When profitability is hurt by lower prices, these natural resources firms all pull back at the same time and there is no other industry that can take up the slack. The declining capital investment, jobs, and tax base all lead to pain..
http://www.economist.com/blogs/economist-explains/2014/11/ec...
http://www.houstonchronicle.com/business/energy/article/As-o...
- barrel price went from $100 to $60. That's $40 drop.
- Price went from $3.60 to $2.80 a gallon in my city. That's $0.80 only
I don't get it.
The price of gas is only partially due to the cost of oil. Taxes make up a pretty chunk of the cost of gas. On average $0.50/gal.[1]. Don't forget the cost of refining and transportation. This chart says 62% of the cost of gallon is due to crude oil costs[2]
So based on your $3.60/gal, $2.23/gal is oil. Reduce that by 40%, you get $1.33 and add back in the other stuff and I get $2.70/gal now.
Not far off huh?
[1]http://en.wikipedia.org/wiki/Fuel_taxes_in_the_United_States [2] http://www.eia.gov/petroleum/gasdiesel/
But as someone said, crude oil prices reflect future retail prices. When you go to a gas station you get fuel that is weeks/months old, so it makes sense to pay the price that crude oil was selling at weeks/months ago.
Here in Chicago, they never dropped. There's almost a $1.00 difference in gasoline vs diesel now.
The cost of the raw crude oil is only part (but a significant part) of the pump price.
It's more 'fun' in the UK where fuel duty and other taxes (VAT) form the majority of the pump price:-
There's also the fact that the oil prices generally reflect future prices. Gas stations need the physically delivered commodity. There's some small fluctuations there.
I don't have a deep understanding of how gas stations work, if anyone else has insights would love to hear them.
This is a gross simplification. I'm not an expert or someone with a deep understanding of how gas stations work, but even I understand that a barrel of crude requires a complex process to turn it into gasoline and even more logistics to get it to the pump. Every one of the people in that process needs to be paid, including your friendly neighborhood gas station cashier.
This line of thinking is the equivalent to wondering why the price of a new car hasn't decreased if steel prices hypothetically dropped. Most products cost much more than their raw materials because to change them from raw materials to products and to put that product on a shelf requires the hard work of many people.
Or maybe there are enough reserves, but they are in the long game and want to buy the foreign oil first... while the taking is good.
That's why the author did not mention the reason that "OPEC doesn't interfere" is that the Saudis are waiting for this new price level to bankrupt the Shale enterprise in the US.
They realize that OPEC doesn't have enough of a majority of the production to take true advantage of lowering prices. America isn't part of the cartel, so our shale companies would be making out with a lot of money, b/c they're not going to lower production.
http://www.economist.com/news/finance-and-economics/21635510...
However, yeah, it's definitely weird how some journalists are coming out in favor of cartels in this scenario. I assume it's from not having a well-rounded education.
