:

http://xs227.xs.to/xs227/08184/stldvsrs189.jpg

STLD is Steel Dynamics, a US steel manufacturer.
RS is Reliance Steel & Aluminum, one of the largest steel service centers in the US.

As scrap prices have gone up in the past year...STLD is seeing a record stock price. RS on the other hand is doing it's best to stay at the same level of profitability with higher costs.

[Phil C]

"The fat cats are raising the prices for profits and more money in their pockets." said the Sinton Godfather while on his way to the snack bar for a cup of coffee.

[waterboy]

Originally posted by Adidas410s
Let's break it down into a hypothetical (so look at the story...not the hypothetical numbers) math problem. For the purposes of this problem, we're assuming that the oil company is operating at optimal efficiency levels and nothing else can be done to improve their per unit cost.


Say they're getting 100 barrels of oil per day from drilling and exploration. It costs them $30/barrel to refine the oil into gasoline. So their production/refining/etc cost to get the oil into a sellable product is $3,000. Now they take their oil to market and the market price is $40 barrel. They sell their oil and earn $4,000. That gives them a net profit of $1,000. Now see the market price rise to $120 barrel. They earn $12,000 in revenues and $9,000 in profit.

That is the simple math behind rising prices and rising profits.

Now let's look at what happens when costs rise due to the US Dollar devaluation.

You have your 100 barrels of oil. Now the dollar devalues to a point where your refining costs go up by 50%. So it now costs you $45/barrel to take your product to market. The market price is $120/barrel. You now earn $12,000 in revenues but only $7500 in profit.

Moral of the story...as long the price is increasing at a right greater than your cost of production is increasing...you have a larger operating margin and thus greater profits.

As far as how all of that relates to the price of gasoline...an oil company does the same thing that a steel company is doing right now. When the cost of raw materials goes up 5%, that 5% extra that the manufacturer is paying is passed on to the service center of fabricator...who ultimately passes (or maybe shares) the increased cost with the consumer of the steel. So the price goes up...but the manufacturer is still able to pass along the price to their customers...who ultimately have to either pass it along to the end consumer or split the burden with them. For a nice graphical impression, consider the stock price chart below:

http://xs227.xs.to/xs227/08184/stldvsrs189.jpg

STLD is Steel Dynamics, a US steel manufacturer.
RS is Reliance Steel & Aluminum, one of the largest steel service centers in the US.

As scrap prices have gone up in the past year...STLD is seeing a record stock price. RS on the other hand is doing it's best to stay at the same level of profitability with higher costs.
Good work Adidas! What are you.......an economist? Stock market analyst? Or did you sleep at a Holiday Express last night?:D

You're right on all accounts. God forbid ANY company to cut their margins just because costs go up......gotta keep those stockholders happy no matter what! The costs of everything is on the rise.....mainly due to 2 big factors: the declining value of the dollar and the rising price of crude. Who didn't plan ahead? With over a billion Chinese and over 600 million in India now able to find affordable autos (thanks to our country's exported jobs and raw materials), and causing a supply crunch, it looks like we (everyday Americans) will have to help pay for this negligent behavior by our powers that be. With the so-called world economy, the dollar is getting more and more diluted value-wise which will hurt everyone except those in the top 1% of income.