Your price at the pump went up. So did Saudi Aramco's profits – to a new record | Hacker News Reader

Your price at the pump went up. So did Saudi Aramco's profits – to a new record

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73 pointsrntn39 comments

Yes, profits go up when there is a supply shock and demand outstrips supply. The effort to divert blame for the predictable results of deliberate policy choices—reducing domestic production—onto oil producer profits is really quite remarkable. If you want a different result, you need to either increase supply by increasing domestic production, or reduce demand by switching people to EVs. If you reduce supply without reducing demand then prices will go up and profits will go up.

It’s such a sign of how Americans have become a society of children. They are completely unable to grapple with trade offs: “if I do this thing I want to do, I’ll have to pay this cost or give up something else.” Any negative consequences must be externalized and blamed on someone else.

It's weird how oil companies are purposely restricting supply. They have production capacity ready to go and not in current use and raw materials, but money is nicer to pad their bottom line.

There's nothing weird about it. During the 2020 presidential campaign, Joe Biden promised to shut down new oil drilling. Thus the domestic oil companies cut their investments in new production capacity.

https://www.politifact.com/factchecks/2020/mar/20/facebook-p...

https://www.cnn.com/2022/03/02/energy/us-oil-production/inde...

https://www.cnn.com/2022/03/24/energy/gas-prices-oil-product...

It’s been made clear to American oil companies that they’re in the buggy whip business. What sense does it make for them to make new investments increasing their buggy whip production capacity?

Precisely.

And not to mention how carbon taxes are espoused as a great way to disincentivize the use of oil.

Then oil prices go up and the government decides to intervene and drop oil prices through the strategic petroleum reserve (federal) or cash handouts (CA).

It’s bizarre. Either higher gas prices are good or they aren’t.

There are thing that the President of the United States can do and thing he can't do. He can stop the issuance of new permits to drill on federal lands. But he can't stop companies from drilling on places where they already have a permit, federal or not. Implicitly, a candidate cannot promise more than a President can deliver, and that's why Biden and his team were vague about what "shut down oil drilling" meant.

The technical term (on Wall Street) for oil companies is "Oil and Gas Exploration and Production" companies [1]. Note that "exploration" is mentioned ahead of "production". Banks have special departments dedicated to lending to O&G E&P companies, and the lending standards are mostly described in the regulatory handbook [2]. If you take a look there, you'll see that lending in that space is mostly about reserves. E&P companies carefully husband their reserves. They need to have all levels of reserves, from proved and developed to proved and undeveloped to probable and then to possible. As they extract oil and gas, they need to continually upgrade their existing reserves (for example from possible to probable), and to acquire new rights of exploration.

All this is very complex because the price of oil is volatile. In Spring 2020 the price of oil reached record lows (including negative futures prices for a few days). In Spring 2022, it reached recent record highs, but oil executives have a longer time horizon in their planning, because prices can plummet in a hurry (as we speak, they've already dropped 25% from their peak).

Bottom line, the oil companies have inertia. Just like an 18-wheeler can't turn as quickly as a personal car, they can't change their operations as quickly as people would like them to.

But of course, both Biden's administration and the oil executive will try to score points. The administration claims that the oil industry is artificially restricting its own output in order to keep prices high and maximize profits, while the oil executives will try to pressure the administration to allow new permits on federal lands.

[1] https://en.wikipedia.org/wiki/List_of_oil_exploration_and_pr...

[2] https://www.occ.gov/publications-and-resources/publications/...

Why not issue permits? The next administration will issue them anyway. In the meantime, all you’re doing is driving up prices. I believe that is what people are referring to.

To ensure that we reach the climate targets, oil will have to be left in the ground in some places, by this administration and all the next ones. I believe there is still a chance to make that happen.

They have plenty of existing leases that they have not yet developed and for which there are no regulatory impediments to developing them.

The reasons they are not investing in new capacity in response to the current high prices are, according to the oil companies themselves, that they don't think the price is going to stay high, there are worker shortages from the pandemic, and (this is the biggest reason) investors want the oil companies to concentrate on consistent profits instead of the boom and bust way things were.

In a survey of oil producers by the Federal Reserve Bank of Dallas [1], they found that 60% of publicly traded oil producers are restraining growth because of investor pressure to maintain capital discipline. Only 11% said they were restraining for environmental, social, and governance issues, and only 6% said it was due to government regulations.

The money that they would have invested in new production is going to dividends and stock buybacks.

[Edit] PS: Forbes says that they are greatly increasing drilling, with a 60% increase in the number of oil rigs over the last year [2].

[1] https://www.cbsnews.com/news/oil-production-prices-us-compan...

[2] https://www.forbes.com/sites/rrapier/2022/03/27/oil-companie...

> maintain capital discipline.

And why? No rational investor will invest capital when collection pipelines and distribution pipelines will not be permitted. Returns on capital investment in refineries is paid back over decades. A rational investor will not allocate capital to new refineries.

It's like domestic nuclear after Carter stopped development of fuel reprocessing - further investment is done for many decades.

And ESG investing. I wonder what S stands for.

Which oil company has capacity? And what sense would it make for them to restrict supply?

The only organization that has enough market power that it makes sense to restrict supply is OPEC.

I'm puzzled too. If the price of oil has gone up, as everyone and their grandmother knows, and Aramco's cost of extraction is constant, why would the profits not go up? Is Aramco supposed to sell below market price for some altruistic reasons?

