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.
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.