Whose fault is it?

[owequitit]

http://news.yahoo.com/s/ap/20070516/...RJzpuZ21sb.3QA

http://news.yahoo.com/s/nm/20070516/...ss_gasoline_dc

Whose fault is it?

Discuss. And keep it civil.

[accordaffair]

The only problem I have is that the oil compaines claim they aren't responsible for the high prices, but they are posting the highest profits ever. They could lower the prices some by taking in less profit.

Does that not make sense?

I hope the price continues to rise to the point that it discourages people from driving such ghastly inefficient vehicles. A 90 pound woman driving in a suburban by herself makes my blood boil.

[shanleycb7]

the way our society is moving forward im not too sure how much longer people can survive, with the price of living slowly rising(and how gas prices effect almost everything we buy). our country is going into a resecsion and im not too sure when, or how were gonna get out of it. its all the oil companys just tryin to make more of a profit. all the oil companys are posting record highs in revenu and sales- the whole thing just makes me angry...

[owequitit]

The only problem I have is that the oil compaines claim they aren't responsible for the high prices, but they are posting the highest profits ever. They could lower the prices some by taking in less profit.

Does that not make sense?

I hope the price continues to rise to the point that it discourages people from driving such ghastly inefficient vehicles. A 90 pound woman driving in a suburban by herself makes my blood boil.

It seems correct on the surface, but there are so many other variables in play, that it is not entirely correct.

To some extent, they are trying to forcast in the future, so there is a margin of error there that doesn't appear until the results actually appear.

Shooting in the dark of sorts. Of course that is the case with any company.

They make "projections" (foward looking assumptions) based on what they think will happen. Since reality doesn't usually show up in the EXACT same way that we predict there is some variance.

As publicly traded companies, they have a duty to try and be profitable. If they make their projections, and then market pricing changes, it can have a profound effect on their balance sheet at the end of the quarter.

Also, lets discuss the other element that is beyond their control.

Supply and Demand. The fundamental #1 rule of economics, and capitalism.

This rule is very basic.

Since profit is based on what it costs to make something, and what that item sells for, our profit is based on supply and demand.

What is Supply and Demand?

It is how many of that item we have, versus how many people want to buy that item.

So, we will use Ferrari and the Chrysler Pacifica as examples, because they work well.

Ferrari sells a few thousand cars per year TOTAL.

But there are several HUNDRED thousand people per year who want to buy Ferrari's.

The end result is that not only can Ferrari charge 200+K for a car, but people will WILLINGLY line up and wait for several years to get that car, even after they pay that much.

The cost for Ferrari to produce that number of cars has not changed, but the price it sells for does.

This results in Ferrari making a HUGE profit per car, because the demand is far greater than the supply.

Now lets use the Pacifica.

It is somewhat cheaper to produce than the Ferrari, but the profit is tiny comparatively speaking.

Why?

Because nobody wants them. Supply exceeds demand.

So in order to sell as many cars as they produce, Chrysler has to bring the price down, so that demand will increase to match supply.

This results in profit going down.

So, if you take this same law of economics and apply it to the current situation with gas prices, what do we get?

1) Supply is down. We have some refineries from Katrina that are not fully operational yet. We have had several other refineries have to go down for routine maintenance, which has cut supply further, and we have had a string of mishaps that have led to still other refineries to operate at less than maximum capacity. For instance, there was one that caught fire in January, and has been down for months.

We HAVE to maintain the refineries. If we don't they will fail. Not good.

Some of those refineries went down for maintenance because they haven't had any since Katrina.

2) Fixing supply is not as easy as pumping more oil.

Even if we pump more, we don't have the capacity to refine it.

You will notice in one of the articles, they mention refinery capacity, and how the US has been adding to existing refineries to add the equivalent of 1 refinery per yer.

Why not just build new refineries? The capital risk is too great for the oil companies.

The certification process costs about 20 years and BILLIONS of dollars. Then they have to spend a couple more billion and a couple more years actually building the thing.

In 25 years, demand may not justify the existence of that refinery, in which case the oil company just lost billions unnecessarily.

