Good morning Lizards! Warm one today in Philadelphia, 84F at 8am and expected to get a wee bit warmer by this afternoon. Good for cold-blooded lizard activity, but remember to seek shade in the afternoon.

Pet peeve time. I often view opinions expressing simple solutions with a highly critical eye since almost without exception one or more simplifications are being made that do not reflect reality. And from that, you can conclude that the actual situation is probably quite complex in its interactions and the suggested solution will simply not work, or will rapidly cause chaos and unintended consequences as the intended effect is not achieved, but instead something entirely different.

With that I turn my critical eye to the generic “oil companies” target of the last few threads. (And I sound off from this based on working for an “oil company” for the last ten years.)

First, some differentiation should be made about the operations of an “oil company”. Some drill for oil, some refine the crude into other products, and some retail these products to consumers, e.g. gasoline. Some do all three, some do fewer.

Second, profitability of the different operational segments will vary due to other constraints.

Drilling profitability is probably heavily dependent on the current market price of crude oil. Plus my limited knowledge indicates that oil well (and field) productivity takes time to ramp up; e.g. it’s an investment where you pour money into making the hole and hope that enough oil is gotten out at enough of a margin to pay back the cost (plus opportunity cost of investing that money in something else.)

Refining profitability is heavily dependent on margins (known in the industry as “crack spread”). Essentially cost of barrel of crude (variable) + cost to break it down (generally fixed) compared to the sale price of the various products made (gasoline, propylene, etc. etc.) Fixed costs are high, so a period where crude oil price is going up while product sale prices are slow to catch up produce very narrow (and possibly negative) margins. Scale is important here, a few years ago a difference of $0.01 in margin equated to $60 million in gross income for the company I worked for. Scale that to a big refiner like Exxon or BP and that’s where the billions come from.

I don’t know the retail side well, but I will make a couple of comments. The main driver there is refinery capacity - only so much crude oil can be processed at a time. Depending on what is profitable the refineries might well prefer making something else rather than unleaded gasoline (such as aviation grade fuel). Therefore, less gasoline for the market, and regular laws of supply and demand affect the price of gasoline. And this industry runs on margins as well - price curve chases the production cost curve and they vary back and forth (crude oil cost + fixed cost again).

Finally, a quick comment on the industry being perceived as monopolistic. Couple reasons for this. One, it’s capital intensive to get into. A new refinery is expensive and would take years of good margins to recover the construction cost. Second, NIMBY - no one wants to license new refineries to be built in the US. They need heavy duty transportation access to get materials (oil) in and products out. That generally means coastal/port access, and that’s valuable real estate that is generally already developed.

Sorry about the book length. Thanks to those willing to read this far this early in the morning. :)