Why the car, oil, tobacco businesses are still (sometimes) very profitable?

[Matteo Martini]

During my earlier years, I studied a little bit of Marketing, and there was the famous chart about the life of a product: the BSG matrix
http://www.netmba.com/strategy/matrix/bcg/
It predicts that any product/business have several phases:
- child, new products
- star, high market growth and high profit
- cash cow, market growth stops and you make profits
- dogs: product/business end

In other words, AFAIK, when a product gets techonologically obsolete, everybody copies it and nobody will make big profits on it.

My question is, why the oil, car, tobacco industries are still among the most profitable, even if the technology behind all of them is at least 50-100 year old?
Should not competition leverage profits down?

How come that Toyota and Exxon make such enormous profits?

[Gazpacho]

First, I don't know why you'd say that the auto and oil industries are technologically stagnant. Car enthusiasts and chemical engineers don't seem to think so.

Second, auto makers have relied a great deal on style to sell cars since the 1930s. This bothers a lot of scientifically minded people (or would-be scientists like Galbraith), I guess because they can't explain styling from first principles. But people really do care about styling when they can get it.

Third, tobacco isn't so much a technology driven business as a taste and supply-driven one. A tobacco brand's success, like a soft drink's, depends on its formula, which is not registered with the patent office.

[Matteo Martini]

First, I don't know why you'd say that the auto and oil industries are technologically stagnant. Car enthusiasts and chemical engineers don't seem to think so.

Cars are basically the same since 1930


Second, auto makers have relied a great deal on style to sell cars since the 1930s. This bothers a lot of scientifically minded people (or would-be scientists like Galbraith), I guess because they can't explain styling from first principles. But people really do care about styling when they can get it.

You can not make billions out of style


Third, tobacco isn't so much a technology driven business as a taste and supply-driven one. A tobacco brand's success, like a soft drink's, depends on its formula, which is not registered with the patent office.

Tobacco is tobacco.
One friend of mine said it is basically is a cartel, and I believe him.
You can not keep selling cigarettes at x price, making a lot of profit.
Making a cigarette is very simple.
How can profits be so high?

[e-sabbath]

Either... cars must not be the same since 1930... or marketing theory must be wrong!

[NobbyNobbs]

Cars are basically the same since 1930

How they function is essentially the same, i.e. combustion engines, pistons, brakes, steering, etc. But this (http://images.google.com/imgres?imgurl=http://www.moviecarmania.com/prodimages/Al_Capone_1930_Cadillac.jpg&imgrefurl=http://www.moviecarmania.com/proddetail.asp%3Fprod%3DMCM-0040%26cat%3D19&h=308&w=500&sz=46&hl=en&start=1&um=1&tbnid=P-cVW1W9tWnLaM:&tbnh=80&tbnw=130&prev=/images%3Fq%3Dcar%2B1930%26svnum%3D10%26um%3D1%26hl %3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en%26sa%3DN) is hardly the same as this (http://images.google.com/imgres?imgurl=http://www.seriouswheels.com/pics-def/Ford-GT90-Concept-Car-Front.jpg&imgrefurl=http://www.seriouswheels.com/def/Ford-GT90-Concept-Car-Front.htm&h=960&w=1280&sz=135&hl=en&start=9&um=1&tbnid=SeOMyfE0cDtFJM:&tbnh=113&tbnw=150&prev=/images%3Fq%3Dconcept%2Bcar%26svnum%3D10%26um%3D1%2 6hl%3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en), stylistically. And people's tastes change.

You may as well say that movies haven't changed since 1930. After all, it's still shown on a big screen, and it's still boy meets girl, and spy vs. spy, etc.

You can not make billions out of style

I would think the fashion industry proves otherwise, wouldn't you?



Tobacco is tobacco.
One friend of mine said it is basically is a cartel, and I believe him.
You can not keep selling cigarettes at x price, making a lot of profit.
Making a cigarette is very simple.
How can profits be so high?

Tobacco is the one thing on your list I can't empathize with; I've never smoked. But to hear people talk about it, tobacco is like wine; there are connosieurs who can taste a difference in tobacco products. And then, of course, there are the millions of cigarette addicts. You can absolutely sell cigarettes at x price, making a lot of profit, if the ones buying are addicted.

Again, you say this is impossible, but the success of the industry obviously proves otherwise.

[e-sabbath]

According to this logic, horses are now available for pittances, as are houses.

Therefore, either the BSG matrix, as explained, is wrong, or the world is wrong. I believe something may be wrong with the explanation. I will examine it when I have a moment. I rather suspect barriers to entry (eg, making a car is a non-trivial cost) may have weight.

[tsg]

Cars are basically the same since 1930

Anti-lock brakes. Computer controlled ignition. Air-bags. Navigation systems. Electric start. Seat belts. Radios. Heat. Air-conditioning. Power windows. Power locks. Power Steering. Power Brakes. Except for having four wheels and a motor, there isn't much about cars that hasn't changed since the 1930s.

You can not make billions out of style

I think the fashion industry would disagree with you.

[Tokenconservative]

First, I don't know why you'd say that the auto and oil industries are technologically stagnant. Car enthusiasts and chemical engineers don't seem to think so.

Second, auto makers have relied a great deal on style to sell cars since the 1930s. This bothers a lot of scientifically minded people (or would-be scientists like Galbraith), I guess because they can't explain styling from first principles. But people really do care about styling when they can get it.

Third, tobacco isn't so much a technology driven business as a taste and supply-driven one. A tobacco brand's success, like a soft drink's, depends on its formula, which is not registered with the patent office.

I think by "technologically stagnant" you can say that a car is essentially unchanged since Ford built his Model Ts: an enclosed platform that gets you from here to there.

Oil exploration, extraction, refining, etc., etc., are moving ahead apace, indeed. But same thing applies: you use oil (mostly...there are other products: plastice, fertilizers, etc.) for energy, like running those cars.

Tobacco is a very addictive thing, like legal heroin--worse, actually.

Cars and oil are necessities in modern life in America, especially. Cars are very much "status" things elsewhere. While it's a status thing here to drive a H3 or Lexus, or Mercedes, in most other parts of the world just being able to afford a car is a HUGE status symbol.

Tobacco is constantly being marketed to new markets. It's a HUGE seller in China, now and the Chinese have money to spend on smokes and American cigs are HUGE status symbol, as they have been all over the world for 75 years. In fact, only in N. America do we look down our noses at smoking. The Euros all smoke like locomotives and do Latin and S. Americans, Aussies and Kiwis, and Asia is awash in smoking...virtually EVERYONE over the age of 9-10 in China smokes and smokes a LOT.

It's just good marketing that keeps this going.

Tokie

[ImaginalDisc]

I think by "technologically stagnant" you can say that a car is essentially unchanged since Ford built his Model Ts: an enclosed platform that gets you from here to there.

An enclosed platform, of which every part inside has undergone radical alteration numerous times conforming to increasing standards of speed, handling, braking, acceleration, top speed, safety, fuel efficiency, and style, which gets you from here to there.

That's as idiotic as saying that a coracle and a battleship are so similar that shipbuilding is "technogologically stangnant."

[JonnyFive]

OP: You really don't think the technology behind cars, oil, and tobacco has changed at all? Seriously?

The level of efficiency in manufacturing alone (ignoring all the wonderful advances in the technology of cars themselves, which is the only product on your list that actually has "technology" as a real component of the product itself) is considerably greater than it was 50 or 100 years ago. This drives down the cost of production.

Your three industries are very different, and the reasons for profit in the three are also quite different. It might also be worth pointing out that many car manufacturers have had trouble making consistent profits in the face of tough competition (GMC, anyone?), and the tobacco industry has seen their US market suffer due to lawsuits and increased anti-tobacco legislation.

[Jaggy Bunnet]

The Euros all smoke like locomotives

Percentages smoking in the UK and US are broadly the same. Guess we can't be in Europe.

[TjW]

With regard to automobiles, I think you're mistaking the forest for the trees.
Trees sprout, get old, and die. How can there still be forests after all these years?

[JonnyFive]

With regard to automobiles, I think you're mistaking the forest for the trees.
Trees sprout, get old, and die. How can there still be forests after all these years?

I don't know for sure, but I'm fairly certain the answer has something to do with badgers.

[NobbyNobbs]

I would think the fashion industry proves otherwise, wouldn't you?






I think the fashion industry would disagree with you.


I beat you! (Actually, I predicted you would say that, almost word for word. I'd like the $1 million in 50's and 100's please.)

As my dad would say, "Great minds think alike....and soft minds run together."

[Gazpacho]

Cars are basically the same since 1930
Here are some changes that have happened just during my lifetime:
- Carburetors have disappeared
- The drive axle has moved from the rear to the front
- Computer control systems have been added
- Numerous safety developments like crumple zones, detachments, and fuel line cut-off.

This is just what I know as a layman. A car enthusiast could tell you more. Sure, cars still spray gasoline into a cylinder and make it explode, so they're the same if you conveniently ignore how the gas gets into the cylinder and how the explosion is used to turn the wheels, as well as everything outside the power system.

You can not make billions out of style
You can if the market is big enough.

Tobacco is tobacco.
You simply do not know what you are talking about.

[tsg]

I beat you! (Actually, I predicted you would say that, almost word for word. I'd like the $1 million in 50's and 100's please.)

In my defense, I hadn't read your post when I made mine. That's my story and I'm sticking to it.

As my dad would say, "Great minds think alike....and soft minds run together."

I always preferred "twisted minds think alike".

[NobbyNobbs]

I think by "technologically stagnant" you can say that a car is essentially unchanged since Ford built his Model Ts: an enclosed platform that gets you from here to there.


I like the idea of applying this logic to other inventions.

After all, an aircraft is simply an object with wings (generally) that uses lift to get you from here to there. Therefore, there really isn't much difference between a hang glider and the Concorde, the aircraft industry being "technologically stagnant" since the Montpelier brothers.

And communications must be "technologically stagnant", since both a cell phone and a couple of tin cans tied with string allow you to project your voice from here to there.

And medicine must be "technologically stagnant", since trepanning and laser-controlled brain surgery are both used to relieve pressure on the brain.

This is fun!

[tsg]

I like the idea of applying this logic to other inventions.

I was thinking that, too. Essentially, the statement is "if you ignore all the things that have changed, nothing has changed."

[littlehulkster]

Cars are basically the same since 1930


Jets are basically the same since 1955.

The automobile might be operating on the same concepts as one from the 30s, but so much has changed since then. Things like electronic fuel injection, variable valve timing, capacitor ignition, and advances in metallurgy have made cars far more efficient, more powerful and cleaner running than ever before.

Not to mention computers allow automakers to greatly increase the efficiency of many parts and plan out aerodynamics for more efficiency.

[NobbyNobbs]

Jets are basically the same since 1955.

The automobile might be operating on the same concepts as one from the 30s, but so much has changed since then. Things like electronic fuel injection, variable valve timing, capacitor ignition, and advances in metallurgy have made cars far more efficient, more powerful and cleaner running than ever before.

Not to mention computers allow automakers to greatly increase the efficiency of many parts and plan out aerodynamics for more efficiency.

Computers! Not much different than an abacus, only faster!

[Tokenconservative]

I like the idea of applying this logic to other inventions.

After all, an aircraft is simply an object with wings (generally) that uses lift to get you from here to there. Therefore, there really isn't much difference between a hang glider and the Concorde, the aircraft industry being "technologically stagnant" since the Montpelier brothers.

And communications must be "technologically stagnant", since both a cell phone and a couple of tin cans tied with string allow you to project your voice from here to there.

And medicine must be "technologically stagnant", since trepanning and laser-controlled brain surgery are both used to relieve pressure on the brain.

This is fun!

Clearly (you've demonstrated this before) logic does escape you.

(this is only a working definition presented by a layman) An airplane is a self-propelled, non-kinetic energy machine that moves through the atmosphere using some sort of engine to do so (this would not include hang gliders or hot air baloons, but could include dirigibles, I suppose).

The Wright brothers had a machine that did this.

A Hawker Harrier does this.

Both are, therefore, airplanes.

Your communications analogy is correct, only it's too broad 'communications' means something far more than devising technical means of communicating over distance. A better analogy would be smoke signals or drums and a cell phone, which, since they do the same thing, analogous.

I did not say the advancement of technolgy was "stagnant." That was someone else.

But yes, in your medicine analogy, all other things being equal, they are very comparble.

I see that the further you went into this, the more rational you became.

That's a start.

Now, if you could only have stopped and said to yourself "uh, self...I am kinda defeating my own point here...that Tokie feller is right!" you'd be much further ahead intellectually.

Tokie

[Tokenconservative]

Computers! Not much different than an abacus, only faster!

No, absolutely wrong. Computers do all sorts of things from the simplest math (like an abacus) to producing advanced graphics.

Sigh...yes...you can argue that it's ALL just math to a computer, and you'd be right.

But the last time I checked, an abacus could not make Angelina Jolie's feet sprout built-in CFM heels as a computer did in Beowulf.

Tokie

[ImaginalDisc]

Clearly (you've demonstrated this before) logic does escape you.

(this is only a working definition presented by a layman) An airplane is a self-propelled, non-kinetic energy machine that moves through the atmosphere using some sort of engine to do so (this would not include hang gliders or hot air baloons, but could include dirigibles, I suppose).

The Wright brothers had a machine that did this.

A Hawker Harrier does this.

Both are, therefore, airplanes.

Your communications analogy is correct, only it's too broad 'communications' means something far more than devising technical means of communicating over distance. A better analogy would be smoke signals or drums and a cell phone, which, since they do the same thing, analogous.

I did not say the advancement of technolgy was "stagnant." That was someone else.

But yes, in your medicine analogy, all other things being equal, they are very comparble.

I see that the further you went into this, the more rational you became.

That's a start.

Now, if you could only have stopped and said to yourself "uh, self...I am kinda defeating my own point here...that Tokie feller is right!" you'd be much further ahead intellectually.

Tokie

I take it then you will stop using the internet and take to using smoke signals to communicate with us over long distances, please? They're both just messages. With one wave if your hand you're idiotically equating the most primative technologies to the bleeding, cutting edge.

[Tokenconservative]

You know, I realize it's something of an...obsession in here for various n00bs to try and find some niggling little aspect of something--anything--Tokie says and nit-pick it to the nth degreee, but sometimes you guys just make yourselves look like morons when you do it.

I will now await my "warning!!!" for calling some morons morons.

Sheesh.

Tokie

[Tokenconservative]

I take it then you will stop using the internet and take to using smoke signals to communicate with us over long distances, please? They're both just messages. With one wave if you hand you're idiotically equating the most primative technologies to the bleeding, cutting edge.

See my post just previous to this one. It especially applies to you.

Tokie

[ImaginalDisc]

You know, I realize it's something of an...obsession in here for various n00bs to try and find some niggling little aspect of something--anything--Tokie says and nit-pick it to the nth degreee, but sometimes you guys just make yourselves look like morons when you do it.

I will now await my "warning!!!" for calling some morons morons.

Sheesh.

Tokie

Egads! You're experiencing criticism of your statements on a forum dedicated to critical thinking?

I am so suprised!

[Gazpacho]

(this is only a working definition presented by a layman) An airplane is a self-propelled, non-kinetic energy machine that moves through the atmosphere using some sort of engine to do so (this would not include hang gliders or hot air baloons, but could include dirigibles, I suppose).
The Wright brothers attached airfoils to their flier and pushed it through the air fast enough that the air pressure difference lifted the flier off the ground.

Modern airplanes work the same way. Therefore airplanes are basically the same as they were at the beginning of the 20th century.

[blutoski]

I think there's a confusion here about what the BCG is showing: it's not a product life cycle, but a set of four general descriptions of how products might compare to one another in an overall company portfolio, in two independent ways, which makes for 'types' of product.

It does speak to product life cycle, though, in that many question marks become stars, which become cash cows, and some cash cows may become dogs. But there's no rigid law about this.


The second complication is the conflation of commodity products versus invented products. An example of this is oil, which is dug out of the ground, and is essentially valuable because it's a bucket of Joules.

The third complication is the conflation of products with markets. "Cars" is an market. "The Datsun S10" is a product. The BCG matrix applies to products a company sells [/i]within[/i] a market.

The fourth complication is that the product life cycle duration varies, and the goal is to make a product profitable forever. There's no reason that some products can't remain cash cows forever.