Now you can criticize this all you want, but the fact is that EVERYBODY makes these same kinds of rational decisions every single day.

If you don't think you are going to need or use something, then you most likely don't buy it.

That is a rational way to do business, like it or not.

3) Demand. This is where I get confused.

The market place does not behave rationally in this situation.

Typically speaking, as prices go up, demand goes down. The trick to maximizing profit, is to find that key point where demand is high enough to sell as many as possible of the product, and where supply is low enough to keep profits up. It is tricky.

Here is where it is weird. As the prices go up and up and up as the demand stays the same. Demand temporarily decreased 6.5% when prices hit $3 a gallon, but now that we are approaching $3.50-4.00, demand is right back where it was BEFORE we hit $3.00 a gallon.

So we have a situation where the supply keeps going down, but the demand stays the same...

This creates a higher fair market value price for the gasoline, because demand exceeds supply. Since the approximate cost to refine crude oil stays about the same, but everyone is paying more, guess what? The profit per unit goes up.

Just like Ferrari vs. Chrysler.

More people want gas, than there is gas.

If you are selling a car, and one person wants to pay $1,000, and another wants to pay you $1,500 for the exact same car, who are you going to sell it to?

That is the law at work on the microeconomic scale (the little picture - i.e. YOU). It applies the same on the Macroeconomic scale (the big picture - i.e. EVERYONE LIKE YOU).

4) The article mentions that the market doesn't not behave rationally, because people depend on their transportation to generate income. That is mostly true. They don't say it in those exact words, but that is what they allude to.

So people can't just buy less gas, because they MUST use a certain amount just to get to and from work.

That makes sense.

But that isn't the irrational part.

THIS is the irrational part.

They are still buying $50K SUV's that get 9mpg when a $20K car that gets 30-40MPG would do the same job just fine.

Why?

If you compare a 9MPG SUV vs a 40MPG car, on the same 100 mile route, you will spend $7.50 fueling the car and $33.30 fueling the SUV over the same 100 miles. That means that not only would that car save you $25.80 every 100 miles, but the $30K difference in purchase price would also pay for an additional 10,000 gallons of gas at $3.00 per gallon.

I figured the cost of fuel on that 100mile trip at $3.00 per gallon.

As gas prices go up, the difference becomes bigger and bigger.

At $4.00 per gallon, the car driver would save $34.00 over the SUV per 100 miles driven.

Now if you think realistically about the number of miles you drive, it adds up. I would save about $ 50 bucks a week, or $200.00 a month.

I haven't changed my standard of living at all, I simply consumed fewer resources doing it.

Then, god forbid you live in an urban area, and take the bus, the train, or a carpool.

You can take that $26 (at $3) savings per 100miles and quadruple it to $104 per 100 miles just by putting 4 people who used to drive Suburbans in 1 car that gets 40MPG! That could be $400-500 per WEEK!

The problem is that we don't want to give up our "freedom" to come and go as we please.

We also don't want to pay the prices.

Do you see where we are going to have an issue?

[owequitit]

the way our society is moving forward im not too sure how much longer people can survive, with the price of living slowly rising(and how gas prices effect almost everything we buy). our country is going into a resecsion and im not too sure when, or how were gonna get out of it. its all the oil companys just tryin to make more of a profit. all the oil companys are posting record highs in revenu and sales- the whole thing just makes me angry...

That is not true.

See my post above. It isn't that simple, and anybody who does themselves the disservice of thinking so, has put themselves in a compromised position.

Inflation is the side effect of a healthy economy. There is no free lunch, and there is NO SUCH THING as having your cake and eating it too.

Everything that has an up, also has a down.

Inflation is the down that is responsible for your increased cost of living.

Of course the solution to the problem is so simple, you wouldn't believe me if I told you.

[sackingz123]

gas prices isnt a new topic. why is this discussed always? Live with it.

[accordaffair]

When people are asked this question, they say they won't drive a tiny jap car, they want a real car with enough room for Andre the giant. Most of these people don't need the room afforded with an over-sized SUV, but they claim it makes them feel comfortable. To me it seems more like a cowardly way to make them feel superior to other drivers in smaller vehicles. They don't have the balls to live with the strength to do what they want, say what they mean, and establish respect with others around them, but they wish they could. The huge vehicle, combined with other aspects in their life, reflect this subconscious desire.

