The Truth About Oil Prices

The end of the I.C.E. age is neigh Surya.

When you have a multi-billion dollar business model to defend, you make sure that no one makes a better engine, no one does enough research on things like solar power, fuel cells, etc. Think about it: a common street criminal may kill someone over a few hundred or thousand dollars; how far do you think executives protecting a $10-billion-a-quarter business will go? Do you think they'll let some scientist take that away from them? And when you have the backing of the government and all of it's nefarious powers, are you really surprised we still burn oil to move cars while in other technological areas, things like Moore's Law functions? Just think: 150 years ago there were no light bulbs and look where computers and communications are today. Does anyone realistically think there are technological reasons we can't be driving way more efficient cars -- at the very least? Follow the money, as usual, and you'll find your answer.

It's the path of least resistance. Oil is very energy rich compared with other sources and for most of the 150 years easier to obtain as well. Engines have made huge progress on their use of fuel, today's vehicles get much further, faster, with better hauling capacity at less fuel than 20 years ago much less 150 years ago. So a company looking to make things better has been more likely to make small changes and advances making current technology for the internal combustion engine better than try and scrap it and start over.

It's not as pretty as the conspiracy theory but it makes sense with human nature. As oil become relatively more expensive an energy source and information technology makes science cheaper there will be other ideas experimented with and eventually adopted. This will be for the same reason as the earlier decisions, it'll be the easiest course with the highest return.

KyleN

It's the path of least resistance. Oil is very energy rich compared with other sources and for most of the 150 years easier to obtain as well. Engines have made huge progress on their use of fuel, today's vehicles get much further, faster, with better hauling capacity at less fuel than 20 years ago much less 150 years ago. So a company looking to make things better has been more likely to make small changes and advances making current technology for the internal combustion engine better than try and scrap it and start over.

I.C.E. engines are already at maximum efficiency, there is some room for power to weight Ratio improvements. It still takes x amount of Kilo Joules to move a 1 tonne object y far.

I.C.E. engines are already at maximum efficiency,

How so? As KyleN points out, improvements are constantly being made.

You could have said that maximum efficiency was reached twenty years ago with the introduction of electronic fuel injection and multi-valve technology. After an era of big block, carburettor fed, two-valve pushrod engines, that seemed like a huge leap which might have made one think that there was little more to be gained in efficiency. Very recently, a few companies are moving toward direct injection which provides far better control over air-fuel mixture. More power, better mileage. Better efficiency.

The internal combustion engine is not at peak efficiency yet.

Praise be to the gods of science and technology I Spy. For the sake of the atmosphere and the planet I hope you're right.

Big oil and the automakers are working together, with the government....

Why the hell do you think a VW Bug got 40 MPG in the 60's and now our hybrids are lucky to reach the same numbers?

I wonder what people think car makers have to gain from working with oil companies to hold back technology. Higher oil prices hurt sales of cars, especially when the gas-mileage is low. This conspiracy theory makes no sense.

Why the hell do you think a VW Bug got 40 MPG in the 60's and now our hybrids are lucky to reach the same numbers?

There were no emissions controls back then. Without that, VW was able to use a very efficient 1.2-1.5 litre air-cooled engine. That saved the weight of a liquid cooled engine and a modern exhaust system.

And, the cars had about 1,000 pounds less weight without all the modern safety features (like shoulder harnesses, air bags, impact protection, anti-lock brakes, traction control, etc.).

The specs on a 1969 Beetle rated it at 25mpg on the highway.

I.C.E. engines are already at maximum efficiency,

How so? As KyleN points out, improvements are constantly being made.

All the big jumps in engine technology and fuel delivery have been made. What KyleN is talking about is very small improvements. A figure like 0.3% more efficient, 55% efficiency is about it for an ordinary I.C.E. If you switched to say Nitro Methane, you may get some improvement, but it would be better to switch to electric motors as they are even lighter. Gasoline just does not produce enough torque, so you need a Transmission, that's a third of your Horse power gone right there.

I was mainly talking about the past, the topic (in this reply thread) was why haven't automotive manufacturers moved to a different engine style. My answer was that when presented with starting over or making improvements it was always easier to make improvements. I'm not an automotive engineer and have no idea what is left to be improved, though generally in fields I am more aware of you don't know what can be improved until you do it - that is it's hard to predict future innovation.

For cars and such it's an even larger obstacle because they rely on so much third (and fourth and fifth) party infrastructure. So if any one of them decided to go a different direction either they win it all or die, not a safe business style. It's not been until very recently that more self-contained systems had a chance at being equal to the energy efficiency of the combustion engine. And it's no surprise that recently they have been looking at other options as well.

The conspiracy theory of oil and car company collusion I think is pretty silly. Any conspiracy for a length of time with more than 3 people becomes public, it is human nature seems like. The numbers of people that would have to be 'in on it' for such manipulation to actually work would number in the hundreds at least. And even better it would have to be a conspiracy across competitors in both industries, even less likely.

