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Gas prices and Myths

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1 Gas prices and Myths on Tue Apr 26, 2011 11:29 pm


Considering most that read this are younger and easily influanced by social media at times, I think it's a good idea to explain in easy terms how the gas prices rise and why you should never get involved in these "gas sit-outs" people are always talking about.

To start, let's look at 2 facts that everyone always brings up. "Gas prices are high because gas companies raised the price". True. "Gas companies are showing record profits". Also true..... but theres a lot more to it.

Gas companies set their prices based on the price of crude oil. If oil goes up, then gas prices go up. Oil prices sit at about 2/3 of what gas prices are. So if gas is $1.00 a gallon, $.66 is due to the oil price and $.34 is refinement and overhead. (Shipping, payroll, insurance, ect.) So if that same oil shoots to $2.00, then gas is now $2.34. Meaning, refinery overhead fluctuates slightly over time, but the basis of gas prices is due to the cost of crude oil.

So, who sets the oil prices? Not the gas companies or oil companies. Oil is a commodity. That means it's prices change daily based on the market. More importantly, the speculators. (I will explain that in a moment). So the gas/oil companies sell their product at the amounts that the market dictates, not what they "choose" to sell them at. That's where people start to believe it's the gas/oil companies.... it's not. It's the global market that dictates the prices. The cost of crude oil goes up, the price of gas goes up. Simple.

Regulators are people that watch the global markets for any "problems" or successions. They base their price bids on crude oil by the amount of oil in production, over seas sales, oil well manufacturing problems, wars near oil production facilities... realistically the basics of supply and demand. Anything that can fluctuate the amount of oil produced. If "prime oil production" to them in the works is 1K barrels a day, and something, anything happens that even "may" slow down the production... they raise the price of crude oil.... which in turn as explained above raises the price of gas.

Now, the problem with regulators is they do not have to justify their price increases with facts. They are called "speculators" for a reason. When the "war" broke out in Libya, the prices went up because the speculators "worried" that the 2.5% or so of total oil produced in Libya was in jeopardy of not getting to the general public Well, that was bullshit.... but because of it, gas prices sky-rocketed. Most of their oil goes to Italy, not here. But still, we pay for it since its the "global market". Again, bull shit.

Well, why do gas companies take the heat and why do they make more money when oil prices go up? Easy answer. If you were to buy a farm that produced pumpkins.... and it cost you $1.00 to make a pumpkin and the seeds cost $1.00, to make a profit you could sell your pumpkin for $2.50. If someone that controls the price of pumpkin seeds says the seeds now cost $3.00, they you would have to up your price to $4.50 to make that same profit..... but to you, since you own the farm... the seeds are the same price since you produce them. So you are now making an extra $2.00 per pumpkin because the "market" says your seed prices are higher. The seed didn't change nor the process you go through to get/grow them, but the markets has deems your "base" product is worth more. Hence upping your profit margin. Why would the seed price change? Maybe there was a fire at the largest seed factory and it's lowered the amount of seeds available to farmers who utilize buying seeds instead of having the ability of making them themselves. Maybe the weather patters seem like there will be a bad season for pumpkin seeds. Fact or speculation, different things can fluctuate the price. Same goes for oil companies. They are pumping the same oil from fields they bought when oil prices were low (Thats typically the basis of the price they pay for the land that they get the oil from, the price per barrel at that time)... and now, due to the market, can sell their products at a higher rate. They didn't change the price, but they are able to cash in. May sound shady in a way, but that's how business works. They do not set the prices.

Why not take part of gas "sit_out"? Because it hurts your local business, not the oil companies who everyone is "after"..... but still has nothing to do with gas prices. In theory, people pick a day to not buy gas because they want to "send a message". When gas prices are high oil companies are making good money, but do you think taking a chip out of high profits actually makes a difference? It's like finding a $100 bill and a $1.00 bill on the road and before you can grab them both, the wind blows away the $1.00 bill. Who gives a shit? You still have the $100!. You can't blame them for following the prices of the global market, they are required to do so.

Now, local businesses are the real people who pay (in theory) for these "protests". They are typically locally owned companies, employed by local employees. Even if they have a Shell sign out front, the place is typically a franchise owned and operated by a local merchant. If you don't buy from them, they lose money. And on top of that, they lose your business for anything else in the store they sell. Them using the "Shell" name means they have to pay dues to Shell (franchise fees) no matter if they sell a drop of gas or not. They pay Shell to use a known name in hopes to show stability as a business.

If their gas price went up, it's because they are paying more for the gas they are selling. Their profit margins rarely fluctuate. But if you decide to "boycott" buying gas.... they still already bought it. They are hoping to sell it to make a profit, but at least break even and make enough to buy more to keep their stock full.

I just wanted to make a post so everyone may be able to understand.... not buying gas for a day does nothing. It's not a protest. It doesn't make you a "patriot". It is completely pointless and if done in large quantities, only hurts the local economy. I see these posts on facebook all the time bitching about "greedy oil companies" and blaming one person or another... but never the real reasons.... speculators and the global market.

If you can find a way to hurt the speculators pocket book, let me know.


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