Who actually buys crude oil?

[danny_galaga]

I understand some basics of stock market transactions, but I'm a bit puzzled by crude oil prices. If for instance, Shell pumps oil out of a well in the North Sea, presumably they will ship it to shore and then refine it. After that, it isn't crude oil anymore, but a variety of pruducts. This somewhat different to say, gold. The market for gold is already of a refined product. Markets need a buyer and a seller, so how can there be a market for something that company is going to 'value add' to? Do they do some Enron-esque magic and sell it to themselves?

[MonMotha]

Chevron, Exxon, BP, etc. are in two fairly distinct industries.  They recover crude from the earth, and the refine it into refined petroleum.  While they're fairly likely to keep things moving internally, they will buy or sell crude if they have excess refinery capacity or crude on hand (respectively) or if they have someone offering to either sell them crude for less than they can recover it themselves or someone offering to buy for more than they think it's worth.

It would not be unheard of for BP to sell a bunch of crude to Exxon today only to turn around and buy some back from Chevron tomorrow or even 5 minutes from now.  Perhaps Exxon is offering to pay more to BP than Chevron is offering to sell to BP for (hence BP can turn a quick profit on the buy/sell and may even do a buy/resell) or Chevron has crude near a BP refinery while BP has crude near an Exxon refinery.

Also, much of the oil is refined by companies unrelated to whoever actually captures the crude.  Think Saudi oil being used in the USA.  The Saudis drill for and pump it, it gets shipped to the US, then it is refined in the US (into gasoline, diesel, kerosene, and other stuff) and shipped (again) to retail markets.  Hence, there's quite a market for crude oil.

One might argue that is BP can recover crude, refine it, and deliver gasoline and diesel cheaper than doing the same with middle eastern originated oil, they ought to sell it cheaper.  While they COULD sell it cheaper, they have absolutely no reason to do so.  They are always able to sell that crude at or close to the market price, so they have no reason to value it any lower, even if their costs on it are lower.

Likewise, there is also a market for refined petroleum.  This is largely how wholesale gasoline prices are determined.  Retail prices are another beast entirely.  The reason they tend to fluctuate a lot has to do not just with the volatility (heh) of the wholesale market but also the fact that, while gasoline is a fairly inelastic good (meaning people will tend to buy about the same amount at any price, at least in the short run), the retail gas market is extremely competitive.  The demand inelasticity encourages retailers to experiment with price hikes, but the large amount of competition forces them back to whatever the market will put up with in short order.

FYI, retail margins on gasoline are often less than $50 on an entire tanker load.  They make their money on the convenience store and other value adds.  Generally, blaming local retailers for gas prices is counterproductive, at best.  (And no, I don't work for a gas retailer or a petroleum or petrochem company).

[Fordman]

The oil companies have agreed to sell what they retrieve from the earth on the 'open market'. Its not uncommon for a tanker that was pumped by BP in the gulf of Mexico to arrive at a Chevron tank/refining facility in Texas. They all basically throw the oil into one big selling block every day and all the oil companies buy it from each other, per barrel. A big difference who pumps it VS who buys it. Many companies buy it, but they dont pump it.

Its the same way with paper, coal, copper, gold, iron ore, steel (raw & rolled form), corn, wheat, beans, cattle, hogs, chickens and the likes. They're called commodities.

Fordman

[t3design]

And don't forget that in the United States, around 50 cents of the price of a gallon of gas is tax. at $3.50 a gallon that is almost 17%. But it is not a percentage tax, so if you were buying gasoline at $2.00 a gallon it would be 25%.

In general, for a gallon of gas, Distribution and Marketing account for about 12% of the cost, the cost of crude oil accounts for half to 2/3rds (half at $2.00, 2/3 at $3.50), taxes run $.50 regardless and refining costs AND profits are in the $.25 to $.30 range.

Summary:
1. Crude oil prices play the major role in the cost of gas at the pump. However, due to the time lag between recovery and delivery and the other market factors, these prices do not always track exactly.

2. The government (federal and state) account for the next biggest chunk of what you pay.

3. Marketing and delivery of the product to your car is next in line, but as has already been stated, the corner gas station sees very little of that.

