How could American Oil Companies lower the price? Or Could they?

[chaosagent]

Could American Oil Companies lower the price of Oil, even if they wanted?

The last figures I saw showed that American oil companies controlled 25% of the world market and 40% of the US Market.

Let's say that under Congressional pressure all of America's oil companies got together and said they were going to sell their oil at $50 per barrel.

What would happen?

My thought is that the rest of the world would immediately buy up all their output to resell at the world price and then nothing else would change.

Anyone have any other scenarios?

[Bloody Sam Roberts]

My thought is that the rest of the world would immediately buy up all their output to resell at the world price and then nothing else would change.

I'm not so sure. First of all, the output from the refining of crude does not result in 100% gasoline. There are other products. But let's say they decided to sell their gasoline at a 50% reduction. This savings would go to the distributors they sell to. It would be up to them and everyone else in the food chain to pass the savings along to the end user.

Personally, I'd be happy if they made a contractual arrangement to do this with diesel fuel only. Cut the price in half and guarantee that all involved would pass the savings on to the end users and watch what happens to consumer prices. It would be a nice offset to the price of gasoline.

The downside is that it would cut into the funds needed for exploration and development of new drilling operations which takes HUGE outlays of capital.

[Koblenz]

Exxon, Marathon, etc. pump oil out of the ground. Then they transport it via tanker or pipeline to a refinery. At the refinery, oil is made into gasoline, diesel fuel, lubricants, etc. Depending on the type of crude oil, the mixture of what you get will be different (oil from Texas is not exactly the same, chemically, as oil from Saudi or the North Sea).

After they refine it, they send it via tanker to the local gas station or to the airport to go into an airplane, or whatever. I have obviously simplified the process.

So your question was if they control every step of the process, why can't they set the price? Well, a couple of things to consider. First, they may or may not own the fields where they pump the oil out of. They may have to pay a commission to the Saudis or the Texas dude or whomever. Second, the price of gasoline is set by supply and demand. Right now, it's gotten to around $4.00 per gallon. So this means that if you could buy oil for $125 a gallon, it'd be profitable to refine it (and there are some independent refineries). So because people are willing to pay $4 per gallon to buy gas, refineries are willing to pay $125 per barrel for crude oil. Now, if Exxon or whomever lowered their price arbitrarily to say $100, they might still have to pay the Saudis $120 or so for drilling for oil.

But suppose Exxon has some of its own property and it pumps oil from there. Well, if it set the price of crude lower than the market price, everyone would want it. Refineries - foreign and domestic -- would be doing all they could to get their hands on the stuff. This includes bidding the price up from $100 to $105, then onwards and upwards until Exxon crude was priced right where everyone else's was priced.

It's the same as if any producer in any industry set their price low. People would flock to buy their product. If they could keep up, great. If not, then the price would go up. Exxon couldn't keep the price low because they don't have enough spare capacity.

[Positive]

"When something is extracted from federal land, like oil, how much of a cut does the government get?"

Don't know the answer to that specific question, but I do know that XOM pays a total of about 40% of its profits in taxes.

[Tatze]

I would look at it as an opportunity to undercut the competition and bring in more business. $25 was just an example. My point in using that low a number was that oil companies were profitable when the cost of a barrel of oil was that low.

I understand charging what you can, in this case the market price, but I’m not understanding the internal workings of it. Does Exxon or any oil company own every step of the process? Drilling, refining, corner station? If so, the only thing that changes is the amount they charge themselves for the oil. And if so, then their profit margin is not the 8-10% they are reporting. Some obviously buy oil from foreign sources. But I’m asking about the ones that drill here and sell here. Do they sell to themselves or is some step of the process a different company?

I guess the real difference is that oil is a commodity, not just some random product. The economics work a little differently.

[TLI]

Anyone have any other scenarios?

Yep. Sure do. The solution lies in attacking the problem from various directions.

Explore and drill, east and west coasts and Alaska.

Develop the reserves contained in the Bakken Formation

Build modern technology refineries

Build Nuke power plants

Build Coal power plants

Open the clean coal deposits Klinton “closed” which contains 62 BILLION tons of environmentally safe low-sulfur coal from the Kaiparowits Plateau in Utah.

Slowly but steadily increase the Corporate Average Fuel Economy (CAFE)

Tax breaks to companies developing bio-diesel techniques that create fuel from cheap waste.

But noooo, we get ethanol. And from CORN no less.

And the enviro-wackjobs demand this...

If the President were to announce this tomorrow and clearly state that due to the necessity of averting a disaster to the economy and a threat to National Security he will emplace Executive Orders that will not only immediately initialize this overall program but exempt it from excessive or unnecessary environmental regulatory agencies rules where do you think the hedge fund speculators will go, thus dropping the market price of crude by 20 - 40 bucks?

They will go straight to that new market of energy production and the companies that will build it, the new technologies that will emerge, as a well functioning "new energy industry" SHOULD be that inviting. Not only will the price start to drop immediately, the very nature of new industry gains and emerging technologies will keep the price down. And, as always, when other nations began to utilize the new and more efficient (higher profit margin) techniques the overall demand will slow.

[#1CTYankee]

"Busch should write an executive order to this end and star drilling on Federal lands."

I've thought about this time and time again, the time has passed.

The oil companies would barely get a drill into the ground before the next Democrat president countermanded the order.