THIS is the irrational part.

They are still buying $50K SUV's that get 9mpg when a $20K car that gets 30-40MPG would do the same job just fine.

More money than sense. Few to none of the people who buy SUV's look at their purchase sensibly, with this point of view. And it seems that every year it gets worse and worse. 10 years ago, people who needed the room were buying Station wagons and Van's and they were actually using them.

They are no longer buying big vehicles for utility, they are buying them for the reason I said before. At least that's the way I see it.

[accordaffair]

I also wanted to ask you, owequitit, based on your first response, it sounds like you feel things are going exactly as they should, and there is no reason for controversy. Is that true?

(Sorry if that sounded like a douchebag question, I don't mean it that way)

[gloryaccordy]

I also wanted to ask you, owequitit, based on your first response, it sounds like you feel things are going exactly as they should, and there is no reason for controversy. Is that true?

(Sorry if that sounded like a douchebag question, I don't mean it that way)

I'm with Scott... supply and demand

And as far as why people are still using SUVs... it's because they're dumb, and it's easier to complain and place blame than admit you're wrong and take action.

There's a family that lives next to my parents, and it's been funny to watch their progression of the family vehicle. They have the husband and wife, and 3 daughters... they've gone from an Expedition, to an Aviator, to the Lincoln Mazda6...

I want to empathize with people because I know there are people out there who need to drive to make a living... i.e. farmers, cab drivers, cops, etc. But odds are they are related to, married to, know someone, or ARE the idiots who commute in Suburbans.

In any case, even with 93 at $3.50, I'm not complaining. But then again, I don't drive to work

[owequitit]

When people are asked this question, they say they won't drive a tiny jap car, they want a real car with enough room for Andre the giant. Most of these people don't need the room afforded with an over-sized SUV, but they claim it makes them feel comfortable. To me it seems more like a cowardly way to make them feel superior to other drivers in smaller vehicles. They don't have the balls to live with the strength to do what they want, say what they mean, and establish respect with others around them, but they wish they could. The huge vehicle, combined with other aspects in their life, reflect this subconscious desire.



More money than sense. Few to none of the people who buy SUV's look at their purchase sensibly, with this point of view. And it seems that every year it gets worse and worse. 10 years ago, people who needed the room were buying Station wagons and Van's and they were actually using them.

They are no longer buying big vehicles for utility, they are buying them for the reason I said before. At least that's the way I see it.

I would agree with this. I have friend with a Suburban. They pretty much quite driving it when the prices went up to $3.00 per gallon.

But they didn't sell it.

So I asked why, and she said that she liked being "up high."

A minivan could have easily doubled the gas mileage and still put her up high.

Subconciously, I think she feels more accomplished while driving it.

Of course, sitting up higher doesn't do a damn bit of good, if you aren't driving it anyway.

[phatdoughnut]

I would agree with this. I have friend with a Suburban. They pretty much quite driving it when the prices went up to $3.00 per gallon.

But they didn't sell it.

So I asked why, and she said that she liked being "up high."

A minivan could have easily doubled the gas mileage and still put her up high.

Subconciously, I think she feels more accomplished while driving it.

Of course, sitting up higher doesn't do a damn bit of good, if you aren't driving it anyway.

JAJAJAJAJAJAJAJAJAJAAJAJAJAJAJAJA

[owequitit]

I also wanted to ask you, owequitit, based on your first response, it sounds like you feel things are going exactly as they should, and there is no reason for controversy. Is that true?

(Sorry if that sounded like a douchebag question, I don't mean it that way)

I am just making a point because I think it is funny when Americans bitch about not being able to have everything they want when they want it.

They always want a cop out, a scapegoat or a conspiracy that will allow them to sleep better at night knowing in their mind that they can't do anything to fix anything, and are responsible for nothing.

Then they get up and get into their Suburban and get 9 MPG while bitching about the price of gas.

Things ARE going exactly as expected.