People in general will do the least to get what they want. Oil was the easiest way, as oil becomes more expensive (harder) it will die off. A new technology that makes electricity super cheap would also kill it off. But as long as the alternatives require extra effort or feelings of goodwill, helping the environment, etc to work they will not completely overcome the use of oil.

KyleN and Novanglus There is no predicting necessary. Just do the Math. I.C.E. on Gasoline is Kilo Joules of energy in a Gallon of Gas = x Kilo Joules required to move a 1 tonne object 1m at 1mps will always be the same. You can not get more energy out of a gallon of gas. Thats the end of it. 55% efficient is about the limit for a Car. You dont have much room for improvement unless you drop the weight. This is Mathematics. Do you understand ?

I SPY: I have no idea what you're talking about. Explain "mathematically" how you get "55% efficient is about the limit for a Car [sic]". And consider saving the attitude until you've actually demonstrated your opinion, rather than simply asserting it and acting like you're smarter than everyone.

I just did.

I SPY: I have no idea what you're talking about. Explain "mathematically" how you get "55%

I didn't think current engines were operating near the pure combustion point yet, otherwise our emissions would be even better. As new innovations allow engines to get a better fuel/air mix, the energy output going to power instead of waste increases. While I know it's much better than it used to be it isn't nearly perfect yet.

I was reading about a new computer controlled injection system that is a nice jump forward on those same lines, increasing energy efficiency by a good measure. Instead of waiting for pistons to draw new vapor into the chamber a sensor and computer would send the right amount in to keep the mix rich. But I think that was an article about something in testing not in production yet. Even so I doubt it's perfect combustion either, just better combustion.

Then moving to gasoline or oil derivatives as an energy source has more potential instead of direct drive. I just don't see us at the end of this rope already, it might be more effort than it's worth to go further but maybe not hard to say.

I SPY: I see no mathematical proof arriving at 55% efficiency as the maximum for an internal combustion engine. Spell it out.

The record profits come from record volume (i.e., how much gas they sell, not how much it costs). The profit margin for gas is pretty small, even now when the price is high. The biggest influence of the price of gas is the price of the crude oil, the ingredient that is refined to make gasoline. When that goes up, so does the price of making the gas, and therefore the price at the pump. Nowhere in that process are oil companies getting higher profits. Higher revenues maybe, but not necessarily higher profits.

Not to mention if the price of oil goes up due to a drop in supply then a company which is not affected by that drop in supply could benefit from the higher price of their product (the crude oil) without having done anything wrong. Why should they sell their product for any less than it's worth on the open market?

Oil companies are unfairly blamed for the price of oil and gas as if they have control over it.

I will concede the OPEC point, though. That is a highly unethical group of companies working together to keep the price higher than it should be. Much like deBeers in the diamond industry. OPEC should be banned, but we have no control over it.

It isn't just record profits, Adam Kemp, but also record margins, at least for refiners.

For refineries...

The profit margin for gas is pretty small, even now when the price is high. The biggest influence of the price of gas is the price of the crude oil, the ingredient that is refined to make gasoline. When that goes up, so does the price of making the gas, and therefore the price at the pump. Nowhere in that process are oil companies getting higher profits. Higher revenues maybe, but not necessarily higher profits.

This quote clearly refers to refiners, making the assumption that many oil companies are also refiners, directly or indirectly, through holdings.

Some oil companies are also refiners. Not all refiners are oil companies. My quote does not imply anything about the relationship between refineries and oil companies. The important point is that the biggest influence on the price of gas is the price of the crude oil.

This is the fundamental point people need to understand I think.

The record profits come from record volume (i.e., how much gas they sell, not how much it costs). The profit margin for gas is pretty small, even now when the price is high.

One reason people are having a hard time understanding this point is that, as noted above, it isn't entirely true.

Social conscience is nice, but any company which makes a business decision that hurts the company in a big way is acting irresponsibly. Bad for the company means bad for the investors, the employers, and sometimes even consumers.

You could make an ethical argument that cleaner standards to protect the environment outweigh profit concerns, but other than that there is no good argument that a company should do something that hurts its profits just to lower prices for consumers. It's not their job to lower prices. It's their job to make money. So long as the consumers will pay the current prices then there is no reason to change anything or waste money/lower profits. This kind of change must come from consumer demand. If people stop buying as much gas because of the price then companies will have to respond to that. Not before then, though.

There is no value in refining, just the original product. If they could do away with refining completely and focus solely on upstream operations, they'd be a lot happier.

Isn't this a little like saying automobile companies would like to do away with distribution and just drive the cars into the ocean while someone pays them to do it?

Automobile companies would like to do away with anything that isn't finance but it's not feasible because cars are their product.

Oil companies produce lots of product and lots of products come out of the ground (oil, natural gas, methane, sulfur, etc.) so there is money to be made and they do not see the refining process as "important" to their business, meaning oil companies could sell off their refineries and stay in business without a bump.