The BCG is a resource allocation tool, and an obsolete one, at that.

You're thinking of product life cycle (http://www.netmba.com/marketing/product/lifecycle/). Note that PLC models have limitations and exceptions. Specifically, note this passage from the linked citation:
The life cycle concept may apply to a brand or to a category of product. Its duration may be as short as a few months for a fad item or a century or more for product categories such as the gasoline-powered automobile.

It would not apply to 'oil,' since that's a resource commodity and anyway, as you're aware, it's a cartel and resistant to conventional marketing models. There are models for cartel management that would apply.

[WildCat]

When I was in college we learned a much different meaning for the term "cash cow". A cash cow was a company that had lots of cash on hand, and these companies were ripe for the picking (meaning likely to be bought out) because they shouldn't have so much cash on hand. Instead, they should be re-investing in new products, new technology, etc. In other words, cash cows were underperforming companies.

[bjb]

During my earlier years, I studied a little bit of Marketing, and there was the famous chart about the life of a product: the BSG matrix
http://www.netmba.com/strategy/matrix/bcg/

My question is, why the oil, car, tobacco industries are still among the most profitable, even if the technology behind all of them is at least 50-100 year old?
Should not competition leverage profits down?

How come that Toyota and Exxon make such enormous profits?

You have made the mistake of not reading your own link:

The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed.

To answer your question, all of these companies are successful in spite of the BCG matrix because the BCG matrix is not a very good economic model.

[Marquis de Carabas]

You have made the mistake of not reading your own link:

The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed.

To answer your question, all of these companies are successful in spite of the BCG matrix because the BCG matrix is not a very good economic model.
Pah! Economic models are basically the same since 1930.

[Matteo Martini]

How they function is essentially the same, i.e. combustion engines, pistons, brakes, steering, etc. But this (http://images.google.com/imgres?imgurl=http://www.moviecarmania.com/prodimages/Al_Capone_1930_Cadillac.jpg&imgrefurl=http://www.moviecarmania.com/proddetail.asp%3Fprod%3DMCM-0040%26cat%3D19&h=308&w=500&sz=46&hl=en&start=1&um=1&tbnid=P-cVW1W9tWnLaM:&tbnh=80&tbnw=130&prev=/images%3Fq%3Dcar%2B1930%26svnum%3D10%26um%3D1%26hl %3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en%26sa%3DN) is hardly the same as this (http://images.google.com/imgres?imgurl=http://www.seriouswheels.com/pics-def/Ford-GT90-Concept-Car-Front.jpg&imgrefurl=http://www.seriouswheels.com/def/Ford-GT90-Concept-Car-Front.htm&h=960&w=1280&sz=135&hl=en&start=9&um=1&tbnid=SeOMyfE0cDtFJM:&tbnh=113&tbnw=150&prev=/images%3Fq%3Dconcept%2Bcar%26svnum%3D10%26um%3D1%2 6hl%3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en), stylistically. And people's tastes change.

You may as well say that movies haven't changed since 1930. After all, it's still shown on a big screen, and it's still boy meets girl, and spy vs. spy, etc.


I agree.
I would rather say: "the main concept behind/things you can do with" a car have not really changed since 1930


I would think the fashion industry proves otherwise, wouldn't you?


The fashion industry is quite small, if compared with the car industry, and nowhere as profitable


Tobacco is the one thing on your list I can't empathize with; I've never smoked. But to hear people talk about it, tobacco is like wine; there are connosieurs who can taste a difference in tobacco products. And then, of course, there are the millions of cigarette addicts. You can absolutely sell cigarettes at x price, making a lot of profit, if the ones buying are addicted.


Why prices do not get leveraged downwards?

[Matteo Martini]

Anti-lock brakes. Computer controlled ignition. Air-bags. Navigation systems. Electric start. Seat belts. Radios. Heat. Air-conditioning. Power windows. Power locks. Power Steering. Power Brakes. Except for having four wheels and a motor, there isn't much about cars that hasn't changed since the 1930s.


With a car, you can do in 2007 basically the same things you could do in 1937.
Air bags do not reduce accidents that much.
Radios are availalbe in cars since 1960.
Power windows, etc., yes, an improvement, hardly a drastic change


I think the fashion industry would disagree with you.

Is there any fashion company one quarter as profitable as Toyota?

[Matteo Martini]

The Euros all smoke like locomotives ..
Tokie

Not really true, but ;)

OP: You really don't think the technology behind cars, oil, and tobacco has changed at all? Seriously?

It has changed, even if cars do basically now what they did in the 30s


The level of efficiency in manufacturing alone (ignoring all the wonderful advances in the technology of cars themselves, which is the only product on your list that actually has "technology" as a real component of the product itself) is considerably greater than it was 50 or 100 years ago. This drives down the cost of production.
[..]
It might also be worth pointing out that many car manufacturers have had trouble making consistent profits in the face of tough competition (GMC, anyone?),

So, why GMC is making huge losses and Toyota great profits, if they both sell similar products at similar prices?

Jets are basically the same since 1955.
[..]

Yes, the main concept of my discussion can involve jets too.
But, with jets, there are basically two big players, with cars, more.

Again, the main concept behing cars has not changed.

You're thinking of product life cycle (http://www.netmba.com/marketing/product/lifecycle/). Note that PLC models have limitations and exceptions. Specifically, note this passage from the linked citation:


You are probably right.
What I am saying is: how can some car companies make big profits (and some, big losses), in an industry which has not seen any kind of enormous tech breakthrough in the last decades?

[tsg]

With a car, you can do in 2007 basically the same things you could do in 1937.
Air bags do not reduce accidents that much.
Radios are availalbe in cars since 1960.
Power windows, etc., yes, an improvement, hardly a drastic change


In other words, except for the things that have changed, nothing has changed.


Is there any fashion company one quarter as profitable as Toyota?

You're moving the goalposts. You don't have to be one quarter as profitable as Toyota to be successful at selling style as the fashion industry clearly shows.

[Matteo Martini]

In other words, except for the things that have changed, nothing has changed.


Cars have remained virtually the same in the last 50-70 years.
Things which changed are: Ipods, computers, internet and microwave, ..


You're moving the goalposts. You don't have to be one quarter as profitable as Toyota to be successful at selling style as the fashion industry clearly shows.

I am talking about the big money.
Not fashion

[Jaggy Bunnet]

Is there any fashion company one quarter as profitable as Toyota?

Depends what you mean by profitable.

As a percentage of revenue? Yes. (For example LVMH made €1,298 million of profit before tax and minority interest on turnover of €7,412 million in the first half of 2007 - 17.5%. Toyota in its half year to Sep 07 made Yen1,166,134 on turnover of Yen11,471,889 - 10.2%)

In absolute terms? Probably not as the fashion industry does not offer the same economies of scale benefits as motor manufacture and therefore companies tend to be smaller.

Given that competition will have a more direct impact on margins than company size, it would appear that net income percentage is a more relevant measure - on that basis the first "fashion" company that came to mind (behind the Louis Vuitton, Moet and Hennessy brands) is significantly more profitable than Toyota.

[tsg]

Cars have remained virtually the same in the last 50-70 years.

Except for having four wheels and a motor (and even the wheels and motor have changed significantly) very little of the car hasn't changed. That you don't want to acknowledge it doesn't change anything.

I am talking about the big money.
Not fashion

You're moving goalposts. You said you can't make billions selling style. The fashion industry says otherwise.

[JonnyFive]

It has changed, even if cars do basically now what they did in the 30s

Well then, that's settled.

So, why GMC is making huge losses and Toyota great profits, if they both sell similar products at similar prices?

This is really beside the point of anything in this thread. Issues with profitability within a particular market are complex, and you weren't really asking about "why are some companies profitable and some aren't?" If you want to explore that, I'd suggest starting a new thread.

Really, blutoski head it square on the head. There are a number of, as he put it, "complications" with your original question. Honestly, I think you're lumping too many different things into one generic question, then making some giant assumptions to make that generalized question valid.

Another issue that I didn't see blutoski mention is that you're conflating "profit" with "price" when you talk about the market. You keep saying that competition will affect "profit," but what you probably mean to say is that competition tends to drive down the price of a good. If a manufacturer is able to continue to reduce their costs of production, distribution, marketing, etc. they may still be able to remain equally profitable.

Although the two do tend to be linked, it's confusing to try to ram the concept of profit into the supply/price curve.

[Tokenconservative]

Egads! You're experiencing criticism of your statements on a forum dedicated to critical thinking?

I am so suprised!

Sigh.

And this is precisely what I mean.

"Critical thinking" does not mean "criticizing someone."

Sigh.

Tokie

[Tokenconservative]

According to this logic, horses are now available for pittances, as are houses.

Therefore, either the BSG matrix, as explained, is wrong, or the world is wrong. I believe something may be wrong with the explanation. I will examine it when I have a moment. I rather suspect barriers to entry (eg, making a car is a non-trivial cost) may have weight.

Not sure, zactly, what you are driving at, but since I know a little about the cost of horses and a lot about the cost of houses, I will comment.

We have given away 6 horses in the past oh, about 10 years. That's pretty cheap.

A reasonably decent Mustang can be had for $300-600. A slightly more trained and better lineage Quarter for around a grand.

Pretty cheap, yeah. On the other hand, I know people who pay $20k-$30 k for horses. I think that's crazy, but they don't.

Houses? Well, that depends. I know neighborhoods near me where you can get a 200-2500 s.f 2-story for around $100k.

I also know neighborhoods not too far from those neighborhoods where the same house will cost you upstairs from $500k.

To me $100k is "cheap" and $500k is expensive (for the same thing. If someone were to offer me Trump Tower for $500k, I would think that "cheap.").

"Cheap" and "expensive" are relative things, no matter the product, era, place or whatever.

Tokie

[Tokenconservative]

Pah! Economic models are basically the same since 1930.

Um...no...only if you are a liberal.

Then you believe that economics started with Malthus and ended with Keynes.

Otherwise, you know better.

Tokie

[ImaginalDisc]

Sigh.

And this is precisely what I mean.

"Critical thinking" does not mean "criticizing someone."

Sigh.

Tokie

When you says thing here, they will be criticized. If you prattle on without a shred of evidence while you spout idiocies we will pick your words apart and then laugh at you.

[Tokenconservative]

With a car, you can do in 2007 basically the same things you could do in 1937.
Air bags do not reduce accidents that much.
Radios are availalbe in cars since 1960.
Power windows, etc., yes, an improvement, hardly a drastic change

Is there any fashion company one quarter as profitable as Toyota?

Exactly so.

Power windows and locks, stereo systems...hell, you can even get little TVs and DVD players in every seat back in your car now.

How (this question is not posed to you, Martini, but to the pedants we are dealing with) does any of this change the basic fuctioning of the car? It's still a means of conveyance more similar to a 1925 Model T than it is to a horse, is it not?

Why is it necessary, in such conversations, for engineer and other types to engage in this sort of nit-pickng pedantry?

Does a car or an airplane do, essentially, the same thing today, as it did in 1920?

If they do something radically different than they did in 1920, then okay. Let's say cars now are primarily used as a means of detecting gamma radiation from neutron stars and aircraft are used, primarily, to inseminate cattle--these would be radically different discoveries of new uses and radical divergences from the original uses, indeed.

But from all that I am able to determine, cars (automobiles) today are independent systems designed to move people and things from one place to another on the ground, and aircraft do the same thing in the air.

How is this radically different from what these machines did in 1997? 1987? 1977? 1967? 1957? 1947? 1937? 1927?

Tokie

[Tokenconservative]

When you says thing here, they will be criticized. If you prattle on without a shred of evidence while you spout idiocies we will pick your words apart and then laugh at you.

Hm.....I am having a hard time figuring out whether the miscommunication here is coming from me, or from the fact that you seem to be a bit...obtuse.

I'll try it again: Critical thinking is not "criticizing" others.

But please, since I am apparently not, in this statement of fact, being entirely clear, tell me which of the words in the above statement you don't have any understanding of, and I'll try to work through their meaning(s) with you.

Tokie

[ImaginalDisc]

Hm.....I am having a hard time figuring out whether the miscommunication here is coming from me, or from the fact that you seem to be a bit...obtuse.

I'll try it again: Critical thinking is not "criticizing" others.

But please, since I am apparently not, in this statement of fact, being entirely clear, tell me which of the words in the above statement you don't have any understanding of, and I'll try to work through their meaning(s) with you.

Tokie

Learn to read.

No one is calling you short, fat, weak, or clumsy. We are tearing apart your assertions, not your appearance or personality.

[Jaggy Bunnet]

But from all that I am able to determine, cars (automobiles) today are independent systems designed to move people and things from one place to another on the ground, and aircraft do the same thing in the air.

And a house is a fixed place intended to provide protection from the elements, intruders and wild animals, so I guess houses must be worth almost nothing as they have been performing the same function for tens of thousands of years?

After all a house today does essentially the same thing as a cave dwelling.

[technoextreme]

My question is, why the oil, car, tobacco industries are still among the most profitable, even if the technology behind all of them is at least 50-100 year old?

Don't know about the oil and tobacco industries but the technology in the current batch of cars is not 50-100 years old. It's an idiotic argument to say that they haven't changed.Jets are basically the same since 1955.

Except for the whole flying themselves part.So, why GMC is making huge losses and Toyota great profits, if they both sell similar products at similar prices?
There are multiple reasons why they could be making great profits that have nothing to do with the similar products. You are ignoring the manufacturing process which is significantly different. Japanese companies like Toyota go to great lengthes to streamline their manufacturing process. They'll have the manufacturer send the parts that they need when they need them. This is called just in time manufacturing.

[blutoski]

You are probably right.

So this is actually not the question you were asking in the original post.

You're talking about industies now, not products. The BCG would be used by, say, GM, to manage its product lines so that they always had something in the pipeline to replace a tired brand.

Consider Apple: a few years ago when Jobs came back on board, they did something like a BCG review, and concluded that Newton was a dog, the OS was a dog, and that their cash cow was the hardware. They used some of the cash cow value to buy NeXT and build a new OS to bundle with the hardware, increasing the profit margin, and invested some of this surplus profit to put new products in the pipeline. Specifically, they gambled on iPod, which is arguably their new star, with the computer+OS as the cash cow. They need to take some of this excess profit and invest in something new, because someday, the iPod may be a dog. That's how the BCG is supposed to be used. And it's a bit obsolete, because it was developed in a time before acquisition research budgets became such an important substitute for in-house product development budgets.






What I am saying is: how can some car companies make big profits (and some, big losses), in an industry which has not seen any kind of enormous tech breakthrough in the last decades?

Cars are not just sold on their tech specs. In fact: auto sales are very dependent on style. A joke I remember from years ago in Mad Magazine of all things was that the typical car buyer spends approximately 200 hours researching his next car purchase, then buys a Buick anyway, 'cause that's what his daddy drove.

My dad spent $2000 on an Austin-Healey Sprite in the '50s. It's worth about $20,000 today. It didn't get 10x more technologically sophisticated in the last five decades.

In any case, there are other factors that come into play that explain the industry's profit volatility. But overall, I have always considered the auto industry to be mature and that part of the evidence for this was that they regularly struggle for profits. The Japanese manufacturers are just now getting out of a decade-long slump, and the American manufacturers are still in one (GM lost $2B in 2006, Ford lost $12.7B in 2006, and DaimlerChrysler appears to have made no profit/loss in 2006)

The second reason that you see cycles in this industry is that the enormous sunken costs (which are also barriers to entry) mean that the industry is very sensitive to demand - it is not able to reduce costs in proportion to production downticks in order to meet temporary reductions in demand. During the good years, they'll underproduce, which raises profits, and during bad years they'll overproduce, which causes losses.

Basically, industries that have large investments in plant can remain slightly profitable (as an industry - not necessarily as a company) in a mature market since increases in demand against a limited production will translate into increased prices. At least temporarily. It is this sensitivity to cycles that also acts as a barrier to entry - would you invest in a new auto company if its factories will not come online for five years? ie: what if they come online in a recession?

The same applies to the automakers: just because there's an increase in demand today doesn't necessarily mean that they will increase capacity. They may find that when the new factories are completed, this demand blip has passed. That's part of why the US automakers are in bad shape: they expected sales growth, invested in plant, and the growth did not materialize. Reports are that in 2006 GM plants were operating at 65% capacity, whereas Toyota plants were at 95%. Per-unit profits are low because of the increased overhead.

