On 1/30/06, Doran L. Barton <[EMAIL PROTECTED]> wrote: > Think of it this way: If you make 10% profit on a candybar that retails for > $1.00 and demand for that candy bar pushes the price to $1.50, your profits > are going to go up 50% as well. The oil companies aren't taking a bigger > slice of the piece, their slice is just worth more money.
While your post has a lot of merit (even if it does simplify things quite a bit), I just had to point out a mistake here that is often made. With your hypothetical candybar retailing at $1.00 with a 10% profit margin, your profit per candy bar is 10 cents. For *profits* to increase by 50%, the profit per candy bar must be 15 cents. Assuming costs remained the same, that means the actual price of the candy bar only increased by 5 cents to $1.05. If the price were raised to $1.50 without any corresponding rise in cost, the profit per bar would be 60 cents, and 500% increase! Let's setup a hypothetical gas price evalutation, say $3.00/gallon median for the most recent quarter and $2.00/gallon for the previous quarter. We'll also combine the entities of distribution and supply into one for simplicity. Let's also assume a 25% profit margin combined between the distibution stations and oil supplier. Finally a 50% increase in profits from one quarter to the next is the given. How much of the $1.00/gallon median price increase is attributable to increased profit? A 25% profit margin on $2.00/gallon gasoline equates to $0.50/gallon. A 50% increase in profits means an extra $0.25/gallon. The other $0.75/gallon is increased cost. In fact, the profit is now $0.75/gallon out of $3.00/gallon. That's only a 25% profit margin; the margin didn't increase at all! I'll give that up as a fluke due to the correspondence between a 50% increase in profits matching a 50% increase in price. If the rise in price were less than 50% (say from $2.50/gallon to $3.00/gallon, which is closer to the actual situation), the profit margin does in fact increase to 31%. This analysis also excludes the fact that increased profits might in fact be due to increased sales volume. Doran mentioned a few things that affected supply -- natural disasters and war/politics -- but there was also increased demand during that time. Travel was booming despite rising gas prices as the travel industry recovers from 9/11. Increased yet non-exhaustive demand (supply could rise to meet the demand) means more units sold, and thus more profit even if the profit margin doesn't change. The point is, you can't look at rising profits and determine that we're being gouged. The important thing to look at isn't the change in profits, but the change in profit margins. Jacob Fugal /* PLUG: http://plug.org, #utah on irc.freenode.net Unsubscribe: http://plug.org/mailman/options/plug Don't fear the penguin. */