This is hard for most people to understand simply because they think that refining is the core of the business, when in fact it is a fringe operation in the eyes of the major oil companies. If one of the big five is trying to decide whether or not to build a refinery, they're going to look at it and say, "ok, we pumped this much oil and made x amount of dollars after doing so, how much would the refining process bring us?". If the answer isn't more than the drilling and pumping, they won't do it, especially after all the new regulations in place after the BP explosion.

I was being a little facetious, but the underlying point was sincere. The oil being produced must go somewhere, and I assume refiners are major customers for oil. In most industries, the closer you get to the raw commodity, the lower the margins. It seems odd that oil should buck this general economic principle, but I suppose that the near-monopoly held by the largest producers might explain it.

I think the fact that there aren't enough refiners in America probably has a lot to do with it. Less competition means they can get away with higher prices.

You've missed my point. Stephan is claiming that oil companies don't want to be in the refining business because it is not as profitable as production. In most industries, the closer you get to the raw materials, the less profitable the business. Apparently, notwithstanding the higher margins some refiners are seeing these days, the oil business is different. This would suggest the influence of monopoly on price. Oil companies point to OPEC as the villain, and perhaps it is, but they happily ride its coattails.

You're still confusing different points, though. Higher profit margins don't mean higher profits. Stephen's point was that refining oil doesn't make as much money as producing oil, and I think that's still true. A refinery can have high profit margins but still not make huge profits. Also, the barrier to entry in the refining business is pretty high. Making a new refinery is extremely expensive, and that's an up-front cost. A well-established oil company has little incentive to spend a huge amount of money creating new refineries when the revenue from producing the oil completely outweighs any revenue they would see from the refining of that oil. Even if the profit margins are increasing, the actual profits (in raw numbers) just don't compare to the production itself.

Your second point (refineries have a high up-front cost) makes sense; your first point makes less sense. If there were higher margins on refining including the amortized cost of getting into the business, then a dollar invested in refining would return more than a dollar invested in production, and an oil company with expertise to do either would put as much into refining as practically possible, because dollar-for-dollar, there is a higher return.

It's like paying off debt; just because your high-interest debt is much smaller than your low-interest obligations doesn't mean you don't pay the higher-interest debt off first.

The high profit margins don't include the amortized cost of getting into the business. Those are all old refineries. Their construction has long since been paid for. Profit margins would be lower for a new refinery because paying off the huge cost of building the refinery would cut into the profits for a long time. I think looking at profit margins of old, established refineries gives the false impression that getting into the refining business will be profitable in the near future.

I can buy that. I still believe, however, that the current refining capacity is being gamed in much the same way that the California energy market was gamed during the power crisis in 2001. The oil industry has another year and a half to operate without significant regulatory oversight, it would be naive to think they wouldn't take advantage of the opportunity.

Let's look at it this way, in the mid to late 80's when there was an overcapacity of refineries, the oil companies did not sell off the plants, they kept them, even if they weren't profitable. The exact opposite is true as well, when there is under-capacity (which I don't think there is necessarily), the oil companies hold onto the refineries even if they aren't that profitable.

A refinery that has a good profit margin has one of two things going on. Either they are extremely good at their inspection and reliability practices or they quick and cheap at repairing breakdowns (the first scenario is more likely). However, this profit margin that they may have is not always true profit, it is merely a means to continue plant operations. Refineries are very expensive beasts, and the money to run them usually comes from their own profits and anything extra goes to the company, however you never see this built into the profit margins. Take a look at Valero's financials, they are a profitable company but they do a lot outside of refining (their main business) to make sure it stays that way.

I am actually agreeing with you in a way vannevar, the problem isn't necessarily capacity, it's the company's behind the refineries saying "we see no reason to slightly increase any kind of production" that is making traders weary. However, some of these refineries are running at 95-100% 24 hours a day, things are bound to break and as soon as that happens, a ripple effect occurs, especially at the pump in the local area.

There is a capacity problem when it comes to other types of fuels and plastics (namely Jet-A and synthetics) simply because there are only a few plants that can produce those things efficiently.

To give you an idea of how stingy the oil companies are when it comes to their refineries, I was at a client recently (large oil company with lots of refineries around the world) and at their one refinery they were begging me to increase their understanding of predictive maintenance and the like, simply because the company was not giving them the money to fix things when they broke and if anything was outside of the budget, it didn't get fixed.

JoulesBeef, read my comment directly above yours. It is the major reason oil companies do not build more refineries (from an industry insider).

If you think the cost of land is the expensive part of a refinery then you're the one who is "wacko". :)

I think you're right about the foreign companies like in OPEC and (now) Venezuela, but I don't think there's rampant collusion in America. I'm sure there have been cases, just like in every other industry, but the oil industry in America is one of the most highly competitive industries. I think most oil companies are too busy trying to keep other companies from spying on them to try to work together.