Fuel costs and consumer preference made the Ford/GM/Chrysler SUV designs obsolete, and undercut the domestic manufacturers' profits, shifting purchasing dollars mostly to Toyota and Honda, who were selling more fuel efficient cars.

So, I'm not seeing what you're seeing: I'm seeing established producers losing market share to new competitors and overall low average profits in the industry. It'll get worse for profitability when the Chinese manufacturers get access to the US and Japanese markets. I predict China will actually dump (sell at a loss to buy market share).

[Matteo Martini]

Depends what you mean by profitable.

As a percentage of revenue? Yes. (For example LVMH made €1,298 million of profit before tax and minority interest on turnover of €7,412 million in the first half of 2007 - 17.5%. Toyota in its half year to Sep 07 made Yen1,166,134 on turnover of Yen11,471,889 - 10.2%)

In absolute terms? Probably not as the fashion industry does not offer the same economies of scale benefits as motor manufacture and therefore companies tend to be smaller.

Given that competition will have a more direct impact on margins than company size, it would appear that net income percentage is a more relevant measure - on that basis the first "fashion" company that came to mind (behind the Louis Vuitton, Moet and Hennessy brands) is significantly more profitable than Toyota.

I mean, in absolute terms.
The fashion market is a small one, if compared with cars, oil and tobacco.
P.S.
Toyota did not make a profit of 1 million yen

Except for having four wheels and a motor (and even the wheels and motor have changed significantly) very little of the car hasn't changed. That you don't want to acknowledge it doesn't change anything.


You do with cars in 2007 the same you did with them in the 30s


You're moving goalposts. You said you can't make billions selling style. The fashion industry says otherwise.

OK
Maybe, there is only one ( or two?) fashion company which made more than 1 billion in profit in 2006

Exactly so.
Power windows and locks, stereo systems...hell, you can even get little TVs and DVD players in every seat back in your car now.

How (this question is not posed to you, Martini, but to the pedants we are dealing with) does any of this change the basic fuctioning of the car? It's still a means of conveyance more similar to a 1925 Model T than it is to a horse, is it not?

Why is it necessary, in such conversations, for engineer and other types to engage in this sort of nit-pickng pedantry?

Does a car or an airplane do, essentially, the same thing today, as it did in 1920?
[..]

TV and DVDs are not really part of the car business, but as part of the electronic business even if they are used in cars.
The main design and the main performances of cars have not really ben changed in the lat 50 years.
You could drive at the same speed in a car built in 1940 and in another one built in 2000.
Probably gallons of oil/mile ration has improved, but how much? Not that much, I guess.

The reasons why Toyota should be profitable and GM is not should be others

Don't know about the oil and tobacco industries but the technology in the current batch of cars is not 50-100 years old. It's an idiotic argument to say that they haven't changed.
Except for the whole flying themselves part.
There are multiple reasons why they could be making great profits that have nothing to do with the similar products. You are ignoring the manufacturing process which is significantly different. Japanese companies like Toyota go to great lengthes to streamline their manufacturing process. They'll have the manufacturer send the parts that they need when they need them. This is called just in time manufacturing.

JIT manifacturing was known in the weat about 20 years ago (I studied it in University).
If it was that good, GM could have used it 20 years ago.
No, the reasons should be others

[tsg]

You do with cars in 2007 the same you did with them in the 30s

That's not the same as the technology behind them being 50 - 100 years old.

[technoextreme]

JIT manifacturing was known in the weat about 20 years ago (I studied it in University).
If it was that good, GM could have used it 20 years ago.
No, the reasons should be others
That's the problem. No one knew it was that good back then. On top of that it's impossible for GM to really implement on any apreciable level. We are talking about having parts flowing in every single minute of the day. You do with cars in 2007 the same you did with them in the 30s
You don't do the same with cares in 2007 the same you did with them in the 30s. You don't do the same with cars in 2007 as the same as you did in 1988. Hell depending on your car it may not do the same thing in 2007 as it did in 1999. Technology changed significantly within cars. Some improvements were for safety. Some were for cost effectivness.

[Matteo Martini]

So this is actually not the question you were asking in the original post.
[..]

Yes, you are right.
The point is that I dunno a lot about business, and I have not really been interested in this topic until recently.
So, my questions may seem naive, to an expert, but I am just trying to figure out why some companies that work in fields which has not really been under a technological revolution in the last years, are so much profitable


Cars are not just sold on their tech specs. In fact: auto sales are very dependent on style. A joke I remember from years ago in Mad Magazine of all things was that the typical car buyer spends approximately 200 hours researching his next car purchase, then buys a Buick anyway, 'cause that's what his daddy drove.

My dad spent $2000 on an Austin-Healey Sprite in the '50s. It's worth about $20,000 today. It didn't get 10x more technologically sophisticated in the last five decades.

In any case, there are other factors that come into play that explain the industry's profit volatility. But overall, I have always considered the auto industry to be mature and that part of the evidence for this was that they regularly struggle for profits. The Japanese manufacturers are just now getting out of a decade-long slump, and the American manufacturers are still in one (GM lost $2B in 2006, Ford lost $12.7B in 2006, and DaimlerChrysler appears to have made no profit/loss in 2006)

The second reason that you see cycles in this industry is that the enormous sunken costs (which are also barriers to entry) mean that the industry is very sensitive to demand - it is not able to reduce costs in proportion to production downticks in order to meet temporary reductions in demand. During the good years, they'll underproduce, which raises profits, and during bad years they'll overproduce, which causes losses.

Basically, industries that have large investments in plant can remain slightly profitable (as an industry - not necessarily as a company) in a mature market since increases in demand against a limited production will translate into increased prices. At least temporarily. It is this sensitivity to cycles that also acts as a barrier to entry - would you invest in a new auto company if its factories will not come online for five years? ie: what if they come online in a recession?

The same applies to the automakers: just because there's an increase in demand today doesn't necessarily mean that they will increase capacity. They may find that when the new factories are completed, this demand blip has passed. That's part of why the US automakers are in bad shape: they expected sales growth, invested in plant, and the growth did not materialize. Reports are that in 2006 GM plants were operating at 65% capacity, whereas Toyota plants were at 95%. Per-unit profits are low because of the increased overhead.

Fuel costs and consumer preference made the Ford/GM/Chrysler SUV designs obsolete, and undercut the domestic manufacturers' profits, shifting purchasing dollars mostly to Toyota and Honda, who were selling more fuel efficient cars.

So, I'm not seeing what you're seeing: I'm seeing established producers losing market share to new competitors and overall low average profits in the industry. It'll get worse for profitability when the Chinese manufacturers get access to the US and Japanese markets. I predict China will actually dump (sell at a loss to buy market share).

Mm..
This is the kind of informative answer I was looking for.
Basically, you are saying that the car industry is not actually that profitable, and the excellent performance on companies like Toyota is compensated by the poor performance of companies like GM.
GM seems to have lost USD10B in 2005 (Struggling US car giant General Motors (GM) has been forced to increase its annual 2005 losses by $2bn (£1.1bn) due to accounting errors http://news.bbc.co.uk/1/hi/business/4818950.stm)
Also, it seems impossible, but did GM really got a loss of USD39billion in the 3rd quarter of 2007 alone?
http://www.mutual-funds.us/2007/11/07/news/companies/gm/index.htm

But leaves out the tobacco and the oil industry.

Now, these two industries really seem to be profitable.
If you look here (http://aol.theonlineinvestor.com/large_cap.phtml), in the first 8 largest companies by market cap, 2 work in the oil business and the number 14 (Altria), in the tobacco industry.
The oil industry has not really been changed that much in the last years, you basically dig and find oil, then you refine it in the consumer place.
How much radical innovation in this business?
Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?

[Matteo Martini]

That's the problem. No one knew it was that good back then.

They did.
I was told how good that business model was at least 15 years ago.


On top of that it's impossible for GM to really implement on any apreciable level. We are talking about having parts flowing in every single minute of the day.
You don't do the same with cares in 2007 the same you did with them in the 30s. You don't do the same with cars in 2007 as the same as you did in 1988. Hell depending on your car it may not do the same thing in 2007 as it did in 1999. Technology changed significantly within cars. Some improvements were for safety. Some were for cost effectivness.

Yes, but none of them was a dramatic tech breakthrough.
Apparently, the answer to my question is that the car business is not that profitable at all, after all

[NoZed Avenger]

Yes, but none of them was a dramatic tech breakthrough.
Apparently, the answer to my question is that the car business is not that profitable at all, after all


If you change the question being asked radically, then ignore 90 percent of the answers, then change the last 10 percent to something else, then yes. You got it precisely.

[Lensman]

I'm a smoker & I can tell you that different blends of tobacco DO taste differently, some I like, some I don't - some I used to like I now dislike.

[Marquis de Carabas]

Um...no...only if you are a liberal.

Then you believe that economics started with Malthus and ended with Keynes.

Otherwise, you know better.

Tokie
The inability to detect sarcasm is basically the same since 1930.

[Skibum]

Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?


Easy, supply a consumable product that 100's of millions perhaps billions of people worldwide are willing to pay for.

[Matteo Martini]

I'm a smoker & I can tell you that different blends of tobacco DO taste differently, some I like, some I don't - some I used to like I now dislike.

I know that many people smoke one or two packets of cigarette per day.
Now, that amounts to one or two grands per year, right?
If you had a brand of tobacco that tastes almost the same and costs half of this, why do not you think people would switch?

Easy, supply a consumable product that 100's of millions perhaps billions of people worldwide are willing to pay for.

Why there is such a concentration in this business?
I do not think tobacco manufacturing is so capital intensive

[Skibum]

If you had a brand of tobacco that tastes almost the same and costs half of this, why do not you think people would switch?


Some would. The problem is, 'almost tastes the same' usually isn't close enough.


I do not think tobacco manufacturing is so capital intensiveWhich would probably explain how they manage to rake in billions per year.

[Matteo Martini]

Some would. The problem is, 'almost tastes the same' usually isn't close enough.

I guess, in free market, if you sell a similar product half the price of your competitor, you have chances some people will buy it

Which would probably explain how they manage to rake in billions per year.

Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor.

[Tokenconservative]

And a house is a fixed place intended to provide protection from the elements, intruders and wild animals, so I guess houses must be worth almost nothing as they have been performing the same function for tens of thousands of years?

After all a house today does essentially the same thing as a cave dwelling.

Well, now you are introducing another element: worth.

What does "worth" mean?

There's a house built in a cave in Tennessee, I believe, that sold for somthing like $3mil USD a few years ago.

To me, cigarettes have no value. I can't imagine wasting as much money as people do on these things on a bit of weed rolled into a srap of paper for the sole purpose of introducing carcinogens and other poisons to your body.

Unless I thought I could resell a fag to an addict for a profit, I wouldn't pay anything for one.

I sense however, that you are intending something else by this comment. I sense that you are essentially putting up a billboard here that reads: I know utterly NOTHING about economics and should probably stay the hell out of this particular debate.

Tokie

[Tokenconservative]

The inability to detect sarcasm is basically the same since 1930.

Really? I'd guess it's gone down quite a bit due primarily to "smart assed" TV shows. Sarcasm is a staple of these things from Seinfeld and Friends to Married with Children to even more serious shows like Law and Order. And look at CSI Miami...that guy who plays the lead male role...you cannot believe the writers give him those lines without at least a bit of sarcasm, can you?

You heard a lot of joshing around, but never the quantity and quality of sarcasm on say the old Amos n' Andy radio show, or the Green Hornet, or Dragnet or Little Orphan Annie.

Nope, I'd have to say that simply by dint of exposure, we are far more attuned to sarcasm today, than we were in the 1930s.

Tokie

[Gazpacho]

Why there is such a concentration in this business?
It's so heavily taxed and so risky, legally, that new companies can't enter. You cannot make and sell cigarettes on any significant scale in the US, without getting sued for a large chunk of your profits.

[Matteo Martini]

It's so heavily taxed and so risky, legally, that new companies can't enter. You cannot make and sell cigarettes on any significant scale in the US, without getting sued for a large chunk of your profits.

Which risks are you talking about?
Manufacturing cigarettes is perfectly legal in almost every country of the world.

[Gazpacho]

Which risks are you talking about?
Manufacturing cigarettes is perfectly legal in almost every country of the world.
It's legal in the US only on several conditions, which include punitive taxes, "protection" payments in addition to the taxes, ongoing civil litigation, a total ban on advertising the product, and a requirement to advertise against cigarette smoking.

As Token said, the politics of cigarettes in North America are a bit out of line with most of the world. A lot of Americans support these measures, and I'm not going to debate them. I'm just saying that there are many problems for anyone who wants to start a new cigarette company that operates in the US. Yes, it's a cartel, and the US government is enforcing it.

[littlehulkster]

Matteo, you are aware that cars periodically wear out/are wrecked and need to be replaced, right?

This isn't even factoring in cars that are replaced for issues of style and taste. An example would be someone going out to buy a new BMW the day they get a promotion.

Also, cars now are tremendously more efficient than their predecessors. A new WRX STi makes more power per liter of displacement than a Formula 1 car did in 1967, not to mention getting nearly 10 times better MPG.

[Geek Goddess]

Yes, you are right.


But leaves out the tobacco and the oil industry.

Now, these two industries really seem to be profitable.
If you look here (http://aol.theonlineinvestor.com/large_cap.phtml), in the first 8 largest companies by market cap, 2 work in the oil business and the number 14 (Altria), in the tobacco industry.
The oil industry has not really been changed that much in the last years, you basically dig and find oil, then you refine it in the consumer place.
How much radical innovation in this business?
Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?


Uh.


Why I can't say "basically dig and find oil" is not correct, it's so simplistic that it doesn't make sense. The technology is constantly evolving in both the exploration/production, and in the processing/refining as well. I don't mean only improvements in the efficiencies or energy conservation. The most common process used in natural gas processing until the mid-80s, for example, was something called 'lean oil absorption'. I have not come across one of these facilities in almost 20 years. It was like replacing a slide rule with a calculator.

[Matteo Martini]

Uh.


Why I can't say "basically dig and find oil" is not correct, it's so simplistic that it doesn't make sense. The technology is constantly evolving in both the exploration/production, and in the processing/refining as well. I don't mean only improvements in the efficiencies or energy conservation. The most common process used in natural gas processing until the mid-80s, for example, was something called 'lean oil absorption'. I have not come across one of these facilities in almost 20 years. It was like replacing a slide rule with a calculator.

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.

[Matteo Martini]

Matteo, you are aware that cars periodically wear out/are wrecked and need to be replaced, right?

This isn't even factoring in cars that are replaced for issues of style and taste. An example would be someone going out to buy a new BMW the day they get a promotion.

Also, cars now are tremendously more efficient than their predecessors. A new WRX STi makes more power per liter of displacement than a Formula 1 car did in 1967, not to mention getting nearly 10 times better MPG.

Formula 1 cars may not be the best comparison model for power/liter

[Matteo Martini]

It's legal in the US only on several conditions, which include punitive taxes, "protection" payments in addition to the taxes, ongoing civil litigation, a total ban on advertising the product, and a requirement to advertise against cigarette smoking.

As Token said, the politics of cigarettes in North America are a bit out of line with most of the world. A lot of Americans support these measures, and I'm not going to debate them. I'm just saying that there are many problems for anyone who wants to start a new cigarette company that operates in the US. Yes, it's a cartel, and the US government is enforcing it.

So, it is a cartel, after all?

[Gazpacho]

So, it is a cartel, after all?
I never said it wasn't a cartel. I wish you'd admit that automobiles, oil development, and tobacco manufacturing aren't as simple as you want to assume.

If automotive technology is not continually improving, then no technology is. Can you admit that?

Formula 1 cars may not be the best comparison model for power/liter
Did you read the post, or did you just reply as soon you saw the words "Formula 1"?

oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.
Exxon is setting profit records because mainly it is setting sales records.

[Geek Goddess]

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.


(a) why do you think radical innovations are needed to 'justify' profits?

(b) Percent profits aren't necessarily related to gross profits.

(c) What is the basis of your determining whether or not the oil business has had radical innovations? What is the source of your opinion, ie., how do YOU know about what innovations have occurred?

[littlehulkster]

Formula 1 cars may not be the best comparison model for power/liter

Yes, they are.