The sad fact is we will need to be in a crisis before any drilling is allowed. (Not far off actually)

[count-your-change]

Why not think of increasing the cost of dollars instead of decreasing the cost of oil?
A dollar now costs 130th. of a barrel of oil. If you want my dollar I charge 130th. of a barrel of oil and if dollars were in shorter supply I could charge more oil for my dollar.
But as it is dollars are easier to produce than oil so there is an over abundance of what I have to sell (dollars) and an under abundance of what the sellers have (oil).
Since we know where oil comes from and why there is not more of it, the question is, where do all these dollars come from and why so many are being produced?
That would be a question the oil companies (and everyone else) should ask.

[Ararat]

I was under the impression that the price of oil is decided on the Mercantile Exchange in New York. Oil is a commodity.

[Tatze]

Thanks! That did explain a lot.

Now, tell me where I am wrong with these scenarios. I’m using hypothetical numbers to ask the question.

Oil Market Price of $20/barrel
Company X spends $18 to drill 1 barrel of oil, sells it at $20/barrel. Profit = $2/barrel or 10%

Oil Market Price of $100/barrel
Company X still spends $18 to drill 1 barrel of oil, sells it for $100/barrel. Profit = $78 or 78%.

Granted, these scenarios are very simplified and do not take into account when the company has to buy additional oil from other sources. But what it does say is that whomever is drilling is making some serious profits. So I’m not so sure I buy the oil companies line that they are only making 8-10% in profit.

If they are drilling, their profit margin has increased because their cost to drill does not change with the market value. I think they are using some creative accounting to show the same 8-10% profits.

And I concede that they are beholden to the world market price, or else they throw off the supply and demand and the price of their product would just be bid back up to world prices.

For the record, I am not trying to suggest any punitive actions against the oil companies. They are entitled to charge and profit whatever they can. That is capitalism! I am just trying to get a better understanding of the process. It is not quite as simple as making a product and selling that product. There are other variables and forces at work.

[#1CTYankee]

http://www.yourownpower.com/

[#1CTYankee]

Check my link on post 30, free energy.
Follow the link, a huge area of geothermal energy is ours for the taking.

These units run at 90% efficiency (vs 33% off the grid) and the only real maintenance is filer changes.(dirty water)

[TLI]

Good point. I will put it in the list.

Thanks!

[HardStarboard]

>>>Freepers are suggesting that the U.S. become a Socialist Dictatorship so that they can put cheap gas in their cars. <<<

It ain't only Freepers. Did you watch any of the Senate hearings on "Big Oil" yesterday?

It was a stunning display of 1) socialist thinking on the part of the Senators, and 2) and absolute lack of understanding of basic economics.

[#1CTYankee]

Thanks!

Adding up alternatives could really give us a punch, I have another one in mind I'll post to you at a latter time.

Cheers, Yankee.

[#1CTYankee]

" lack of understanding of basic economics."

Tough call, pandering to the base, grandstanding or just idiots.

Pick your poison.

[CharlesWayneCT]

If you had a skill, and you found out others with your skill were paid $30 an hour, would you offer yourself for $10 an hour simply because you thought you could live on that much?

[CharlesWayneCT]

70 days is probably long enough for us to take over a country with oil wells.

[CharlesWayneCT]

Oil is mostly sold in the market, not by private contracts.

Each day everybody who wants oil goes out and makes bids on what they will pay for oil, and everybody who has oil puts out bids for what they will accept. If nobody will by at a price, someone with oil will lower their price a bit to sell. If more people are willing to pay $125 for oil, than there is oil to be bought for that day, that’s the price it will be, even if you were willing to sell it for less.

It’s an auction, and the oil goes to the highest bidder. And right now there are people willing to buy up the rights to oil months down the road for a price that seems absurd, just so they can be sure they have some.

It’s the same reason your houses all went up in value — someone was willing to pay that much. You’d put a house on the market thinking you’d get $400,000, but immediately 5 people would put in a contract, some for thousands more, and you’d pick the best contract, and suddenly all the houses were worth $500,000, and then $600,000.

And then one day nobody wanted to BUY a house for $600,000. And sellers realised that $500,000 was still making money, so they would sell to the person who offered. Then it was $450,000, and then $400,000, and then $350,000.....

But right now there isn’t a lot of extra oil sellers sitting around begging people to buy. The cartel controls the supply pretty well, because no single member state can really outproduce their quota by enough to matter.

If one country not in the cartel could produce an extra 4 million barrels, and offer it up for $120 a barrel to take over market share, then the cartel would increase supply and the price would fall. But nobody has the excess capacity, China is buying up every last drop of oil with the trillion dollars we gave them for crappy consumer goods made with slave labor, and for a while we will all pay more for our gasoline.

[Radix]

I occasionally will lurk in threads dedicated to Economics. It is always fascinating to learn from others out here on FR.com.

That was a terrific post.

Thank you.

[CharlesWayneCT]

But you can’t drive your car on geothermal energy. We need to develop mass production electric cars, then we can use the electric grid and on-site electric generation to power our cars.

Until then, nothing we do will really cut the price of gasoline, because we all still drive our cars with gas at $4.00.

I had hoped that by the time the price got over $3.00 the poor people and people with SUVs would have to stop driving, which would reduce demand and keep the price low. But apparently people will pay ANYTHING to get from point A to point B.