Demand is up, supply is down, the result is prices are up. As much as it might seem like it, it isn't rocket science.

But, what is the first thing that 99.9999999999% of people in this country will say?

"The oil companies should lower their prices."

Now put yourself in THEIR shoes.

You are selling that car for $1500, and the person who was willing to pay $1,000 comes back and explains to you that you should sell the car to them instead because they are hard working people, and you shouldn't make that much profit on the car.

What would YOU say?

Even if they deny it, I know what ANYONE would say in that situation. They would be stupid not to.

Funny how the shoe fits on the other foot...

[owequitit]

gas prices isnt a new topic. why is this discussed always? Live with it.

Instead of living with it, why not get up off our asses and try to make an actual change that will allow us to not have to live with it?

Over time, yes, the prices will go up. But we aren't exactly helping matters either.

[owequitit]

Of course the solution to the problem is so simple, you wouldn't believe me if I told you.

I guess I will answer my own question...

"So what is the solution then if it is so simple?"

It is very easy.

Since inflation is primarily responsible for our cost of living increase, then we have to make our income grow MORE than inflation.

Unfortunately, as long as you are working for someone else, that probably won't happen, unless you are at some VERY high level of the company, such as CEO.

Of course those are performance based jobs, so it isn't exactly a cake walk, even though, it seems like it.

"Well what do I do if I am in a position where I DO work for someone else? Am I basically screwed?"

Absolutely not!

It is very simple. The rich get richer and the poor get poorer because the rich invest their money in a manner that allows it to grow FASTER than inflation. So when the year ends, they are further ahead, as opposed to further behind.

There are a lot of ways to do this, but one of the most common is to invest in a good mutual fund.

"What is a Mutual Fund?"

It is a collection of stocks from all sorts of different companies. The companies are chosen to maximize growth regardless of market conditions.

The company that creates the fund takes all the money that people invest into it, they pool it all together, and they use this large sum of money to buy many stocks. Even though, each person only invested a small amount.

"Yeah, but if they are buying stocks, doesn't that mean that there is a risk that I will lose money?"

Yes, it absolutely does.

Of course, if you were to not invest at all, there is no risk that you will lose money.

It is pretty much a 100% certainty.

"Well, what kind of sacrifice would I have to make to make this happen?"

It depends on a lot of factors, but basically you will have to not spend money you are currently spending.

It could be that Starbucks every morning.

Or it could be that Cable TV every month. Maybe you can just drive a little less and put the gas savings into your investment of choice.



A Mutual Fund is favorable for many because they range from mild to aggressive, and usually cost less than $100 per month.

If you start when you are 20 and put $50 a month into a GOOD, SUCCESSFUL one, and don't touch it until you retire, you will have somewhere in the vicinity of several million dollars waiting for you. Assuming no catastrophes.

Had you not invested it at all though, you are pretty much guaranteed to have $0 waiting for you.

Of course, you could invest more for the same amount of time, and be better off. Or you can invest the same amount longer. The big key to this is LONG TERM. I.E. Start when you are young, make a small sacrifice, and it can payoff handsomely in the future.

There are good mutual funds and bad ones, but as long as you take the time to do your research and learn the information, you should be able to choose wisely.

The truth of the matter is that there are a lot of different and effective ways to invest your money. The Mutual Fund is but one of these methods.

But they all have 1 thing in common. You take your money, and rather than spending it on discretionary items, you invest it every month, and it works for you instead of the other way around.

Rich people can spend it, because their relative income is larger, and therefore so is their relative budget.

I find it amusing when people complain about the system and being "slaves to the man" and yet for the majority of them, they consistently put themselves in a postion to be a slave to the man.

Why? Because it is less effort and allows us a little more instant gratification now, instead of a whole lot of REAL gratification down the road.

[Night Wolf]

The only problem I have is that the oil compaines claim they aren't responsible for the high prices, but they are posting the highest profits ever. They could lower the prices some by taking in less profit.

Does that not make sense?

I hope the price continues to rise to the point that it discourages people from driving such ghastly inefficient vehicles. A 90 pound woman driving in a suburban by herself makes my blood boil.

same here