F1 has always been strictly regulated on displacement. When most racing leagues allowed 6l motors, F1 only had 3. F1 cars were, at one time, making nearly 1000 horsepower out of 1.8l motors. Only Group B rally can match those numbers, and that only lasted a few years. Even now F1 is only running 2.4l motors, and getting nearly 800 horsepower.

F1 has always been about making the most power out of a small motor. Nothing else makes nearly that much power out of that size motor.

[Jaggy Bunnet]

I mean, in absolute terms.
The fashion market is a small one, if compared with cars, oil and tobacco.

Then you need to think about what you are asking.

Why is there more profit (in absolute terms) on the sale of a car than a shirt? That is obvious and there is no reason to expect that there would not be.

[Jaggy Bunnet]

Well, now you are introducing another element: worth.

What does "worth" mean?

There's a house built in a cave in Tennessee, I believe, that sold for somthing like $3mil USD a few years ago.

To me, cigarettes have no value. I can't imagine wasting as much money as people do on these things on a bit of weed rolled into a srap of paper for the sole purpose of introducing carcinogens and other poisons to your body.

Unless I thought I could resell a fag to an addict for a profit, I wouldn't pay anything for one.

I sense however, that you are intending something else by this comment. I sense that you are essentially putting up a billboard here that reads: I know utterly NOTHING about economics and should probably stay the hell out of this particular debate.

Tokie

No, just trying to point out to the hard of thinking (clue: that means you) that just because something has existed for a long period of time it is not reasonable to conclude it has no value.

[Jaggy Bunnet]

I know that many people smoke one or two packets of cigarette per day.
Now, that amounts to one or two grands per year, right?
If you had a brand of tobacco that tastes almost the same and costs half of this, why do not you think people would switch?

Lets try and drag this little example into the real world shall we?

How are you going to produce cigarettes that retail for half the price of those currently on the market?

You are going to have to charge the same tax as other brands (and that is a large percentage of the retail price - a minimum of 57% in the EU).

Having adjusted for that you will have a maximum of £1.20 per pack of revenue (source: http://www.the-tma.org.uk/files/January%202007.pdf).

From that £1.20 you need to take out the retailers cut, the distribution costs, the manufacturing costs and the costs of acquiring the raw materials needed in the first place. Now I very much doubt that you are going to convince the retailer, the distributor or the grower to cut their prices in half just because you are a nice bloke, so what we are actually looking at MIGHT be a price differential of 10p per pack on a good day with a fair wind.

All you need to find now are huge numbers of smokers willing to change the brand of cigarettes that they have smoked for however many years that costs £5.25 to try a new one that they have no idea if they will like, that they have never heard of previously (got to save those expensive branding costs to keep the price down) and that costs £5.15. Or more accurately you need to find financial backers who believe that you are going to be able to do so. Good luck with that.

[Jaggy Bunnet]

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.

Oil is a limited commodity, in that there is a finite amount of it available. Therefore if demand increases, supply cannot easily and quickly be increased to match that demand, therefore the price goes up.

As a simple example, lets say that there are 5 types of oil deposit in the world:

Type A is easily accessible and costs $10 a barrel to extract
Type B is slightly more difficult and costs $20 a barrel
Type C $30 and Type D $30.
Finally there is Type E which costs $50 a barrel to extract (lets say it is under deep water in a remote region and needs highly specialised equipment)

If the market price for oil is $25 a barrel, then the Type A and B deposits will be drilled as there is a profit in doing so. I own the only company in the world that has access to Type B deposits, so I make a healthy return on each barrel as I sell it for $25 and it only cost me $20.

Then a war breaks out in the country that has a large percentage of the type A deposits and demand increases as countries which have previously been largely undeveloped advance economically and increase their demand for oil. As a result it gets a little bit more expensive for me to hire workers and equipment (supply and demand after all) and therefore the cost to me of extracting my Type B oil goes up to $25. Fortunately the price of oil increases to $60, encouraging extraction from higher cost sources to make up the supply shortfall.

I now make $35 a barrel instead of $5. No radical innovation required.

[Cinorjer]

"During my earlier years, I studied a little bit of Marketing, and there was the famous chart about the life of a product: the BSG matrix
http://www.netmba.com/strategy/matrix/bcg/
It predicts that any product/business have several phases:
- child, new products
- star, high market growth and high profit
- cash cow, market growth stops and you make profits
- dogs: product/business end"

After reading the posts, I'd like to suggest that the problem is that this initial theory sounds good but is either completely wrong or so oversimplified as to not apply to real life situations - something people in Marketing and Sales are notorious for doing.

Also, this more accurately describes the life of a company, not a product. And for every instance where a company seems to fit the paradigm, I can think of dozens that don't. This describes the exception instead of the rule.

And profits certainly aren't only realized in direction relation to market growth.

[Tokenconservative]

No, just trying to point out to the hard of thinking (clue: that means you) that just because something has existed for a long period of time it is not reasonable to conclude it has no value.

Um...I guess maybe I am hard-of-thinking. Since I have a houseful of antique furniture, I can't imagine myself saying something like that, but okay...if you think I did, you must be right because I am Tokie and you are not.

You should probably not allow your hatred of me for my political beliefs cripple your own thinking.

Crippled thinking is not pretty.


Tokie

[Tokenconservative]

When you says thing here, they will be criticized. If you prattle on without a shred of evidence while you spout idiocies we will pick your words apart and then laugh at you.

Hmm...so can you provide a link showing that critical thinking means "criticizing conservatives"?

Tokie

[Gazpacho]

Hmm...so can you provide a link showing that critical thinking means "criticizing conservatives"?
I don't see anyone talking about political ideology in this thread except you.

[Tokenconservative]

I don't see anyone talking about political ideology in this thread except you.

True...but when someone ignorantly claims that they know what "critical thinking" is, and then goes on to parrot the standard leftist-education version of what that is today, and to verify my understanding of the leftist-education version as "criticizin conservatives," then I am going to note that.

Tokie

[blutoski]

Basically, you are saying that the car industry is not actually that profitable, and the excellent performance on companies like Toyota is compensated by the poor performance of companies like GM.

Basically, yes. And that's not new: Chrysler was on government-subsidized life support in the 1970s. Aviation is another unprofitable industry: Warren Buffet is famous for pointing out that the industry is a net loser.






But leaves out the tobacco and the oil industry.

Now, these two industries really seem to be profitable.
If you look here (http://aol.theonlineinvestor.com/large_cap.phtml), in the first 8 largest companies by market cap, 2 work in the oil business and the number 14 (Altria), in the tobacco industry.
The oil industry has not really been changed that much in the last years, you basically dig and find oil, then you refine it in the consumer place.
How much radical innovation in this business?
Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?

Don't confuse market cap with profitability. Profitability's best measured in terms of dividends.

Tobacco and oil are very different industries, so I'll address them seperately.

Oil's easiest to explain: it is largely a cartel. But it's not the oil companies that are raking in the profits - it's the governments of the producer nations. Here in Canada, each province gets a cut of every litre pumped out of the ground, and it's used to reduce general taxes. Most countries in OPEC have nationalized oil companies. They get together and establish national production quotas to keep prices high. That's the definition of a cartel, and OPEC is a perfect specimen.

Also: the production bottlenecks in oil are the refineries, which are extremely expensive, and this captial outlay has the same effect as automobilie factories. Would you invest a quarter trillion dollars in an oil refinery if it's going to come online in 2015 or so? What if crude has a 80% crash like the one OPEC saw between 1981 ($70/barrel) and 1998 ($15/barrel)?


Tobacco is different in that the supply isn't limited, and governments don't have as much control over production, except in terms of zoning agricultural land. Also, there's a credible argument that it has a legal oligopoly in the US due to the terms of the Master Settlement Agreement, but this is different than oil's global cartel, and even a global oligopoly is not the same thing as a global cartel.

On the other hand, the MSA almost bankrupted them all, and this speaks to risk versus return issues. I just had a look at the big board, and Altria's dividend yield on the US exchange is about 4%, which is not a very attractive return considering the menace of risk of total loss. There's not much net profit there to attract competitors. If I'm going to park my cabbage somewhere for 4%, it wouldn't be in tobacco. Altria's net tangible assets appear close to zero (negative six billion dollars in 2006), which means the stock price is almost entirely a reflection of dividend and speculative capital gains potential. Dividends were $3.05/share in 2007, which does jibe with about $76/share for about a 4% return.

So, again, I'd suggest that the tobacco industry is not as profitable as you're assuming in the opening post. Big dollars because it's large volumes, but narrow margins and diminishing if not negative growth potential, which hurts long-term capital gains expectations.

One thing that oil and tobacco have in common is low plasticity: if you increase the price, people don't cut back as much as they do for other products.

[Matteo Martini]

(a) why do you think radical innovations are needed to 'justify' profits?

As if no radical innovation/patent comes out, market competition should leverage profits down


(b) Percent profits aren't necessarily related to gross profits.


Yes


(c) What is the basis of your determining whether or not the oil business has had radical innovations? What is the source of your opinion, ie., how do YOU know about what innovations have occurred?

I have limited knowledge on the topic, but I am an engineer, and it looks like oil business has not had radical innovations in the last 20-30 years

[Matteo Martini]

Yes, they are.

F1 has always been strictly regulated on displacement. When most racing leagues allowed 6l motors, F1 only had 3. F1 cars were, at one time, making nearly 1000 horsepower out of 1.8l motors. Only Group B rally can match those numbers, and that only lasted a few years. Even now F1 is only running 2.4l motors, and getting nearly 800 horsepower.

F1 has always been about making the most power out of a small motor. Nothing else makes nearly that much power out of that size motor.

Then you are maybe right on this, I am not really speacialized on F1 cars, so I take your word for it.
However, I do not see how improved mileage alone can be seen as such a breakthrough revolution in technology, looking at the mileage of many SUVs that have been best sellers only few years ago.

Then you need to think about what you are asking.

Why is there more profit (in absolute terms) on the sale of a car than a shirt? That is obvious and there is no reason to expect that there would not be.

That does not change the fact that, competition should leverage profits down.
My wrong point is that I considered the car industry as profitable, and, Blutoski showed me I was wrong on this

No, just trying to point out to the hard of thinking (clue: that means you) that just because something has existed for a long period of time it is not reasonable to conclude it has no value.

Not no value, but market competition should leverage profits down

Basically, yes. And that's not new: Chrysler was on government-subsidized life support in the 1970s. Aviation is another unprofitable industry: Warren Buffet is famous for pointing out that the industry is a net loser.
[..]

Thank you for the very informative answer.
I have read it and I think it deserves a well-thought reply.
Unfortunately, my head still aches (it is 1st January 10:08 here in Tokyo).
I will address your point ASAP.

[littlehulkster]

SUVs are remarkably efficient for their size. A 1974 Suburban had a rating of 8MPG highway, 5MPG city.

A new one is rated at 15/20 and has nearly twice as much power, not to mention being a much nicer ride.

Even the VW Beetle was only getting around 35mpg. A Toyota Corolla does better than that by around 6mpg, weighs 1000 pounds more, has 3 times the horsepower and does 0-60 a full 4 seconds faster.

[Geek Goddess]

As if no radical innovation/patent comes out, market competition should leverage profits down
Apparently not. Oil is not a manufacturing enterprise, it is a mining operation.



I have limited knowledge on the topic, but I am an engineer, and it looks like oil business has not had radical innovations in the last 20-30 years

Ah. I am also an engineer. A chemical engineer, and I have worked in the oil business and processing business exclusively since May 1981. I am intimately familiar with the innovations and new technology in this industry, and politely say that you are incorrect in your analysis. I attend one or two industry conferences each year trying to keep up, and serve on the technical advisory committee of one industry group, that is based in the U.S. but serves the international community.

[Matteo Martini]

Apparently not. Oil is not a manufacturing enterprise, it is a mining operation.


Refinery?
Distribuition?


Ah. I am also an engineer. A chemical engineer, and I have worked in the oil business and processing business exclusively since May 1981. I am intimately familiar with the innovations and new technology in this industry, and politely say that you are incorrect in your analysis. I attend one or two industry conferences each year trying to keep up, and serve on the technical advisory committee of one industry group, that is based in the U.S. but serves the international community.

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so

[Matteo Martini]

Basically, yes. And that's not new: Chrysler was on government-subsidized life support in the 1970s. Aviation is another unprofitable industry: Warren Buffet is famous for pointing out that the industry is a net loser.


Good point.


Don't confuse market cap with profitability. Profitability's best measured in terms of dividends.


I think the two are closely related.
The more a company is profitable, the higher the value of its stock, the bigger the market cap


Tobacco and oil are very different industries, so I'll address them seperately.

Oil's easiest to explain: it is largely a cartel. But it's not the oil companies that are raking in the profits - it's the governments of the producer nations. Here in Canada, each province gets a cut of every litre pumped out of the ground, and it's used to reduce general taxes. Most countries in OPEC have nationalized oil companies. They get together and establish national production quotas to keep prices high. That's the definition of a cartel, and OPEC is a perfect specimen.


I had a similar opinion.
Anyway, I remember that the current president of Iraq, Ahmadinejiad, was complaining that oil companies get a more-than-fair share in the business, and that they buy oil at xUSD from Iran, Iraq, Venezuela, Saudi Arabia, and they sell it back still not refined at 2xUSD (if I remember well).
I still have to understand how an oil company can make USD10billions in profits in one quarter.


Also: the production bottlenecks in oil are the refineries, which are extremely expensive, and this captial outlay has the same effect as automobilie factories. Would you invest a quarter trillion dollars in an oil refinery if it's going to come online in 2015 or so? What if crude has a 80% crash like the one OPEC saw between 1981 ($70/barrel) and 1998 ($15/barrel)?


Agreed with that.
Anyway, as you pointed out, the situation is similar to the one of the car industry.
Now, compare the market cap of General Motors, with the one of Exxon.
The difference is forty times?


Tobacco is different in that the supply isn't limited, and governments don't have as much control over production, except in terms of zoning agricultural land. Also, there's a credible argument that it has a legal oligopoly in the US due to the terms of the Master Settlement Agreement, but this is different than oil's global cartel, and even a global oligopoly is not the same thing as a global cartel.

Mmmm..
I can not see the difference between "global oligopoly" and "global cartel".
Anyway, maybe this is just my problem and not the main point here


On the other hand, the MSA almost bankrupted them all, and this speaks to risk versus return issues. I just had a look at the big board, and Altria's dividend yield on the US exchange is about 4%, which is not a very attractive return considering the menace of risk of total loss. There's not much net profit there to attract competitors. If I'm going to park my cabbage somewhere for 4%, it wouldn't be in tobacco. Altria's net tangible assets appear close to zero (negative six billion dollars in 2006), which means the stock price is almost entirely a reflection of dividend and speculative capital gains potential. Dividends were $3.05/share in 2007, which does jibe with about $76/share for about a 4% return.

So, again, I'd suggest that the tobacco industry is not as profitable as you're assuming in the opening post. Big dollars because it's large volumes, but narrow margins and diminishing if not negative growth potential, which hurts long-term capital gains expectations.

One thing that oil and tobacco have in common is low plasticity: if you increase the price, people don't cut back as much as they do for other products.

Sorry, but I have to go back to market cap.
Market cap is the value of a company.

Altria 160billions
BTI 80billions
Reynolds American a lot

Basically, since the assets of tobacco companies are not so worthy, as you pointed out, the market cap is only based on hope of future profits, and we are talking about some of the biggest companies of the world.

So, tobacco has to be a lot profitable.
If not, why their stock value is so high?

[NoZed Avenger]

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so


Wow. Are those goalposts heavy?

They look heavy.

[Tokenconservative]

SUVs are remarkably efficient for their size. A 1974 Suburban had a rating of 8MPG highway, 5MPG city.

A new one is rated at 15/20 and has nearly twice as much power, not to mention being a much nicer ride.

Even the VW Beetle was only getting around 35mpg. A Toyota Corolla does better than that by around 6mpg, weighs 1000 pounds more, has 3 times the horsepower and does 0-60 a full 4 seconds faster.


You misunderstand: since nobody, in a good, leftist-environmentalist's view from the Starbuck's table behind a venti soy latte with extra soymilk foam and cinamon sprinkles and the $4000 laptop his mom got him for Winter Solstice, "needs" such a vehicle, they should be banned.

Tokie

[Tokenconservative]

Basically, yes. And

So, again, I'd suggest that the tobacco industry is not as profitable as you're assuming in the opening post. Big dollars because it's large volumes, but narrow margins and diminishing if not negative growth potential, which hurts long-term capital gains expectations.