4. The "big" oil companies are not making huge profits as a percentage. In fact, at an average of 10% for BOTH cost and profit, the gasoline refining business is not all that lucrative. The dollar amounts result from volume and people have a tendency to forget that the millions to drill and complete the wells were invested by the company in the first place. There is considerable money being made in recovery, but it is a difficult and somewhat risky business. For every successful company out there (big or small) there are dozens that went broke trying to do the same thing.

Finally, the market for crude is a simple supply and demand market. The more oil there is available to buy, the cheaper it is. The cost of recovery does not effect the price, rather, the price dictates which recovery methods are financially sound at any point in time. IF we drilled more in North America and recovered more of the oil available (and current estimates place the reserves already discovered at levels which exceed predicted usage for the next 100 years) the SUPPLY would be greater and therefore the DEMAND being met would cause the PRICE to be as low as possible and still support the necessary means of exploration, drilling, completion and recovery.

And FYI, I don't work for the oil companies either. But I do like to drive my car to work!

[Kevin Mullins]

"Supply and Demand"..... now there's a worthless excuse for an economical concept.

Realists call it "Greed" ...... the just because they can concept.

Ask yourself what is the going rate for a barrel of oil ?
Then ask yourself from where ?
So a barrel of crude oil from the middle east cost exactly the same as Canada, Mexico, Brazil ?
 

[MonMotha]

One other thing to remember: the market for crude (and most other commodities, as well) is governed not just by simple supply and demand but also by a little bit of speculation.  Everything is done on futures contracts.  Basically, somebody is willing to trade the ability to potentially make a lot of money for the ability to know exactly what they'll get paid for something they don't yet have.  Crude tends to be traded about a full month ahead of when it is to actually be delivered.

Present supply and demand is a big chunk of what determines the value, but there are also speculators who think that something will happen between now and when the contract is due to be fulfilled.  They will bid the contract lower or higher in response.  If they get it right, they make a bunch of money.  If they get it wrong, they lose a bunch of money.  In 2009, speculation was tending to drive prices down below what would have probably been "set" by simple supply/demand (hence <$2/gal gas) on the belief that the economy was going to tank worse and demand would continue to drop.  Now, speculation is likely driving the price up on the belief that there will be future supply disruptions due to the various "issues" in the middle east (where a lot of oil comes from).

In a nutshell, you get to pay more for gas NOW so that some billionaire financier can make a bunch of extra money with little risk (since ol' Uncle Sam will apparently bail him/her out if he/she screws up) on the assumption that oil will cost more a month from now.  Fun, eh?

[Kevin Mullins]

In a nutshell, you get to pay more for gas NOW so that some billionaire financier can make a bunch of extra money with little risk (since ol' Uncle Sam will apparently bail him/her out if he/she screws up) on the assumption that oil will cost more a month from now.  Fun, eh?

And regardless of what (i.e. nothing) happens these companies will just go on about their merry way as if nothing happened to you and I as well.... and then the cycle will come back around and begin again.....for no real reason.

[Ed_McCarron]

I keep waiting for the gov't to declare gas a necessity and start regulating it's pricing or cutting the taxes on it.

What?  It could happen.   

[t3design]

Not sure if gas is necessity, but beer certainly is. 

[Ed_McCarron]

Not sure if gas is necessity

Most people can't get to work without it.  It's easily as much of a necessity as toilet paper.

[Kevin Mullins]

Most people can't get to work without it. 

I wouldn't say "can't" .... just gotta leave the house a bit earlier is all. 

[danny_galaga]

Chevron, Exxon, BP, etc. are in two fairly distinct industries.  They recover crude from the earth, and the refine it into refined petroleum.  While they're fairly likely to keep things moving internally, they will buy or sell crude if they have excess refinery capacity or crude on hand (respectively) or if they have someone offering to either sell them crude for less than they can recover it themselves or someone offering to buy for more than they think it's worth.

It would not be unheard of for BP to sell a bunch of crude to Exxon today only to turn around and buy some back from Chevron tomorrow or even 5 minutes from now.  Perhaps Exxon is offering to pay more to BP than Chevron is offering to sell to BP for (hence BP can turn a quick profit on the buy/sell and may even do a buy/resell) or Chevron has crude near a BP refinery while BP has crude near an Exxon refinery.

Also, much of the oil is refined by companies unrelated to whoever actually captures the crude.  Think Saudi oil being used in the USA.  The Saudis drill for and pump it, it gets shipped to the US, then it is refined in the US (into gasoline, diesel, kerosene, and other stuff) and shipped (again) to retail markets.  Hence, there's quite a market for crude oil.

