Originally posted by: sunzt
Originally posted by: Genx87
If the govt caps the price and the oil companies stop making a profit, why would they sell their product in our market? You may make the situation worse by drying up the supply.
It's pretty obvious the oil companies are making a pretty rediculous amount of profit, so I'm sure there exists a price cap that wouldn't make them lose that much profit, but would help the consumers more.
I'm not saying for a price cap that would bankrupt the companies, that's pretty stupid in general. I'm asking about a price cap that helps the consumers while still making oil profitable... (like it always will be).
Let me argue this for a moment. I don't deny for a second that oil companies make money. I have family in the oil business, so I know it's the truth.
But keep in mind that not all oil is created equal, and not all wells are created equal.
Say, for instance, that you have two wells of equal size. One is in Russia, one is in the ME. Let's ignore for simplicity's sake the fact that the oil from the ME is likely to be of higher quality, and thusly less expensive to convert into gasoline, and focus on extraction.
In Russia, the well is under miles of rock that requires tough drilling and makes extraction very difficult. In the ME well, you're going through lighter rock to a well that's not nearly as deep. Factor in the fact that your ME country typically is an easy place to do business--they're typically friendly to Western business given the fact that oil revenues drive their economies, and as such they don't hamper your business much at all. Russia, on the other hand, isn't quite as straightforward. Where in the ME you have a direct top-down dictatorship calling the shots that you can do business with, in Russia you have several powers to deal with--the oligarchs, the country leadership, and the mafia. All have a lot of power, all have their own interests, and all have their own reasons for not wanting a foreign company to be making out like bandits on their country's oil.
I don't recall the exact numbers, but after speaking with someone who works at a Western oil company's office in Russia, I was given a fairly impressive figure. It was along the lines of "a barrel of oil from the ME turns a $2.00 profit per barrel. From Russia, we're lucky to squeeze out 25 cents."
Okay, so the ME oil is better quality, cheaper to process, and cheaper to extract. I'd wager it's cheaper to transport, too, since you have quick access to a port, as opposed to Russia, where you're going to have to transit thousands of miles of pipelines to get your oil to a boat.
So what happens when stuff starts to hit the fan in the ME? Local companies get nervous, some pull out, others are forced to pay their employees more to offset the risks, perhaps local unrest makes business difficult (carbombed office, pipeline sabotage, kidnapping of executives, etc). All of these things whittle away at that profit margin, and suddenly your ME oil isn't making any more than your Russian oil. Profits have to come from somewhere and if your profits were just cut by 6/8 overnight, you're going to raise prices to soften the impact on your bottom line.
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