Doesn't this apply to just about any retail business (I can't think of one it does not apply to). Look at grocery stores...we all have to eat, but I think their profit margin is something around 3% normally. And while there are staples there is also plasticity there...I don't HAVE to eat Doule-Stufft Oreos when the price goes up because the price of the lard they make the filling out of is going up because corn prices are going up and the cost of a cow to get lard from is rising.

Tokie

[Hindmost]

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.

I don't think it is fair to single out Exxon for its profits. The profit of 10 billion was on 100 billion in sales...a standard goal of 10% margin. Oil company profits were terrible to non-existant for a long period when oil was cheap. Now that cheap oil is gone due to demand, oil profits are returning to normal. I am not sure what day rates are for rigs at this time, but I would believe it would be about 150 to 200 thousand a day--very capital intensive.

Google made 4 billion on only 15 billion in sales last year...that margin should outrage people...but everyone likes google because they don't see it directly in their gas cost.

glenn

[Tokenconservative]

I don't think it is fair to single out Exxon for its profits. The profit of 10 billion was on 100 billion in sales...a standard goal of 10% margin. Oil company profits were terrible to non-existant for a long period when oil was cheap. Now that cheap oil is gone due to demand, oil profits are returning to normal. I am not sure what day rates are for rigs at this time, but I would believe it would be about 150 to 200 thousand a day--very capital intensive.

Google made 4 billion on only 15 billion in sales last year...that margin should outrage people...but everyone likes google because they don't see it directly in their gas cost.

glenn

Hmmm....I guess you are forgetting a few things:

Google was started by liberals and Exxon is eeeeehhhhhhvvvvviiiilllllllllllll!!!

So they should be punished for making money, whereas Google, being a "progressive" company (you know how "progressive" all those child porn links are) deserves it's financial rewards!

Tokie

[NoZed Avenger]

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so


Come to think of it, can you name three other major industries who have "similar innovationas . . . the microprocessor[s], electronics industries in the last twenty years"? How about one other major industry?

[Skibum]

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so

Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?

I'm not sure there is going to be similar types of innovative breakthroughs in the oil industry (tobacco either) that are seen elsewhere. About the best I would expect are methods of slightly increasing production and slightly decreasing production costs.

[Hindmost]

I was thinking about the innovation issues related to the oil industry...since I follow it to a reasonable extent...there are some great stuff that has occured in recent years.

steerable drilling: can angle and steer bits throught a field to hit more pockets of oil...great for west texas. Also, drill bits have sensors on them to reveal oil or gas and can sense density of the rocks.

Enhanced recovery: Boost of about 10-15% out of a well using liquid carbon dioxide..or water.

Seismic analysis: 3D pictures of underground strata...this has increased field production by better knowing where to drill in certain fields.

Deepwater drilling: Can drill in 1000 meters of water now.


glenn

[Geek Goddess]

You misunderstand: since nobody, in a good, leftist-environmentalist's view from the Starbuck's table behind a venti soy latte with extra soymilk foam and cinamon sprinkles and the $4000 laptop his mom got him for Winter Solstice, "needs" such a vehicle, they should be banned.

Tokie You forgot "non-fat"

Refinery?
Distribuition?



Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so Can you fill me in on what qualifies you to make such a determination?

I'm not disputing that you are not qualified, I am just interested in your credentials or expertise in this area.


Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?

I'm not sure there is going to be similar types of innovative breakthroughs in the oil industry (tobacco either) that are seen elsewhere. About the best I would expect are methods of slightly increasing production and slightly decreasing production costs.

Much of innovation in the oil production arena is driven by finding and producing oil that was not discoverable or producible 10 years ago. At $90/bbl, I can afford to explore and drill for oil that might cost $50 to find and lift. When oil was $5-8 per bbl just a decade ago, only the most shallow, light, sweet, or very old (meaning that the investment was long since paid out) could be produced without a loss. Frac spreads were so low that you could not afford deep extraction on the ethane/propane components of natural gas.

I was thinking about the innovation issues related to the oil industry...since I follow it to a reasonable extent...there are some great stuff that has occurred in recent years.

steerable drilling: can angle and steer bits throught a field to hit more pockets of oil...great for west texas. Also, drill bits have sensors on them to reveal oil or gas and can sense density of the rocks.

Enhanced recovery: Boost of about 10-15% out of a well using liquid carbon dioxide..or water.

Seismic analysis: 3D pictures of underground strata...this has increased field production by better knowing where to drill in certain fields.

Deepwater drilling: Can drill in 1000 meters of water now.


glenn

Horizontal drilling, membrane separation, foamed cement fracturing, gas sub-cooled processing. Smart pigging.

[Tokenconservative]

Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?

I'm not sure there is going to be similar types of innovative breakthroughs in the oil industry (tobacco either) that are seen elsewhere. About the best I would expect are methods of slightly increasing production and slightly decreasing production costs.

Standard lefty, anti-Western, anti-capital, anti-American fare: no more oil exploration or extraction, no more oil refined, no more oil used for anything except cups at Starbuck's and the cases of $4000 laptops to use at Starbuck's.

Tokie

[Tokenconservative]

Come to think of it, can you name three other major industries who have "similar innovationas . . . the microprocessor[s], electronics industries in the last twenty years"? How about one other major industry?

How about that little scooter that was going to "change everything!"?

Anybody ever see any of those? Not here. When we have 8-10 inches of Global Warming lying around on the ground for weeks at a time, those seem one of the less...utilized means of personal transport.

Tokie

[Matteo Martini]

I don't think it is fair to single out Exxon for its profits. The profit of 10 billion was on 100 billion in sales...a standard goal of 10% margin. Oil company profits were terrible to non-existant for a long period when oil was cheap. Now that cheap oil is gone due to demand, oil profits are returning to normal. I am not sure what day rates are for rigs at this time, but I would believe it would be about 150 to 200 thousand a day--very capital intensive.

Google made 4 billion on only 15 billion in sales last year...that margin should outrage people...but everyone likes google because they don't see it directly in their gas cost.

glenn

Mmmm..
That is more or less my point.
Exxon is working in a business which is old (oil), so, competition should leverage profits down.
Oil should be a commodity, so, a profit margin of 10% should be very high/impossible to achieve.
Google is a completely new company which works in a completely new business (internet ads).
They started something really new, they have more reasons to deserve the money.
If no major change in that industry in the next 10-15 years, they should have theor profits (and market cap) leveraged down by competition/antitrust too.
But, as I explain, Google and Exxon is the new business against the old one.

Come to think of it, can you name three other major industries who have "similar innovationas . . . the microprocessor[s], electronics industries in the last twenty years"? How about one other major industry?

There are others, internet, informatics/OSes, certainly not oil

Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?
[..]

None.
But, I would expect Exxon to have the same market cap of GM.

I was thinking about the innovation issues related to the oil industry...since I follow it to a reasonable extent...there are some great stuff that has occured in recent years.

steerable drilling: can angle and steer bits throught a field to hit more pockets of oil...great for west texas. Also, drill bits have sensors on them to reveal oil or gas and can sense density of the rocks.

Enhanced recovery: Boost of about 10-15% out of a well using liquid carbon dioxide..or water.

Seismic analysis: 3D pictures of underground strata...this has increased field production by better knowing where to drill in certain fields.

Deepwater drilling: Can drill in 1000 meters of water now.

glenn

Well, if there is no big big patent rights problem behind this (I maybe wrong, but I have no news there is, maybe Greek Goddess can help), there is no reason why all the above technologies should not be adopted by all competitors, therefore, leveraging profits down

[Matteo Martini]

You forgot "non-fat"

Can you fill me in on what qualifies you to make such a determination?

I'm not disputing that you are not qualified, I am just interested in your credentials or expertise in this area.

I may well be not qualified.
But, I think you do not have to be a leading expert in the oil mining field to make some general statements about the oil industry.
BTW, I may well be wrong.
As for the "I do not think so", I think that this is not "I am sure it is not so", it is just "I do not think so"


Much of innovation in the oil production arena is driven by finding and producing oil that was not discoverable or producible 10 years ago. At $90/bbl, I can afford to explore and drill for oil that might cost $50 to find and lift. When oil was $5-8 per bbl just a decade ago, only the most shallow, light, sweet, or very old (meaning that the investment was long since paid out) could be produced without a loss. Frac spreads were so low that you could not afford deep extraction on the ethane/propane components of natural gas.

Horizontal drilling, membrane separation, foamed cement fracturing, gas sub-cooled processing. Smart pigging.

Is there any reason to believe that there are patents or other impeding obstacles to use to the technologies above mentioned? In order to assume that only few of the players have access to, for example, horizontal drilling?
If not, and if all the players in the field have access to the techniques you mentioned, there I see no reason why competition should not leverage profits down.

[NobbyNobbs]

No, absolutely wrong. Computers do all sorts of things from the simplest math (like an abacus) to producing advanced graphics.

Sigh...yes...you can argue that it's ALL just math to a computer, and you'd be right.

But the last time I checked, an abacus could not make Angelina Jolie's feet sprout built-in CFM heels as a computer did in Beowulf.

Tokie

Whether it's balancing the budget or putting heels on Angelina, it all eventually comes down to ones and zeroes. Lots of them, really fast. Just like I said.



I did not say the advancement of technolgy was "stagnant." That was someone else.


Never claimed you did. Note the quote. I was answering someone else.

[littlehulkster]

One more thing I forgot.

The auto industry can sell vehicles at a loss and still make money off them. As long as you finance through them, they're raking in the cash. GM and Ford may have lost money, but GMAC and Ford Financial are still big winners. They also own lots of other financial companies, Ditech being an example (They're GMAC owned.)

[Geek Goddess]

Is there any reason to believe that there are patents or other impeding obstacles to use to the technologies above mentioned? In order to assume that only few of the players have access to, for example, horizontal drilling?
If not, and if all the players in the field have access to the techniques you mentioned, there I see no reason why competition should not leverage profits down.

First, the entry cost into this industry is huge. A couple guys can't go in their garage and start it. They have to acquire the leases, then do the seismic, then obtain drilling permits, find rigs, drill, test, and complete the wells and build the surface facilities.

Second, many of these technologies ARE available to any company that has both the funds and the foresight to use them. Producing a bit more oil won't drive the price down when there is an unlimited market. At some point, consumer goods reach a saturation. Once everyone has a cell phone, then all you can do is produce newer, cheaper, fancier phones with more services.

Oil is getting burned up, one way or another. No matter how much heating oil I buy, I need more next year. Even if I cut consumption, insulate my house, turn down the thermostat, I will still need heating oil every year, and in 20 years, there are even more people that need heating oil. You cannot compare something like oil to widgets. If there were unlimited supplies, and the next incremental barrel took the same technology to pull out of the ground, the price would drop. But each additional barrel takes something new, and probably more expensive, to lift. Each new EPA regulation means the next barrel costs more to process. And the market is out there, with its mouth wide open.

The price is controlled by OPEC, more or less. The USSR was largely brought to its financial knees in the 1980s when crude prices fell so far that their only source of hard currency essentially disappeared.

[Matteo Martini]

Oil is a limited commodity, in that there is a finite amount of it available. Therefore if demand increases, supply cannot easily and quickly be increased to match that demand, therefore the price goes up.

As a simple example, lets say that there are 5 types of oil deposit in the world:

Type A is easily accessible and costs $10 a barrel to extract
Type B is slightly more difficult and costs $20 a barrel
Type C $30 and Type D $30.
Finally there is Type E which costs $50 a barrel to extract (lets say it is under deep water in a remote region and needs highly specialised equipment)

If the market price for oil is $25 a barrel, then the Type A and B deposits will be drilled as there is a profit in doing so. I own the only company in the world that has access to Type B deposits, so I make a healthy return on each barrel as I sell it for $25 and it only cost me $20.


If you own the only company in the world that has access to Type B deposits, either you have some real tech advantage over competitors, or you are a monopolist, at least, in that specific area

Lets try and drag this little example into the real world shall we?

How are you going to produce cigarettes that retail for half the price of those currently on the market?

You are going to have to charge the same tax as other brands (and that is a large percentage of the retail price - a minimum of 57% in the EU).

Having adjusted for that you will have a maximum of £1.20 per pack of revenue (source: http://www.the-tma.org.uk/files/January%202007.pdf).

From that £1.20 you need to take out the retailers cut, the distribution costs, the manufacturing costs and the costs of acquiring the raw materials needed in the first place. Now I very much doubt that you are going to convince the retailer, the distributor or the grower to cut their prices in half just because you are a nice bloke, so what we are actually looking at MIGHT be a price differential of 10p per pack on a good day with a fair wind.

All you need to find now are huge numbers of smokers willing to change the brand of cigarettes that they have smoked for however many years that costs £5.25 to try a new one that they have no idea if they will like, that they have never heard of previously (got to save those expensive branding costs to keep the price down) and that costs £5.15. Or more accurately you need to find financial backers who believe that you are going to be able to do so. Good luck with that.

I see it from another point of view.
PM, err., Alteia, has a market cap of 160 billions.
Other tobacco companies have a huge market cap.
If they have a huge market cap, it is because they rack up huge profits.
If they rack up huge profits, it is because they sell cigarettes at a price which is far higher than the cost of production + fixed costs.
Making cigarettes is not enormously difficult, you are not making high-precision lasers.
So, new competitors should come in, sell cigarettes at half the price, like it happens in all the other markets.
Yes, you have to consdier the margin of the reseller and the brand loyalty, but that is something that happens in every other market.
So, why this does not happen?

[Hindmost]

Mmmm..
That is more or less my point.
Exxon is working in a business which is old (oil), so, competition should leverage profits down.
Oil should be a commodity, so, a profit margin of 10% should be very high/impossible to achieve.
Google is a completely new company which works in a completely new business (internet ads).
They started something really new, they have more reasons to deserve the money.
If no major change in that industry in the next 10-15 years, they should have theor profits (and market cap) leveraged down by competition/antitrust too.
But, as I explain, Google and Exxon is the new business against the old one.


I don't see why the age of a company should be related to profits unless there is an anti-trust issue. No one complained when exxon didn't make any profit and that was actually a problem as there was no incentive to search for oil. A 10% margin is a standard goal for large cap companies and if an old or new company can manage it, that is reasonable. Google being a new company doesn't give them the right to make more money...they just did the job better than their competitors (altavista, yahoo, etc.)--however--we are all paying for their profits as well; advertising just doesn't show up as a monthly bill. If Exxon does its job well, they should profit and increase their market cap. Those profits are going to be need for future oil field development and downtream refining etc.



Snip


Well, if there is no big big patent rights problem behind this (I maybe wrong, but I have no news there is, maybe Greek Goddess can help), there is no reason why all the above technologies should not be adopted by all competitors, therefore, leveraging profits down

These technologies are being used...They are keeping oil discoveries coming. And that is dearly needed right now as the world use of oil is much more than the discovery rate. The amount discovered in each field not is typically smaller than in the past. The technologies here have lessened the impact of demand.

glenn

[Matteo Martini]

First, the entry cost into this industry is huge. A couple guys can't go in their garage and start it. They have to acquire the leases, then do the seismic, then obtain drilling permits, find rigs, drill, test, and complete the wells and build the surface facilities.

OK with that.
Still AFAIK (correct me), there are quite a number of oil companies out there, so, if competition works as it should, margins should be thin.


Second, many of these technologies ARE available to any company that has both the funds and the foresight to use them. Producing a bit more oil won't drive the price down when there is an unlimited market. At some point, consumer goods reach a saturation. Once everyone has a cell phone, then all you can do is produce newer, cheaper, fancier phones with more services.

Oil is getting burned up, one way or another. No matter how much heating oil I buy, I need more next year. Even if I cut consumption, insulate my house, turn down the thermostat, I will still need heating oil every year, and in 20 years, there are even more people that need heating oil. You cannot compare something like oil to widgets. If there were unlimited supplies, and the next incremental barrel took the same technology to pull out of the ground, the price would drop. But each additional barrel takes something new, and probably more expensive, to lift. Each new EPA regulation means the next barrel costs more to process. And the market is out there, with its mouth wide open.

The price is controlled by OPEC, more or less. The USSR was largely brought to its financial knees in the 1980s when crude prices fell so far that their only source of hard currency essentially disappeared.

