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.
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.