--- Bill Saidel <saidel@camden.rutgers.edu> wrote:
> And I still don't understand how the profit level can be so high
> even with
> high prices if a shortage (reduced supply and therefore reduced
> income)
> exists. I may be paranoid to some degree but it does seem like
> they are out to get us.
Well, I can *try* to explain this again...
Gasoline is volitile and will decompose if stored for long
periods. Therefore, inventory is moved FIFO - First In,
First Out. As the price of oil rises, the gasoline in
the refining and delivery system is still that made from
the cheaper oil. This in part explains why the rise in
gas prices *lags* the rise on oil prices, but to some
extent, the oil companies need to begin charging more for
the gas right away so that they can afford to buy oil at
the escalating price. Between the time the customer buys
the current batch of gas and the oil company buys the next
patch of oil (actually it's a continuous flow, but this
is simplified for the sake of explanation) there is money
accumulating in the bank -- profits. Those profits don't
stick around - they go into buying more expensive oil and
searching for new oil. They also finance bringing more
expensive means of production online. But the money is
there for a while, and that galls alot of folks - especially
those in government who think all "excess money" ought to
go to them by Divine Right.
The flip side to this is that as oil prices decrease, the
same mechanism causes oil companies to lose money, but
nobody seems to holler as much about that. If you have a
mutual fund or 401(k) you're probably doing pretty well
right now, and will take it in the shorts when oil prices fall.
David Breneman david_breneman@yahoo.com
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