If the price is controlled by OPEC, the OPEC countries should make fat profits, and I have no doubts they do.
But, Exxon is not part of OPEC, it is one oil company.
How can Exxon make 10billions in one quarter of profits, if OPEC countries control the price of crude?
I do not see why the fact that oil supply is limited has anything to do with the point in discussion

[Matteo Martini]

I don't see why the age of a company should be related to profits unless there is an anti-trust issue. No one complained when exxon didn't make any profit and that was actually a problem as there was no incentive to search for oil. A 10% margin is a standard goal for large cap companies and if an old or new company can manage it, that is reasonable. Google being a new company doesn't give them the right to make more money...they just did the job better than their competitors (altavista, yahoo, etc.)--however--we are all paying for their profits as well; advertising just doesn't show up as a monthly bill. If Exxon does its job well, they should profit and increase their market cap. Those profits are going to be need for future oil field development and downtream refining etc.


The point is why Exxon is a large (the largest) cap company at all, and why GM is not.
If Exxon is a large market cap company, it is because it makes huge profits.
Oil is a business where there have no radical breakthrough that can not be copied by all the (other oil) companies.
So, why do not competition does not drive profits and market cap down?
I understand why Google does make profits, as basically, everyone uses them as they do better search.
It is a new field
Now, is gas from Exxon better than oil from another oil company?

[Gazpacho]

The point is why Exxon is a large (the largest) cap company at all, and why GM is not.
If Exxon is a large market cap company, it is because it makes huge profits.

Exxon's book value is $118B. That is the (accounted) value of everything it has in the world, if it were just sitting there.

GM's market cap is $13.82B.

This means, essentially, that Exxon could sell everything it owns at auction, pay off its debts, and then use the rest of the money to buy GM several times over.

You really need to appreciate how huge Exxon is.

[Hindmost]

The point is why Exxon is a large (the largest) cap company at all, and why GM is not.
If Exxon is a large market cap company, it is because it makes huge profits.
Oil is a business where there have no radical breakthrough that can not be copied by all the (other oil) companies.
So, why do not competition does not drive profits and market cap down?
I understand why Google does make profits, as basically, everyone uses them as they do better search.
It is a new field
Now, is gas from Exxon better than oil from another oil company?

Competition does not necessarily drive market cap down. Exxon has been a large cap company even when losing money.

I don't think it is fair to compare and Exxon. There is an over production of cars in the US and the world in general. Cars aren't commodities either. Oil was up 55% this year and will probably go up another 40-50% in the near future...GM isn't going to get that type of price hike on their cars as there isn't a shortage of production. Refinaries are running very much flat out.

Exxon is delivering a commodity in short supply--that isn't going to change since all the cheap to find oil has been found driving production costs very high. Other oil companies are making huge profits as well but gas is basically the same as it is a very mature product. This isn't going to change unless there is a world wide recession that is fairly severe...and I don't think that will happen.

glenn

[Matteo Martini]

Competition does not necessarily drive market cap down. Exxon has been a large cap company even when losing money.


Market cap is the value of a company, which is basically, the expectation of future profits.
Competition works trimming profits


I don't think it is fair to compare and Exxon. There is an over production of cars in the US and the world in general. Cars aren't commodities either. Oil was up 55% this year and will probably go up another 40-50% in the near future...GM isn't going to get that type of price hike on their cars as there isn't a shortage of production. Refinaries are running very much flat out.


I don't think it is fair to compare GMand Exxon?
I think Exxon has been consistently n.1 or n.2 world company as market cap in the last few years.
If crude price goes up, why should be Exxon to make profits out of it?


Exxon is delivering a commodity in short supply--that isn't going to change since all the cheap to find oil has been found driving production costs very high. Other oil companies are making huge profits as well but gas is basically the same as it is a very mature product. This isn't going to change unless there is a world wide recession that is fairly severe...and I don't think that will happen.

glenn

Again, why delivering a commodity in short supply should create huge profits, if there is competition?

[Matteo Martini]

Exxon's book value is $118B. That is the (accounted) value of everything it has in the world, if it were just sitting there.

GM's market cap is $13.82B.

This means, essentially, that Exxon could sell everything it owns at auction, pay off its debts, and then use the rest of the money to buy GM several times over.

You really need to appreciate how huge Exxon is.

I am very aware of how huge Exxon is, this is why I started this thread.
BTW, market cap of Exxon is even much bigger than USD118B

[Gazpacho]

I am very aware of how huge Exxon is, this is why I started this thread.
BTW, market cap of Exxon is even much bigger than USD118B
I used a different term (book value) because I was talking about a different thing.

You picked the companies and asked the question. I merely answered it. The answer is that Exxon's assets alone explain why it is valued more than $13.8B, without looking at profits.

GM's book value is negative and it is losing money. Companies in worse condition than GM are called "bankrupt."

[Matteo Martini]

I used a different term (book value) because I was talking about a different thing.

You picked the companies and asked the question. I merely answered it. The answer is that Exxon's assets alone explain why it is valued more than $13.8B, without looking at profits.

GM's book value is negative and it is losing money. Companies in worse condition than GM are called "bankrupt."

OK with that.
Probably you know more about economics than I do.
Still, what is your opinion about why the oil industry is so profitable?

[blutoski]

Anyway, as you pointed out, the situation is similar to the one of the car industry.
Now, compare the market cap of General Motors, with the one of Exxon.
The difference is forty times?

Again, the market for fuel is bigger than the market for cars. It's also bigger than the market for Australian beaver cheese. But the cheese guy may be more profitable if he's making a decent return.



I can not see the difference between "global oligopoly" and "global cartel".
Anyway, maybe this is just my problem and not the main point here

Oligopoly is an industry with a few players.

Cartel is an industry where its players collude to fix prices. You can have a cartel with a hundred thousand participants (the simplest example is a guild, or labour union).





Sorry, but I have to go back to market cap.
Market cap is the value of a company.

Altria 160billions
BTI 80billions
Reynolds American a lot

Basically, since the assets of tobacco companies are not so worthy, as you pointed out, the market cap is only based on hope of future profits, and we are talking about some of the biggest companies of the world.

So, tobacco has to be a lot profitable.
If not, why their stock value is so high?

The key word there is 'hope' of future profits. Right now, they're disappointing at 4% ROI, and it reduced the value of their stock. Keep in mind that these companies do more than just sell tobacco. Altria's stock prices are iffy right now, because it's been less than a year since they disentangled from food brands, which used to be the bulk of their profitable business as Kraft and General Foods. One of the reasons Altria is close to zero in assets is that it's been moving its HQ around, shifted assets to Europe, borrowed heavily to pay its MSA liabilitiy, and its books are a basket case because of the Kraft sale. (I believe they peeled off pooled assets into the Kraft subsidiary to protect them from future class actions) Altria is an exception in tobacco. They all own significant plant.

Netscape had an insane market cap at one time, too - it's worth nothing today, because profits did not materialize. But nobody has a crystal ball, so shares reflect many things, and one is profit expectations. There's also the value of plant, and intangibles such as the 'brand'. Have a look at GAAP.

Again, though, I think you're failing to grasp the distinction between total profits versus rate of return, which is what any investor should really consider an indicator of the health of the company. Why should I care how much money Altria makes if I only own 100 shares? I want to know how much I make per share. (answer: $305 in 2007). Also: Altria's profits do not represent industry profits unless they are a monopoly. If they're only one player, be mindful that the market's profits are the accumulation of all players, including subtracting the losses of those who go bankrupt.

It should also be mindful that energy has its money-losers, too. They look like small exploration and prospecting firms that simply exhaust their money before finding a profitable source. Here in Canada, we see them come and go all the time by the thousands every year.

Actually, there's a lot of politics in this: energy exploration is so likely to lose money that there is a special tax shelter for investment, or nobody would do it. There's also the problem that the income from any find is limited, and once a field has been tapped it is shrinking in value. We had a special category for that called an "Income Trust," which is being phased out of the tax code over something like five years. The point is that profits can shrink for an individual company even in an industry that is seeing overall growth in demand.

[blutoski]

Still, what is your opinion about why the oil industry is so profitable?

Supply is a cartel, and has cyclic fortunes. They're in a supplier's market right now.

Speculators usually lose money.

Refiners and distributors have cyclic fortunes. They're in a supplier's market right now.

There are fixed costs that generate profit/loss during swings. Specifically, refineries. When demand is low, refineries sit idle. When demand is high, there aren't enough refineries.

Game theory comes into play in the suppliers' cartel (it's tempting to overproduce on the side - small increase in overall supply won't affect price, but it'll affect your income) and there's a game of hot potato in the refiners' oligopoly (there *will* be a buyer's market when the cycle reverses - who wants to get caught with the extra idle refinery?)

There are other political complications to oil: the 1970s oil crisis was entirely political in nature. China's fuel demand may translate into new refineries on Chinese soil - will they grant access to EXXON? Will the US government allow the domestic facilities be dismantled an reassembled in China the way they did steel? Will the US invade Iran? These are political decisions that impact oil prices. (These are also political decisions impacted *by* oil prices.)

[Jaggy Bunnet]

That does not change the fact that, competition should leverage profits down.

Not no value, but market competition should leverage profits down

Ask yourself whether that leverage will apply in absolute or percentage (margin) terms.

[Jaggy Bunnet]

If you own the only company in the world that has access to Type B deposits, either you have some real tech advantage over competitors, or you are a monopolist, at least, in that specific area

If by that you mean that I own the land under which those deposits are found then yes I am a monopolist in relation to those deposits. Why you think this changes anything is slightly unclear - google has a monopoly on the adverts that appear on google.com, but so what?


I see it from another point of view.
PM, err., Alteia, has a market cap of 160 billions.
Other tobacco companies have a huge market cap.
If they have a huge market cap, it is because they rack up huge profits.
If they rack up huge profits, it is because they sell cigarettes at a price which is far higher than the cost of production + fixed costs.

Or they sell huge numbers of cigarettes at a price that is very slightly above the cost of production + fixed costs.

Making cigarettes is not enormously difficult, you are not making high-precision lasers.
So, new competitors should come in, sell cigarettes at half the price, like it happens in all the other markets.

If you had bothered to read the post that you were replying to you would not have reposted this nonsense. Go back and read it and try again - anyone pricing their cigarettes at half the market price is either going to go bakrupt very quickly (because the amount they generate on each pack is less than the tax they have to pay to the government on each pack) or they are going to jail for tax evasion.

So, why this does not happen?

Already explained it to you, if you can't be bothered to read it I am not going to repost it.

[Jaggy Bunnet]

Again, why delivering a commodity in short supply should create huge profits, if there is competition?

Because competition does not increase supply (certainly in the short term).

You could have the most competitive, open agressive market you can imagine - unfortunately until they discover a cheap form of alchemy or a time machine to go back a few million years and create some new oil deposits, that is unlikely to result in significantly more oil being found.

The owners of certain artwork can generate massive profits by supplying a commodity in short supply (e.g. Picasso paintings). Do you expect competition to operate to reduce those profits?

[Jaggy Bunnet]

You should probably not allow your hatred of me for my political beliefs cripple your own thinking.


Why would you think I have hatred for your political beliefs? You are slightly too left wing for my taste, but I don't hate you for it.

[NobbyNobbs]

SUVs are remarkably efficient for their size. A 1974 Suburban had a rating of 8MPG highway, 5MPG city.

A new one is rated at 15/20 and has nearly twice as much power, not to mention being a much nicer ride.

Even the VW Beetle was only getting around 35mpg. A Toyota Corolla does better than that by around 6mpg, weighs 1000 pounds more, has 3 times the horsepower and does 0-60 a full 4 seconds faster.

But the VW Beetle was so much cooler looking! (Here we are, back to style...)

You misunderstand: since nobody, in a good, leftist-environmentalist's view from the Starbuck's table behind a venti soy latte with extra soymilk foam and cinamon sprinkles and the $4000 laptop his mom got him for Winter Solstice, "needs" such a vehicle, they should be banned.

Tokie

You almost got it right. You'd consider me a leftist-environmental, I'm sure. Except that I hate Starbuck's, hate lattes, hate soymilk, I'm not fond of cinnamon, my laptop cost less than 1/4 of your quote, I paid for it myself, the only reason I celebrate "Winter Solstice" is that my birthday happens to be then, and if I could afford an SUV I'd probably have one.

Other than that, your stereotype was dead on.



Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so


How about unleaded gasoline?

[Tokenconservative]

But the VW Beetle was so much cooler looking! (Here we are, back to style...)

You almost got it right. You'd consider me a leftist-environmental, I'm sure. Except that I hate Starbuck's, hate lattes, hate soymilk, I'm not fond of cinnamon, my laptop cost less than 1/4 of your quote, I paid for it myself, the only reason I celebrate "Winter Solstice" is that my birthday happens to be then, and if I could afford an SUV I'd probably have one.

Other than that, your stereotype was dead on.

How about unleaded gasoline?

I'm certified correct 97.6% of the time!

If you don't like soy lattes, no...you won't like unleaded. Tastes about the same, and a Starbuck's soy latte is about three times as expensive as a gallon of unleaded.

Tokie

[Tokenconservative]

Why would you think I have hatred for your political beliefs? You are slightly too left wing for my taste, but I don't hate you for it.

You are a leftist. Leftists are full of hate and fear and anger...but mostly hate.

For their betters.

Conservatives.

Tokie

Keep in mind the Membership Agreement and do not use personal attacks or insults to argue your point.

[Tokenconservative]

Because competition does not increase supply (certainly in the short term).

You could have the most competitive, open agressive market you can imagine - unfortunately until they discover a cheap form of alchemy or a time machine to go back a few million years and create some new oil deposits, that is unlikely to result in significantly more oil being found.

The owners of certain artwork can generate massive profits by supplying a commodity in short supply (e.g. Picasso paintings). Do you expect competition to operate to reduce those profits?

Competition can be the catalyst for increased supply, due to increased demand--as prices drop for a commodity that is in demand (we are not talking Pet Rocks or Beenie Babies, right?) and it becomes more affordable to more people, demand can rise. If it's not some rare earth metal, then production will usually rise to meet the demand (when it catches up, of course). Look at SUVs. This was toy for the rich in the 80s...by the mid 90s every middle-class family had one. By the early 'oughts, even "the poor" drive them.

Tokie

[ImaginalDisc]

I'm certified.

Edited for truth.

[Jaggy Bunnet]

You are a leftist.

What makes you think that? I already told you that your views are a little too far left for my liking.

[Jaggy Bunnet]

Competition can be the catalyst for increased supply, due to increased demand--as prices drop for a commodity that is in demand (we are not talking Pet Rocks or Beenie Babies, right?) and it becomes more affordable to more people, demand can rise. If it's not some rare earth metal, then production will usually rise to meet the demand (when it catches up, of course). Look at SUVs. This was toy for the rich in the 80s...by the mid 90s every middle-class family had one. By the early 'oughts, even "the poor" drive them.

Tokie

Which is oil more comparable to? A rare earth metal or an SUV?

[Geek Goddess]

I don't think it is fair to compare GMand Exxon?
I think Exxon has been consistently n.1 or n.2 world company as market cap in the last few years.

If crude price goes up, why should be Exxon to make profits out of it?

Why should they make profits?

You make profit when you take a lower-value item (crude in the ground) and make a higher-value product (petroleum products) and sell them to consumers who are willing to pay for them. If Exxon can keep their production costs below the the sales price, why shouldn't they make a profit?

Why would they want to be in business if they didn't make a profit?

As the price of crude goes up, companies start producing the more expensive, harder-to-get crude. Their costs go up.



Again, why delivering a commodity in short supply should create huge profits, if there is competition?


Define 'huge'. Why do you consider 10% profit margin huge?

How do you know the current price is determined by the amount competition that currently exists? If there were only one oil company in the world, would prices be much higher?

You keep asking the same question over and over, expecting a different answer? Since reality isn't conforming to your opinion of how things should be, which needs adjusting?

[Jaggy Bunnet]

As the price of crude goes up, companies start producing the more expensive, harder-to-get crude. Their costs go up.

And of course they keep producing the cheaper, easier-to-get oil that they were already producing, but that they can now sell for a much higher price.

[Geek Goddess]

And of course they keep producing the cheaper, easier-to-get oil that they were already producing, but that they can now sell for a much higher price.


What's left of it. Much of the money made on the cheaper oil funds the exploration on the more difficult oil. A well cost hundreds of thousands, if not millions, to drill, and quite a few of them are dry holes.

