4/03/2008

Oil Chiefs Shift the Blame

Wow! Does anyone feel trapped by this endless ordeal over soaring gas prices? If you don't, then read the article "Congress Presses Oil Chiefs on Big Profits."

You can look at this conflict from two standpoints: a consumer or a producer. The consumer standpoint, as we all know, is extreme frustration over volatile gas prices and reported "big profits" for the oil industry at our expense. The last thing we want to hear after paying $3.29 per gallon at the pump is anything to do with increasing profits for oil producers.

As consumers, we know the complaints and frustrations of the American people; however, how much have we considered the oil industry as a business rather than the enemy. If you remove yourself from your consumer shoes and put on the hat of an executive in the oil industry, you'd be singing a different tune. Don't get me wrong--I am just as frustrated as the next person over the extremely volatile gas prices; however, as a business student I also recognize the reasoning behind some of the strategies practiced by businesses in order to grow and survive long term.

In the article, J.S. Simon made some "valid" points regarding the high profits of the oil industry. He pointed out that you have to put the profits in perspective relative to the investment requirements for the industry as well as the need for sustainability over down cycles that are likely to follow the market upswings.

As a business owner, what would you do? You are dealing with a potentially limited natural resource requiring a huge capital investment in order to distribute. There has to be some middle ground here: I understand that a business must be profitable in order to justify staying in business; however, does this justify virtual "rape" of the American economy?????

3 comments:

Reagan said...

The American economy will suffer more that what you think. We continually look at gasoline prices and see how high they are but what we neglect to look at is all the petroleum based products consumers use. I owned a business and our main product we sold was almost completely made out of petroleum based products. In 2006 we had a 55% increase in cost of goods sold. In the first two quarters of 2007 we had an additional 45% increase in cost of goods sold. We shipped our sales to all the 48 continental states and we contracted flat shipping rates with the carriers we used. Our shipping costs increased from $385 a unit shipped to $750 a unit shipped from the beginning of 2006 to July of 2007. We were forced to pass on most of the costs to our customers to maintain a reasonable profit. I bet you can guess what happened to the demand of our product. Needless to say the dramatic increase in the costs of petroleum persuaded me to get out of that business. If we want gasoline prices to go down the best thing we can do is decrease demand by purchasing less gasoline and petroleum based products. We will see a small decrease because of financial pressure but I don't think the population as a whole in the United States is willing to take the necessary action to permanently decrease the price of gasoline.

Grace said...

Good points Regan. I agree that we don't recognize all of the petroleum-based products we consume. We see the price at the pump and the increasing costs at the grocery store, but there are other avenues that are affected as well. You are right--we could take action and try to decrease our demand for gasoline, but I think we all find this easier said than done. Some may already be doing this by purchasing vehicles with better gas effiency, cutting down on road trips, and trying to use alternate transportation (i.e. your feet!). However, I think there is still a large market segment that hasn't felt the pressure yet--they are easy to spot in their monster trucks!

Dr. Tufte said...

-1 on Grace for multiple spelling errors.

How many people who complain about gas prices are offsetting that by investing in oil companies. If they are making such huge profits, there is nothing to keep you from getting a piece of the action.

The reason you don't hear about this is that oil companies aren't making huge profits in terms of rates of return. They are making big profits in gross terms because they are just big operations.

How many people do you hear about who are offsetting higher gas prices by using the futures and options markets? It isn't hard to that. My guess is that very few of those people who did are actually complaining. The complainers are those who are not quite as swift on the uptake.

Lastly, the real profiteers here are the governments, particularly the states. They are making far more in tax revenue off of higher gas prices than are the oil companies. But ... you won't hear them having Congressional testimony about their own behavior.