Tuesday, May 02, 2006

Regardless of politics there will be profits

Regardless of politics the following statement is true: increased demand and reduced supply for oil should mean lower profits for petrol producers.

Jon Stewart got it right when debating the issue with Wall Street Journal correspondent Kimberley Strassel who needs Economics 101 training and focused on how high profits were good for shareholders. [A similar 'debate' played out at NBC's Meet the Press].

Basically, oil is the chief input into producing petrol. Everything points to it being high because there are problems getting supply from Nigeria, Iraq and Iran. Everything points to it being high because China and India are booming. What that means is that the costs of producing petrol have done up.

Regardless of whether petrol production is a monopoly or perfectly competitive or somewhere in between, this should mean lower profits. If it is not, something else is going on and it is not competition.

1 comment:

Josh Parris said...

I guess oil-production and petrol-production are linked in people's minds. For some reason the Caltex share price has been rocketing recently - Caltex is just a refiner/reseller. But, their profits have been going up (I think it might be stock-on-hand revaluations driving that profit 'tho).

I don't understand all the petrol-price hoo-hah. In Australia they haven't moved much in real terms in the last 20 years (a graph of 20 years of Australian petrol prices in 1995 dollars).