In many places it’s illegal to sell below market rates.

I used to work at a gas station, and every day would start with driving around and writing down the price of gas at the competition.

How is the market rate determined in those places? If no one can lower prices unilaterally, it seems like price discovery just can’t happen.

Lowering prices isn't illegal. There are only certain very limited circumstances where selling below the market rate can potentially be illegal. One is dumping, where foreign companies sell at artificially low prices in an attempt to drive domestic competitors out of business. Another is when a domestic monopoly (or near monopoly) does the same. But if a fuel retailer wants to sell gasoline at $1 / gallon less than the competition then that's totally fine (although local law enforcement might be annoyed if that causes a traffic jam).

Where I live there’s a minimum markup law - a relic of the Great Depression. Certain goods must be marked up a certain percentage.

Gasoline and oil are commodities, so the price doesn’t change much from place to place.

Lots of the businesses that sell gas don’t make any profit on it at all. They use gas to draw people in, and sell them other stuff, like overpriced headphones.

The price of gas has more to do with what you’re buying if for than what you’re competitors charge.

The drive around is defensive. If someone says “so and so is dumping gas at below market prices” you can defend yourself by showing competitors prices.

Since the gasoline is a marketing technique, long term below market prices aren’t inconceivable.

Edit:

The real question is “why is the government opposed to low gas prices?”

To be clear there is actually a minimum markup law where I live, so it’s not just anti-dumping.

This is supported mostly by old school Democrats.

The United States is the largest producer of oil in the world. We are also a net exporter.

This happened within the past decade.

Now we are told that we just need to drill even more.

Using every last drop of domestic oil is quite short-sighted.

We will never use every drop. There will always be some remaining which isn't economically viable to extract. But there is wisdom in leaving some significant quantity in the ground, both to limit environmental damage and as a hedge against foreign supply disruptions.

It’s only a hedge if you use it.

The SPR is a hedge. Strange the Pres. has been releasing it to China.

https://www.hawley.senate.gov/hawley-calls-investigation-bid...

>"Crude and fuel prices would likely be higher if (the SPR releases) hadn't happened, but at the same time, it isn't really having the effect that was assumed," said Matt Smith, lead oil analyst at Kpler.

https://www.reuters.com/business/energy/oil-us-reserves-head...

We are a net importer of crude oil. We are a net exporter of petroleum products.

It’s pretty wild how blatantly others are being scapegoated for the impact of bad monetary policy.

“Putin price increase”, “greedy companies”.

The deflection is epic.

One of the main issues is that recent gasoline prices are not following historic trends against crude oil prices. A barrel of oil right now is close to 2014 prices, but a gallon of gas is not. The difference is being seen as profiteering off of global fear and not due to natural market forces.

https://www.macrotrends.net/2501/crude-oil-vs-gasoline-price...

Perhaps because U.S. oil refining capacity has fallen 5.4% since 2019.

https://www.reuters.com/business/energy/us-oil-refining-capa...

It's a commodity with a world market. Increasing supply doesn't have to be domestic to affect domestic prices.

World production should be going up in September. The 2020 deal that the US pressured OPEC into agreeing to (by threatening to cut military aid to Saudi Arabia) [1] that cut production by an amount equal to around 10% of the world's total production should expire then.

[1] https://www.reuters.com/article/us-global-oil-trump-saudi-sp...

When your Bangladeshi relatives have to go knock on doors in Cherrapunji for a place to live I hope you’re this sanguine with them. We cannot afford to increase domestic production any more than is necessary to stymie Russia.

I suppose you might be able to say this piece is targeted at Americans, but it appears to be originally published by Kevin Granville, European business editor at The New York Times, United Kingdom.

https://www.nytimes.com/2022/08/14/business/saudi-aramco-ear...

> "Unless we have shareholders that come in and say, look, we absolutely — we do not like these big dividends. We do not like your share repurchase programme. We want you to go back to a growth model," Rick Muncrief, chief executive of Devon Energy, one of the shale patch’s biggest producers, told analysts. "Until we see that, I see no reason to change our strategy."

https://www.ft.com/content/137e38d3-c0e5-493b-9690-7c2fae364...

Saudi Arabia was smart enough to nationalise their oil industry. It was a long and hard struggle- they were completely exploited for decades by Western companies (with respect Saudi leaders were completely out of their depth). Payback is a bitch.

lmao do you really think the Saudis, or any of the Gulf countries, have any sovereignty at all? If the US wants the prices down they'll get them down. The issue is internal politics.

What are you talking about? Saudi were not exploited by western companies. After independence from British, they contracted out to western companies but took the healthy profits for basically doing nothing. Later, they bought out everything and now they have been exploiting the whole world for more than half century. All the oil and assets are basically a personal property of Saudi royal family. The MBS walks into marina in Europe and purchases mega yacht on the spot for $500M in all-cash same day transaction with no pre-planning just because he happen to like it when he saw it. All the while, general public not connected to royal family lives miserably. Saudi then hires managers who goes out like bull dogs to get every last cent from every possible move they can make. This results in supporting Putin to manipulating OPEC so MBS can purchase another $500M painting to hang in his bathroom.

Doesn't this just mean, we'll start fracking again?

That’s been going on for quite a while already

Not in California. Fracking is effectively banned.

https://apnews.com/article/climate-business-environment-and-...

So why does Biden blame fuel prices on Putin's little war? I really want to like and trust the President, but I think he is being disingenuous in his attempts to explain the fuel prices.

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