[NobbyNobbs]

You are a leftist. Leftists are full of hate and fear and anger...but mostly hate.

For their betters.

Conservatives.

Tokie

If you're gonna troll, at least put a little subtlety into it. I'm sure you're better at it than this effort suggests.

[Tokenconservative]

Which is oil more comparable to? A rare earth metal or an SUV?

Rareearth metals, of course. Both are fungible commodities. SUVs are durable goods

What a silly question.

Tokie

[Tokenconservative]

If you're gonna troll, at least put a little subtlety into it. I'm sure you're better at it than this effort suggests.

Energy can neither be created nor destroyed, it can only change form.

That's not trolling, Nobbs....statin' da facts is just statin' da facts.

Tokie

[blutoski]

What's left of it. Much of the money made on the cheaper oil funds the exploration on the more difficult oil. A well cost hundreds of thousands, if not millions, to drill, and quite a few of them are dry holes.

To some extent, this brings the conversation full circle to the portfolio model brought up in the original post. A company will use its cash cow to invest in new product development. Oilsand extraction could be considered a new product, for example, in this model. R&D is invested with the hope that there will be future returns, but there is some risk.

[Tokenconservative]

What makes you think that? I already told you that your views are a little too far left for my liking.

You believe you are being...I dunno, humorous or something with that. Like it's "opposite day" at the local middle school and you answer "no" to every "yes" question.

Maybe that is funny.

To other 8th graders.

Not sure it is here.

Tokie

[Geek Goddess]

Great. Another thread that had potential for some actual discussion, shot to hell.

[Matteo Martini]

Because competition does not increase supply (certainly in the short term).


But should drive down prices

How about unleaded gasoline?

Is it really something that has been discovered in the last 20 years?

[Matteo Martini]

Why should they make profits?

You make profit when you take a lower-value item (crude in the ground) and make a higher-value product (petroleum products) and sell them to consumers who are willing to pay for them. If Exxon can keep their production costs below the the sales price, why shouldn't they make a profit?

Why would they want to be in business if they didn't make a profit?


I was speaking about huge profits, not just profits
And, you should not make huge profits when there is stiff competition and no technical breakthrough only one company has


As the price of crude goes up, companies start producing the more expensive, harder-to-get crude. Their costs go up.


But also profits go up..
Mm..


Define 'huge'. Why do you consider 10% profit margin huge?


For GM that would be considered as big


How do you know the current price is determined by the amount competition that currently exists? If there were only one oil company in the world, would prices be much higher?


I expect them to be higher, yes


You keep asking the same question over and over, expecting a different answer? Since reality isn't conforming to your opinion of how things should be, which needs adjusting?

Oh, OK

[Matteo Martini]

If by that you mean that I own the land under which those deposits are found then yes I am a monopolist in relation to those deposits. Why you think this changes anything is slightly unclear - google has a monopoly on the adverts that appear on google.com, but so what?


The comparison is flawed



Or they sell huge numbers of cigarettes at a price that is very slightly above the cost of production + fixed costs.


Define "very slightly"..
It could me even more "slighter"


If you had bothered to read the post that you were replying to you would not have reposted this nonsense. Go back and read it and try again - anyone pricing their cigarettes at half the market price is either going to go bakrupt very quickly (because the amount they generate on each pack is less than the tax they have to pay to the government on each pack) or they are going to jail for tax evasion.


Where do the huge profits in the tobacco industry come from?


Already explained it to you, if you can't be bothered to read it I am not going to repost it.

You do not want to address the point that the big tobacco make huge profits

[Matteo Martini]

Supply is a cartel, and has cyclic fortunes. They're in a supplier's market right now.

Speculators usually lose money.

Refiners and distributors have cyclic fortunes. They're in a supplier's market right now.

There are fixed costs that generate profit/loss during swings. Specifically, refineries. When demand is low, refineries sit idle. When demand is high, there aren't enough refineries.

Game theory comes into play in the suppliers' cartel (it's tempting to overproduce on the side - small increase in overall supply won't affect price, but it'll affect your income) and there's a game of hot potato in the refiners' oligopoly (there *will* be a buyer's market when the cycle reverses - who wants to get caught with the extra idle refinery?)


I havre read all this twice.
Still, Exxon has been the n.1 or n.2 company of the world for market cap of in the last several years, and not cyclically


There are other political complications to oil: the 1970s oil crisis was entirely political in nature. China's fuel demand may translate into new refineries on Chinese soil - will they grant access to EXXON? Will the US government allow the domestic facilities be dismantled an reassembled in China the way they did steel? Will the US invade Iran? These are political decisions that impact oil prices. (These are also political decisions impacted *by* oil prices.)

You are giving me a cheap shot here to the US-led invasion of Iraq..
Eh! Eh!

[Matteo Martini]

Again, the market for fuel is bigger than the market for cars. It's also bigger than the market for Australian beaver cheese. But the cheese guy may be more profitable if he's making a decent return.


OK with that


Oligopoly is an industry with a few players.

Cartel is an industry where its players collude to fix prices. You can have a cartel with a hundred thousand participants (the simplest example is a guild, or labour union).


I suspect with tobacco and oil, it could be both..


The key word there is 'hope' of future profits. Right now, they're disappointing at 4% ROI, and it reduced the value of their stock. Keep in mind that these companies do more than just sell tobacco. Altria's stock prices are iffy right now, because it's been less than a year since they disentangled from food brands, which used to be the bulk of their profitable business as Kraft and General Foods. One of the reasons Altria is close to zero in assets is that it's been moving its HQ around, shifted assets to Europe, borrowed heavily to pay its MSA liabilitiy, and its books are a basket case because of the Kraft sale. (I believe they peeled off pooled assets into the Kraft subsidiary to protect them from future class actions) Altria is an exception in tobacco. They all own significant plant.


So, if Altria`s market cap is huge it means that there is high hope of substantial future profits, right?


Netscape had an insane market cap at one time, too - it's worth nothing today, because profits did not materialize. But nobody has a crystal ball, so shares reflect many things, and one is profit expectations. There's also the value of plant, and intangibles such as the 'brand'. Have a look at GAAP.

Again, though, I think you're failing to grasp the distinction between total profits versus rate of return, which is what any investor should really consider an indicator of the health of the company. Why should I care how much money Altria makes if I only own 100 shares? I want to know how much I make per share. (answer: $305 in 2007). Also: Altria's profits do not represent industry profits unless they are a monopoly. If they're only one player, be mindful that the market's profits are the accumulation of all players, including subtracting the losses of those who go bankrupt.


I am not en economist, and I admit my ignorance on the matter.
This is why I am trying to ask very simple question.
If Altria has a huge market cap, it means that makes/is expected to make huge profits
Making cigarettes is not difficult
How can you make huge profits making something that a lot of other company can do with (kind of) little investment?


It should also be mindful that energy has its money-losers, too. They look like small exploration and prospecting firms that simply exhaust their money before finding a profitable source. Here in Canada, we see them come and go all the time by the thousands every year.

Actually, there's a lot of politics in this: energy exploration is so likely to lose money that there is a special tax shelter for investment, or nobody would do it. There's also the problem that the income from any find is limited, and once a field has been tapped it is shrinking in value. We had a special category for that called an "Income Trust," which is being phased out of the tax code over something like five years. The point is that profits can shrink for an individual company even in an industry that is seeing overall growth in demand.

OK with that.
Still, I am sticking with the point that Exxon is the no.1 and no.2 market cap company in the last years (decades?)
Sorry, if you think I do not know enough to address the matter, that is OK for me

ADDED
My suspect is, this is why I started this thread, that, at least oil and tobacco companies are more or less a cartel, they make high profits on businesses which are not new, impeding other companies to enter making exclusive deals with distributors and so on..
But, mine is just a guess..

ADDED - PART II
Also, at least in Italy, all distributors of gas have very close prices to each other
Is that because there is cartel?

[Hindmost]

You are a leftist. Leftists are full of hate and fear and anger...but mostly hate.

For their betters.

Conservatives.

Tokie

ARMY Posting

:)

[NobbyNobbs]

Energy can neither be created nor destroyed, it can only change form.

That's not trolling, Nobbs....statin' da facts is just statin' da facts.

Tokie

Still not subtle enough.

[Damien Evans]

You could drive at the same speed in a car built in 1940 and in another one built in 2000.

Just try that. I'll see you at the morgue in 15 minutes.

[Jaggy Bunnet]

What's left of it. Much of the money made on the cheaper oil funds the exploration on the more difficult oil. A well cost hundreds of thousands, if not millions, to drill, and quite a few of them are dry holes.

I wasn't suggesting it was a bad thing, just a fact of life and an explanation for why companies that own cheap to extract oil will make significant profits when the oil price increases which appears to be beyond some people posting here.

[Jaggy Bunnet]

Rareearth metals, of course. Both are fungible commodities. SUVs are durable goods

What a silly question.

Tokie

No, what was silly was suggesting that competition would act as a catalyst for increased supply in a discussion about oil prices by giving an example of an SUV.

[Jaggy Bunnet]

But should drive down prices

This makes no sense - you acknowledge that supply will not increase but expect "competition" to drive down prices anyway.

Competition is not a magic formula that says profits should always be £x.

If you really know so little about the subject (as opposed to just trolling) then read a basic economics book.

[Jaggy Bunnet]

The comparison is flawed

Translation - I don't like the comparison.

Define "very slightly"..
It could me even more "slighter"

No. You define "huge".

Where do the huge profits in the tobacco industry come from?

Huge volume.

You do not want to address the point that the big tobacco make huge profits

I am not willing to waste my time reposting stuff that you refuse to read. You keep posting utter nonsense like a new market entrant selling cigarettes at half the price currently charged, ignoring the fact that taxation makes up more than 50% of the price.

For example, BAT turnover to Dec 06 was £25.189 bn. Included in that number was duty, excise and other taxes of £15.427 bn. That is 61% of revenue. When someone suggests a new market entrant could charge 50% of the price it is not an argument, it is evidence of how ignorant they are of the subject they are talking about.

[Jaggy Bunnet]

ADDED - PART II
Also, at least in Italy, all distributors of gas have very close prices to each other
Is that because there is cartel?

What would you expect to be the case in a highly competitive market:

Prices which vary widely; or

Prices which are very close together?

Why?

[Matteo Martini]

I am not willing to waste my time reposting stuff that you refuse to read. You keep posting utter nonsense like a new market entrant selling cigarettes at half the price currently charged, ignoring the fact that taxation makes up more than 50% of the price.

For example, BAT turnover to Dec 06 was £25.189 bn. Included in that number was duty, excise and other taxes of £15.427 bn. That is 61% of revenue. When someone suggests a new market entrant could charge 50% of the price it is not an argument, it is evidence of how ignorant they are of the subject they are talking about.

Taxation is not fixed, but based on selling price.
If selling price is half, taxation should also be half.
In other words, simple example, if I sell one packet of cigarette at 1USD, and taxes ar 100%, final price to consumer will be 2USD
If I sell one packet of cigarette at half that price, that is, 0,5USD, and taxes ar 100%, final price to consumer will be 1USD.
Final price to consumer, too, will be half

This makes no sense - you acknowledge that supply will not increase but expect "competition" to drive down prices anyway.

Competition is not a magic formula that says profits should always be £x.

If you really know so little about the subject (as opposed to just trolling) then read a basic economics book.

Supply of oil is not really limited, as competition for findoing new resources drives companies to develop technologies to be able to drill in more places
However, yes, even with limited supplies, I can not see why real competition, with free access by all the players to the oil fields, should not drive prices down, I may be wrong on that, however.
If not, then I can not see how we can call the oil market as "free"

[blutoski]

Taxation is not fixed, but based on selling price.
If selling price is half, taxation should also be half.
In other words, simple example, if I sell one packet of cigarette at 1USD, and taxes ar 100%, final price to consumer will be 2USD
If I sell one packet of cigarette at half that price, that is, 0,5USD, and taxes ar 100%, final price to consumer will be 1USD.
Final price to consumer, too, will be half

That depends on the product. For example, BC government oil and natural gas royalties are fixed. They don't know or care what the price of oil is - the extractor pays a flat rate per volume extracted. My understanding is that's SOP for government royalties on energy.

BC also has a flat-rate tax on tobacco, per pack of 20. Price is not an issue. The objective is to establish a floor price for cigarettes.



Supply of oil is not really limited, as competition for findoing new resources drives companies to develop technologies to be able to drill in more places

But each of those different raw materials is limited. You're basically explaining why you think prices *should* increase: when the low hanging fruit is exhausted, more oil can be extracted, but at a higher cost - a cost that has to be passed on to consumers.




However, yes, even with limited supplies, I can not see why real competition, with free access by all the players to the oil fields, should not drive prices down, I may be wrong on that, however.
If not, then I can not see how we can call the oil market as "free"

I'm not sure anybody's claiming that the oil market is a free market. The point is that there are many players and levels, and some are more competitive than others. Extraction is almost entirely a cartel (Canada is not part of OPEC, and does not participate in price-fixing). Right now, they're making windfall profits.

Refining has more participants, but the high cost of entry causes inertia that leads to profits and losses at supply/demand inflection points. This is not because it's uncompetitive. We're in a supply/demand inflection point that makes high profits right now. It's not a cartel, but there is an oligopoly.

Distribution has even more participants, and they're a competitive, marginal, business. Brent at Corner Gas (http://www.cornergas.com/) isn't making any higher margins than the Kims running their corner grocery. There is neither a cartel here, nor oligopoly.

Lastly, there's demand. Prices will go up with demand, no matter what. And a sudden increase in demand coupled with high costs of entry into supply translate into temporary high profits. But all bets are off when you have a bona fide cartel like OPEC.

[Skibum]

Taxation is not fixed, but based on selling price.


You are wrong. Cigarettes have a per pack tax (not including sales tax) and gas has a per gallon tax.

http://www.taxadmin.org/FTA/rate/cigarett.html
http://www.gaspricewatch.com/usgastaxes.asp

[Hindmost]

snip

Supply of oil is not really limited, as competition for findoing new resources drives companies to develop technologies to be able to drill in more places
However, yes, even with limited supplies, I can not see why real competition, with free access by all the players to the oil fields, should not drive prices down, I may be wrong on that, however.
If not, then I can not see how we can call the oil market as "free"

The oil fields have to be found first. Modern geological surveys have shown the probable areas to drill. However, there has not been a major oil discovery on the planet since the 70s. Refineries are running to capacity in the US and other parts of the world. Recent discoveries have taken advantage of advanced technology, but they have all been in the 5-10 billion barrel range. It takes time to develop a field to produce at reasonable rates. For example a recent find in the gulf of mexico will take about 5-10 years to get production up to a possible million barrels a day. The alaska pipeline used to deliver 2 million barrels a day and now only produces about 800,000. The world uses twice the amount of oil that it discovers.

Its just not a simple equation of competition due to the nature the industry.

Oil prices will continue to go up--it may not be a straight line function, but, there is nothing to stop it.

glenn

[David Wong]

It's fascinating to see the conflict between the part of Matteo that knows he's ignorant on the subject, and the part of him eager to make some controversial point.

He alternates between "I admit I don't have an education on the subject!" and steadfastly refusing to accept the things he's told by people he admits are more knowledgeable.

Interesting the way some people work. He's formed some kind of theory based on bad information, knows it's bad information, then when presented with the good information refuses to change the theory.

[Matteo Martini]

You are wrong. Cigarettes have a per pack tax (not including sales tax) and gas has a per gallon tax.

http://www.taxadmin.org/FTA/rate/cigarett.html
http://www.gaspricewatch.com/usgastaxes.asp

That depends on the product. For example, BC government oil and natural gas royalties are fixed. They don't know or care what the price of oil is - the extractor pays a flat rate per volume extracted. My understanding is that's SOP for government royalties on energy.

BC also has a flat-rate tax on tobacco, per pack of 20. Price is not an issue. The objective is to establish a floor price for cigarettes.

OK.
Then I was wrong to think that taxes on cigarettes were % of the price.
This could be (one of) the reason(s) why tobacco is a actual cartel.

[Matteo Martini]

But each of those different raw materials is limited. You're basically explaining why you think prices *should* increase: when the low hanging fruit is exhausted, more oil can be extracted, but at a higher cost - a cost that has to be passed on to consumers.

