Friday, June 08, 2007

The poor and what we pay for. . .

A couple of recent news reports captured my attention pretty quickly.

Last week I heard the CEO of a major U. S. oil company interviewed on NBC. His particular company, not really a very large one, had seen profits rise annually from a beginning point of a bit over $4 billion in 2003 to almost $16 billion in 2006.

When asked about the rising price of fuel in the U. S. today, the very nice man started down the road of supply and demand. He also threw in the claim that Americans, despite rising prices, continue to drive and demand more fuel.

The fact that the price of a barrel of crude oil sells today for about $10 less than it did a few months ago doesn't seem to be doing anything but continuing to drive prices up. Something seems a bit out of whack to me. How about you?

The last time I filled up, I paid $3.15 per gallon. I wonder what % of their profit margin is being directed toward alternative fuel research and development?

Jeremy Gregg, our Director of Development, sent me some information about the impact of rising fuel costs on other consumer goods. Jeremy's point was to have me consider the effect of such a reality on the poor and their families.

Milk: +3.2%
Oranges: +34.1%
Ground beef: +2.7%
Chicken +5.5%
Coffee +4.9%

(Source: The Dallas Morning News, "Food prices add up: Increasing fuel prices are also being felt at the supermarket," http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-foodprices_28bus.ART.State.Edition1.c35172.html .)

Then there was the little side bar report about a new initiative put forward by Brazilian President Luiz Inacio Lula da Silva to provide very inexpensive birth control pills for the benefit of family planning among the poor in his country. Under the plan, 10,000 drugstores across Brazil would make the a year's supply of the pills available to low-income people at a total annual cost per person. . .are you ready for this???. . .of $2.40!

The President said his plan would give poor Brazilians "the same right that the wealthy have to plan the number of children they want" (The Dallas Morning News, Tuesday, May 29, 2007, page 6A).

Sounds like a good effort.

But, look at that price! I'm I missing something?

Hmmm.

I'm wondering, can someone convince Brazil to tell us where to buy our pharmaceuticals as a nation? Or, could it be that the price is tied to the government's power to purchase in such mass quantities and directly from the manufacturer? Again, just wondering about solutions to the practical problems we face here every day.


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9 comments:

Anonymous said...

Larry, great comments and insights. We are quickly becoming a nation of total disregard for all but self. So many resources, so little heart. I would like to meet and pray over Monica & Jose and their families sometime, if possible. I can come there, if you can arrange it. Bill (bluemustangpride@msn.com

Anonymous said...

Larry-

This is what drives us to discovery. Its not the job of the CEO of an oil company to find alternative fuels! His job is to run and ethical business that turns the largest profit possible for his shareholders.

We didnt replace the horse-and-buggy until it was no longer economically and logistically productive.

High prices will drive technology and inventors to come up with whats next.

Instead of asking oil companies to lower prices, we should ask them to fund science and math centers in the inner city! Perhaps some of your kids could invent what ever will drive us next!!!

God Bless You and The Wor of CDM!

JC

Fajita said...

The oil companies see the writing on the wall and are getting all they can before their power is diminished.

Ethanol and hybrids are going to hack into their profits. Later, hydrogen will do so even more.

I am so mad at these short-sighted and greedy bastards. There is no supply problem.

If they were not so short sighted, they would be taking their profits and looking to the future of alternative fuels so they their industry can survive 50 or 100 years from now. But since the CEOs won't be alive then, they don't care.

My next car will be a hybrid and I hope I can find one that burns ethanol.

Finally, the auto industry needs to divorce itself from the oil companies and wed themselves to the alt fuels companies. The technology is there to make every vehicle get super good mileage and the only only reason automakers still make 12 MPG vehicles is because the oil companies have them by the nads.

Rant over.

IBreakCellPhones said...

OK, I could say something along the lines of profits and profit margins are not the same thing. The cost of the raw materials is higher, so the cost of the final product is higher. Gas prices have been coming down. And where are you looking that you found gas for $3.15? In my neighborhood in Garland/Richardson, I saw gas for $2.929 per gallon this morning.

With regards to pharmaceuticals, someone's got to pay for it. Limiting prices in one area moves it around in another. For instance, a direct subsidy from the government means it eventually has to be made up through tax revenues. A straight limit on prices may mean that research is cut.

