Thats along the lines of the question I have. I understand that oil on the open market sells for the market value. But if Exxon/Mobil, or Marathon, or Oil Company X controls every step of the process, drilling, refining, etc, why can’t they set the price.
If Company X can drill it themselves for $25 a barrel, and they refine it themselves, and sell it at the corner station themselves, can they not base their price on $25 a barrel? Or do they have to sell that oil to themselves for $135 a barrel for some reason?
Or do they purposely not own the refining company for just this reason?
What am I missing?
WHY would any company sell their oil for $25, if the world price is $125?
Are you going to sell your house for 1/4 of the price of the other houses on your block, to be a nice guy?
Earth to Tatze.......come in Tatze.....
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.
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?