One might argue that is BP can recover crude, refine it, and deliver gasoline and diesel cheaper than doing the same with middle eastern originated oil, they ought to sell it cheaper.  While they COULD sell it cheaper, they have absolutely no reason to do so.  They are always able to sell that crude at or close to the market price, so they have no reason to value it any lower, even if their costs on it are lower.

Likewise, there is also a market for refined petroleum.  This is largely how wholesale gasoline prices are determined.  Retail prices are another beast entirely.  The reason they tend to fluctuate a lot has to do not just with the volatility (heh) of the wholesale market but also the fact that, while gasoline is a fairly inelastic good (meaning people will tend to buy about the same amount at any price, at least in the short run), the retail gas market is extremely competitive.  The demand inelasticity encourages retailers to experiment with price hikes, but the large amount of competition forces them back to whatever the market will put up with in short order.

FYI, retail margins on gasoline are often less than $50 on an entire tanker load.  They make their money on the convenience store and other value adds.  Generally, blaming local retailers for gas prices is counterproductive, at best.  (And no, I don't work for a gas retailer or a petroleum or petrochem company).

Ok, so it's mostly trade between the companies for shortfalls. that makes sense. Like I say, I'm not oblivious to the markets, and I understand what's happening with derivative trades of the same product, but I couldn't quite picture where the buying and selling was happening of the physical product.

About Saudi Arabia. I would have thought it was still companies like BP, Mobil Shell etc who pump the oil there? OIl companies seem to be bigger a-holes than diamond mining monopolies in that they seem to make it near impossible for a country to just do it themselves.

The secondary (or tertiary even) market involving petrol sales at retail I have a bit of an inside understanding of too since I used to work at a Mobil station. At the time (about 15 years ago) the markup for petrol for the station was maybe 5% at best. Like you say, it's the other products that make the dough. Drinks, snacks, cigarettes. In our case we also had a drive through car wash.

[pinballwizard79]

Re: Who actually buys crude oil?

Charlie Sheen

[danny_galaga]

Re: Who actually buys crude oil?

Charlie Sheen

Is Charlie Sheen the new Chuck Norris?

[Dervacumen]

"Supply and Demand"..... now there's a worthless excuse for an economical concept.

Realists call it "Greed" ...... the just because they can concept.

 

Supply and demand works only in theory if there is perfect competition, which doesn't really exist.  So I agree, it's greed.

[Blanka]

I do. Home-brew distilling has become a very good price-alternative to buying gas directly. I make gas for my car at 0.5 euro/liter now. Residue is put in empty paint buckets for recycling.

[Dervacumen]

I do. Home-brew distilling has become a very good price-alternative to buying gas directly. I make gas for my car at 0.5 euro/liter now. Residue is put in empty paint buckets for recycling.

You must do a lot of painting.

[Ed_McCarron]

Most people can't get to work without it. 

I wouldn't say "can't" .... just gotta leave the house a bit earlier is all. 

A bit?  My response radius is about 250 miles in each direction.

[Blanka]

You must do a lot of painting.

If you buy good old Arabian oil, the left-overs are pretty minimal.

[Donkbaca]

I used to, I figured with mud wrestling joints being pretty much a dime a dozen that we would have crude oil wrestling nights at my cantina.  It worked REALLY well, the crude smell really seemed to fire up the patrons, we always sold more tequilla and whisky on crude oil wrestling night.  Plus, the sweet thing about it is that it didn't evaporate or take any maintenance, we just had to drag the crude oil pit out every wednesday night.  Its gotten way, way too expensive though, and with gas prices being so high, people are spending less on drinks, and aren't as willing to drive to my cantina.  So we have switched to pudding.  Its a pain to make, but we all have to make sacrifices.

[Gray_Area]

Pics or it didn't happen.

Maybe you've missed out on or mis-comprehened his other fanciful commentary....

[Donkbaca]

I only speak from the heart, and the heart only knows truth ( or at least that which I wish were true...)

[danny_galaga]

I do. Home-brew distilling has become a very good price-alternative to buying gas directly. I make gas for my car at 0.5 euro/liter now. Residue is put in empty paint buckets for recycling.

Diesel engine?