Third, when you add in the fact that there's not been a new refinery built in the US since the 1970s, you can only push refinery capacity so far. Whenever there's a disaster (like in Texas City last year), the tiniest shock to the market has major repercussions.

Unfortunately, demand for gasoline is rather inelastic. That is, the price can change wildly before it really influences demand. I know that I don't do any pleasure driving anymore. I'm sure that lots of people have given that up. The demand for commuting, however, isn't going to change without radical price increases. Same thing for moving goods from one part of the country to another. One thing that would help with that is allowing non-US flagged ships to make stops at more than one US port in a row.

Larry, in your view, is there something the government is doing now that it could stop doing to help alleviate the problem?

Larry James said...

Our problem is more basic than what the government does or does not do. Our problem is that we regard health care in all of its dimensions as a commodity, rather than a community/public responsibility.

Larry James said...

JC, thanks for your post, as well!

I know that what you say is exactly how we normally think--you know the part about what the job of a CEO of an oil company is. But, is that necessarily the case? Does it have to be that way?

Given the nature of the product/commodity in which he/she trades and the demand for it today, is there not a way to "blend" missions so that our market industries affecting so many of us can, as a part of their business plan, invest some of their profit margin into what will keep them profitable in the future, while also serving the public, including stock holders?

This is very important in our time. The move from horse and buggy to the Model T hardly compares to the state of the environment, the danger we face internationally around petroleum and its supply and our future as energy consumers and producers. We need more complexity in our thinking about real, going forward strategies that in fact become solutions.

I believe that in business, as in so many areas, our thinking needs to be more imaginative and more inclusively beneficial, especially when it comes to natural resources and the larger public good--in this case the good of the entire world.

chris said...

The profit made by gas and oil companies is about 10-12 cents/gal.

Adjusted for inflation is is now less than it was in 1981.

Government profit, taxes, is between 28-68 cen/gal. depending on the state you live in.

Europeans pay about $7.00-$8.00/gal.

We are lucky.

Justin said...

Just because the price of oil is lower than it was earlier this year, does not mean that gas will necessarily be cheaper. If demand rises to the point where the refineries cannot produce enough, they must raise prices to avoid a shortage. Its why price caps in the seventies led to massive shortages (I wasn't there, but I've seen the pictures).

The cost of a product is used to keep shortages from occurring. And When demand is high, causing high prices to try and quelch demand, either the companies will try to produce more at a cheaper price in order to make more profit, or other companies will enter the market, creating more supply and competition, which then lowers prices.

I agree completely that we need to become less dependent on foreign oil, or oil in general, but that will only happen when gas prices rise, because those higher profits lead to more funds for researching new products.

Fajita, I have to disagree with you that the oil companies are being "bastards". First off, there are a ton of middle class people whose livelyhood is directly affected by those companies making a profit. When profits go down, people have to be laid off. So, you can be concerned merely with what you're paying at the pump and call them bastards or you can realize that just the same as you work for a company trying to make a profit in order to be able to pay you, the oil companies are doing the same thing.

And besides that, one of the biggest contributors to our shortage at this point is government involving itself in this market. When President Bush (or other politicians) start coming out saying that our country has to cut our oil consumption by a certain percentage by a certain time, the oil companies quit investing in new technology to speed up production. They don't want to waste a bunch of money on new things when their demand is supposed to be cut by 30 percent. I assume its similar to what a newspaper company would do if the government came out and said "we're losing too many trees because of newspapers, so by 2030, all newspapers must be read online". When they say that, Newspaper companies will not invest in more factories to produce the paper copies, because it will not bring the desired return. This is just an example.

The thing to remember is that if we assume there isn't a secret group of men just arbitrarily determining gas prices out there, they set the price at the lowest level where they make the most profit. Because if gas station A decides to sell gas for 3.15, gas station B will look at the numbers and determine, "hey, we can sell gas for 3.10 a gallon, and we'll actually make more money because we'll sell more gallons than they will at 3.15. Its how capitalism keeps shortages from occurring, and its how it keeps prices at the lowest possible level, and its how it gets goods to the places that need them most.

I've been getting married and honeymooning and stuff, so I haven't been around. I'm sure ya'll are glad I'm back, right? ;)

PBR said...

The U.S. patent laws are either not followed at all or are different in Brazil. That is probably why it is cheaper there.

The problem with gas prices seems to be because there are too few refineries, thanks to the environmentalist lobby.