[Blanka]

No, the Diesel that comes out is too dirty. I sell that to a farmer.

[danny_galaga]

No, the Diesel that comes out is too dirty. I sell that to a farmer.

Are you for real? You are distilling petrol in your home from crude oil? A process that is delicate enough that the tiniest difference would mean say, ten octane difference at least. And how is that even legal? Or am I missing a joke here?

[ark_ader]

So are we back to virtues of growing rapeseed again?

[Vigo]

No, the Diesel that comes out is too dirty. I sell that to a farmer.

Are you for real? You are distilling petrol in your home from crude oil? A process that is delicate enough that the tiniest difference would mean say, ten octane difference at least. And how is that even legal? Or am I missing a joke here?

All you need to do is buy crude oil off of Amazon.com and pour it through a Brita pitcher. Viola! Gasoline. 

[Nephasth]

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[Nephasth]

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[Nephasth]

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[Nephasth]

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[Donkbaca]

I used to lay pipe all the time at crude oil wrestling night in my cantina


Sent from my iPhone using Tapatalk

[MonMotha]

FYI, retail margins on gasoline are often less than $50 on an entire tanker load.

WRONG. Trucking companies will send trucks hundreds of miles or more out of the way to save a couple pennies per gallon. The average load is around 7300 to 8000 gallons. At just a penny per gallon that's $73 to $80. If a supplier is offering a product for 10 to 15 cents less than other suppliers (to move old product out of storage most likely) that's $730 to $1200 the trucking company can make extra off of just one load. On a busy day, my terminal will load 60-80 trucks (and we're considered a small volume terminal). Terminals around big cities will load hundreds of trucks per day.

What most people don't realize is that there is more than one middle man. And most "big oil companies" don't own the pipelines that is used to move the product. Far greater volumes are moved through pipe than by truck. Pipeline companies charge suppliers (oil companies) per barrel moved through their pipe. It's only around $0.30 per barrel, but they can move over 24,000 barrels per day through an 8" pipeline (refined products) and that is on only a small segment of pipeline. Then there are terminals, facilities that store  millions of barrels of oil and refined products. One pipeline company buys and stores crude oil in HUGE volumes, and they wait, until prices go up and profit like crazy.

You're telling me that people will send a truck that gets single digit miles per gallon "hundreds of miles out of the way" at $3.5+/gal while paying the driver, too, just to save ~$100 or less on the price of the cargo?  This seems...dumb.  In fact, it's downright wrong.  I'll be optimistic and say that tanker averages 10mpg on the trip (half of it loaded, half of it unloaded).  At $3.5/gal for fuel for the truck (I'm figuring tax exempt diesel at less than retail price), it costs $0.35/mi driven extra that you go to get it from "wherever's closest".  The break even point, assuming you save $100 by going "out of your way", don't pay the driver, and incur no expenses on the vehicle (to include wear and tear as well as depreciation) is 285 miles round trip or 142.5mi "out of the way".  A significant distance, but not "hundreds of miles", and that's a pretty optimistic scenario.

I got the $50 figure from a filling station operator saying that they lost money on the tank load if one customer drove off without paying.  Note that's probably referring to THEIR tank which may be smaller or larger than the tanker that supplies them.  Is it an exaggeration?  I don't know.  It seems perhaps "difficult to believe" but not totally out of reason.  Retail gasoline can get pretty cut-throat.  There's often several filling stations on a corner, and people are usually willing to drive across the street to save even a cent or two per gallon, if only for the "principle of the matter".  Remember, this is the RETAILER'S margin on the gasoline.  There is of course margin at each step along the way to that point, as well.

[Nephasth]

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[danny_galaga]

Looking at the retail margins. A gas station orders a full load of fuel, let's say at $3/gal just to keep things simple. 8,000 gallons (a full load) would cost the gas station $24,000. To earn their stated $50 on the whole load, they would only mark the gas up $0.00625/gal. Who in their right mind would spend $24,000 to make $50? To make $1000 off the load they would only need to mark it up $0.125/gal which seems reasonable considering current gas prices.

That sounds in the ballpark. When I worked at a Mobil service station, the mark up was roughly 5c/ litre, maybe a bit less. So a full load I guess is roughly 30,000 litres. Times 5 cents, is, err, carry the one...

1500 bucks. Per load. Still peanuts, but more than 50 bucks that's for sure!