OK with that.
Still does not explain why Exxon should make such profits and have such high market cap, which has been very high in quite a long time.
At least, half a trillion dollars does seem high to me


I'm not sure anybody's claiming that the oil market is a free market. The point is that there are many players and levels, and some are more competitive than others.

This is the point.
Where is competiton all about?
I expect to be in extracting technology and finding good fields, not in the product itself, as oil is oil, and I do not see why there could be companies who perform better or worse than others in extracting technology as it should be equally available to all.
Of course, I may be missing something


Extraction is almost entirely a cartel (Canada is not part of OPEC, and does not participate in price-fixing). Right now, they're making windfall profits.


I agree that OPEC is a cartel and they could make profits out of it
The point is that also oil companies seem to make profits when oil prices hike..

[Matteo Martini]

The oil fields have to be found first. Modern geological surveys have shown the probable areas to drill. However, there has not been a major oil discovery on the planet since the 70s. Refineries are running to capacity in the US and other parts of the world. Recent discoveries have taken advantage of advanced technology, but they have all been in the 5-10 billion barrel range. It takes time to develop a field to produce at reasonable rates. For example a recent find in the gulf of mexico will take about 5-10 years to get production up to a possible million barrels a day. The alaska pipeline used to deliver 2 million barrels a day and now only produces about 800,000. The world uses twice the amount of oil that it discovers.

Its just not a simple equation of competition due to the nature the industry.

Oil prices will continue to go up--it may not be a straight line function, but, there is nothing to stop it.

glenn

I basically agree, even if there are major oil fields recently discovered (Huge new oil discovery in Brazil http://news.bbc.co.uk/2/hi/business/4563896.stm).
I also understand that it makes sense that oil prices will continue to go up, until at least a new viable source of energy is found (corn, crystal methane, ..)
I was more interested in understanding the reasons of the massive market cap (and, therefore, profits) of companies like Exxon

[Gazpacho]

I was more interested in understanding the reasons of the massive market cap (and, therefore, profits) of companies like Exxon
Every president of Exxon, from Rockefeller to the present day, sold his soul to the devil.

[Tokenconservative]

Every president of Exxon, from Rockefeller to the present day, sold his soul to the devil.

Yeah?

What about Jobs from Apple? Him too? What about Ben & Jerry? Them? And how about the guys who started Starbuck's...same deal?

Or does Da Debil only buy the souls of eeeehhhvvvvvviillll CEOs who are not socialists?

Tokie

[Tokenconservative]

No, what was silly was suggesting that competition would act as a catalyst for increased supply in a discussion about oil prices by giving an example of an SUV.

Oops!

My bad!

Um...how about a Prius, then?

Would that work better?

And instead of talking about cigs, doobie?

Tokie

[Tokenconservative]

Great. Another thread that had potential for some actual discussion, shot to hell.

Yeah.

Need to weed out the MoveOnPAC posters.

Tokie

[ddt]

I am not en economist, and I admit my ignorance on the matter.
This is why I am trying to ask very simple question.
If Altria has a huge market cap, it means that makes/is expected to make huge profits
Making cigarettes is not difficult
How can you make huge profits making something that a lot of other company can do with (kind of) little investment?


I'm not an economist either, but I noticed one argument hasn't come up in this discussion: brand recognition. I wouldn't be surprised if the brands Altria and BAT and other big tobacco companies hold are valued at billions of dollars.

Even though advertising in the First World now has been banished, people still recognize brands like Marlboro - and why would you switch if another brand only costs 10 cent less on a 5 euro package?

In the Third World it's a different picture: "Marlboro man" is still visible in the streets, and it's considered cool to smoke American cigarettes, in particular the "strong" brands. Local produce is much cheaper, but tastes indeed much different (worse) than Western ones.

That also defeats your argument that making cigarettes is somehow easy; there goes a lot more into making cigarettes than just tobacco and paper, a lot of flavoring is added and you don't just copy that.

[Hindmost]

I basically agree, even if there are major oil fields recently discovered (Huge new oil discovery in Brazil http://news.bbc.co.uk/2/hi/business/4563896.stm).
I also understand that it makes sense that oil prices will continue to go up, until at least a new viable source of energy is found (corn, crystal methane, ..)
I was more interested in understanding the reasons of the massive market cap (and, therefore, profits) of companies like Exxon

Huge field of 700 million barrels...that is about 30 days of oil for the US if it could be extracted in that time, which it can't.

During the 70s, the world was pumping about 45 million barrels a day...when the embargo hit, it was a significant amount of oil that was taken out of production. However, production ramped up slow as everyone enjoyed the higher prices...but then the north sea and alaska came online and price plunged along with a bit of recession in the 80s and more fuel efficient cars. OPEC didn't control that much of the production during that period and couldn't levy prices anymore. At that time, the Saudias said they wouldn't allow that to happen again since the world economy took a big hit and also because it promoted alternative fuels and they wanted the income. They would just open the taps. Fast forward. The world is using 85 million barrels a day translating to about 30 billion barrels a year. World wide production is close to maximum. But it is difficult to day how much more could be squeezed out on a daily basis. Recent evidence points to the north sea being past peak and Britain may have to import oil in the near future. Russia probably has some reserves that have yet to be discovered but, there are obvious political and economic issues in getting production up to speed. Along with consolodation in the industry, this has lead to high profits. When the prices were 10 to 20 dollars a barrel, the oil companies couldn't afford to even look for oil...it was negative revenue.

Alternative energies will have a difficult time ramping up to supply this much energy on a daily basis. Corn will definitely not be the answer--it has already been marginalized...switch grass has a shot at making a dent, but production to any large level is 15 to 20 years away.

glenn

[Tokenconservative]

Huge field of 700 million barrels...that is about 30 days of oil for the US if it could be extracted in that time, which it can't.

During the 70s, the world was pumping about 45 million barrels a day...when the embargo hit, it was a significant amount of oil that was taken out of production. However, production ramped up slow as everyone enjoyed the higher prices...but then the north sea and alaska came online and price plunged along with a bit of recession in the 80s and more fuel efficient cars. OPEC didn't control that much of the production during that period and couldn't levy prices anymore. At that time, the Saudias said they wouldn't allow that to happen again since the world economy took a big hit and also because it promoted alternative fuels and they wanted the income. They would just open the taps. Fast forward. The world is using 85 million barrels a day translating to about 30 billion barrels a year. World wide production is close to maximum. But it is difficult to day how much more could be squeezed out on a daily basis. Recent evidence points to the north sea being past peak and Britain may have to import oil in the near future. Russia probably has some reserves that have yet to be discovered but, there are obvious political and economic issues in getting production up to speed. Along with consolodation in the industry, this has lead to high profits. When the prices were 10 to 20 dollars a barrel, the oil companies couldn't afford to even look for oil...it was negative revenue.

Alternative energies will have a difficult time ramping up to supply this much energy on a daily basis. Corn will definitely not be the answer--it has already been marginalized...switch grass has a shot at making a dent, but production to any large level is 15 to 20 years away.

glenn

I'm old enough to remember the OPEC embargo in the 70s.

And that the hysterical, scaremongering screaming at the time was that the world would be completly out of oil by, as I recall, the 1990s.

I guess we ran out and someone forgot to shriek it from the headlines.

Tokie

[blutoski]

OK with that.
Still does not explain why Exxon should make such profits and have such high market cap, which has been very high in quite a long time.
At least, half a trillion dollars does seem high to me

I've already explained that that's not the same as profitability. A company with more installed facilities and a large market will have a larger market cap, but could be less profitable. A company can have a large market cap and be unprofitable. Sony, Nortel, Motorola, Netscape, Enron, Chrysler... market cap reflects the mix of factors I mentioned earlier.

Any industry has a total dollar demand. eg: 2007 it looks like CDs had a $2.3B demand worldwide. Oil is a consumption market of 90 million barrels per day. That translates to a $2.8 trillion dollar market at a cheap $2/gallon. $4.2T at $3/gallon. A monopolist in CDs couldn't possibly have more than $2.5B in market cap - it could not be profitable enough to justify a higher share price.

Exxon made $39B in profits on $380B in sales (9% market share). A reasonable market cap in any industry is between 10 and 20x profits. We should expect it to be between $390B and $780B. At this point, it even looks undervalued, and part of that is because oil prices are volatile and all players are exposed to government interference. Look at Russia and Venezuela (http://www.venezuelanalysis.com/news/2245).

(The calculation is more complicated, since Exxon also has profitable natural gas fields, pipelines, and refineries - they're not just an oil company)




This is the point.
Where is competiton all about?
I expect to be in extracting technology and finding good fields, not in the product itself, as oil is oil, and I do not see why there could be companies who perform better or worse than others in extracting technology as it should be equally available to all.
Of course, I may be missing something

I don't understand the question. Be mindful that we're running out of oil, and no technology will 'solve' that. Losing the low-hanging fruit makes more expensive oil available, but it's still more expensive. There are basic laws of physics involved.

Another thing to be mindful of is that extraction companies fail when they dig and there is no oil. The information about what's under the ground in an untapped field is not 'available to all,' and exploration investment is accordingly risky, and my impression is that it is net unprofitable. Like a lottery: people buy $100M in tickets, and the lottery pays out $25M to the winners. But people keep buying tickets, and people keep drilling.

Other things worth understanding about supply cartel: "peak oil" and the US "NOPEC" bill.



I agree that OPEC is a cartel and they could make profits out of it
The point is that also oil companies seem to make profits when oil prices hike..

We've already pointed out that refinery and distributors like Exxon are not making extraordinary profits, which is especially noteworthy since this is a period in the cycle where they should be making extraordinary profits, according to the models I explained above. During the early '90s, they lost buckets of money. What profits are you worried about exactly?

[Matteo Martini]

I'm not an economist either, but I noticed one argument hasn't come up in this discussion: brand recognition. I wouldn't be surprised if the brands Altria and BAT and other big tobacco companies hold are valued at billions of dollars.

Even though advertising in the First World now has been banished, people still recognize brands like Marlboro - and why would you switch if another brand only costs 10 cent less on a 5 euro package?

In the Third World it's a different picture: "Marlboro man" is still visible in the streets, and it's considered cool to smoke American cigarettes, in particular the "strong" brands. Local produce is much cheaper, but tastes indeed much different (worse) than Western ones.

That also defeats your argument that making cigarettes is somehow easy; there goes a lot more into making cigarettes than just tobacco and paper, a lot of flavoring is added and you don't just copy that.

Yes, the main point I previously disregarded is taxation.
I am still searching how much the taxation is making state by state in the percentage of the price of one packet, but, it seems it is quite a lot.
Then, of course, you will not switch from a brand you have bought for ten years to a new brand, if the saving is 5% of the price

Huge field of 700 million barrels...that is about 30 days of oil for the US if it could be extracted in that time, which it can't.


Sorry, I have pointed to the wrong Brazilian oil field (eh! eh! Oops!!).
Better try with this one (5 to 8 billion barrels)
http://edition.cnn.com/2007/WORLD/americas/11/08/brazil.oil.ap/index.html
That is about one year of oil for the US
OK, not that big..


During the 70s, the world was pumping about 45 million barrels a day...when the embargo hit, it was a significant amount of oil that was taken out of production. However, production ramped up slow as everyone enjoyed the higher prices...but then the north sea and alaska came online and price plunged along with a bit of recession in the 80s and more fuel efficient cars. OPEC didn't control that much of the production during that period and couldn't levy prices anymore. At that time, the Saudias said they wouldn't allow that to happen again since the world economy took a big hit and also because it promoted alternative fuels and they wanted the income. They would just open the taps. Fast forward. The world is using 85 million barrels a day translating to about 30 billion barrels a year. World wide production is close to maximum. But it is difficult to day how much more could be squeezed out on a daily basis. Recent evidence points to the north sea being past peak and Britain may have to import oil in the near future. Russia probably has some reserves that have yet to be discovered but, there are obvious political and economic issues in getting production up to speed. Along with consolodation in the industry, this has lead to high profits. When the prices were 10 to 20 dollars a barrel, the oil companies couldn't afford to even look for oil...it was negative revenue.


Again, I hate to be insisting, but I have to ask you or anybody else to clarify one point that seems obvious to anybody except me: in time of high oil prices, I can understand that producers may make profits, but, why oil companies can make profits out of expensive oil, if they have to buy at high price?
Wait, I am reading Blutoski`s comment, I think he is replying me on that


Alternative energies will have a difficult time ramping up to supply this much energy on a daily basis. Corn will definitely not be the answer--it has already been marginalized...switch grass has a shot at making a dent, but production to any large level is 15 to 20 years away.

glenn

[derail]
What about ITER, Crystal Methane??
Why corn should not be the answer?
Brazil is running 30% of their car park on ethanol, apparently
Here: http://en.wikipedia.org/wiki/Ethanol_fuel_in_Brazil

[Matteo Martini]

I've already explained that that's not the same as profitability. A company with more installed facilities and a large market will have a larger market cap, but could be less profitable. A company can have a large market cap and be unprofitable. Sony, Nortel, Motorola, Netscape, Enron, Chrysler... market cap reflects the mix of factors I mentioned earlier.


Basically, market cap is the value of a compay, that is, its expectancy of profits in the medium-long term


Any industry has a total dollar demand. eg: 2007 it looks like CDs had a $2.3B demand worldwide. Oil is a consumption market of 90 million barrels per day. That translates to a $2.8 trillion dollar market at a cheap $2/gallon. $4.2T at $3/gallon. A monopolist in CDs couldn't possibly have more than $2.5B in market cap - it could not be profitable enough to justify a higher share price.

Exxon made $39B in profits on $380B in sales (9% market share). A reasonable market cap in any industry is between 10 and 20x profits. We should expect it to be between $390B and $780B. At this point, it even looks undervalued, and part of that is because oil prices are volatile and all players are exposed to government interference. Look at Russia and Venezuela (http://www.venezuelanalysis.com/news/2245).

(The calculation is more complicated, since Exxon also has profitable natural gas fields, pipelines, and refineries - they're not just an oil company)


Mmmm..
Basically, you are saying that oil companies do not make exceptionally high profits, it is just the market that is huge, right?
Since the market is worth $4.2T, it is obvious to expect profits in the billions USD per quarter
per player (at least, for the big players)


I don't understand the question. Be mindful that we're running out of oil, and no technology will 'solve' that. Losing the low-hanging fruit makes more expensive oil available, but it's still more expensive. There are basic laws of physics involved.


I was saying that, without any competitive advantage on each side, competition should leverage profits down.
Since, I can not see which competition advantage has, for example, Exxon, against other oil companies, I would expect oil companies to make similar profits.


Another thing to be mindful of is that extraction companies fail when they dig and there is no oil. The information about what's under the ground in an untapped field is not 'available to all,' and exploration investment is accordingly risky, and my impression is that it is net unprofitable. Like a lottery: people buy $100M in tickets, and the lottery pays out $25M to the winners. But people keep buying tickets, and people keep drilling.


I am not sure that drilling is unprofitable, as if it were, oil companies may go bankrupt at the end..

[joobie]

What about Jobs from Apple? Him too? What about Ben & Jerry? Them? And how about the guys who started Starbuck's...same deal?


jobs would kick his father in the nuts, ben and jerry sold out to unilever, starbucks i dunno except that they actually treat employees the way people like to be treated.

i'm sure you were trying to make some sort of point there.

[ddt]

Yes, the main point I previously disregarded is taxation.
I am still searching how much the taxation is making state by state in the percentage of the price of one packet, but, it seems it is quite a lot.
Then, of course, you will not switch from a brand you have bought for ten years to a new brand, if the saving is 5% of the price.

That shouldn't be too difficult. I found the information very simply at the Dutch Ministry of Finance:

www DOT minfin DOT nl /nl/onderwerpen,belastingen/kostprijsverhogende_belastingen/accijns_en_verbruiksbelastingen/index.html

(can't post links yet...). (Sorry, couldn't be bothered to find out how this kind of taxation is called in English in the first place). Bottom of the page, "Factsheet" gives an overview over all kinds of taxes. "Wettekst" links to the law code.

To summarize: cigarettes are taxed at EUR 72.97 per 1000 pieces plus 20.52% of the retailprices before special taxation (but after 20% VAT). The tax is minimally EUR 110.58: so that foils trying to sell super-cheap cigarettes. The fact sheet mentions that this typically comes down to 57% of the total price (for a pack of 20, sold at EUR 4.00), so the fixed part of the cigarettes tax is the prominent part.

So, of the price the consumer pays only 36% goes to manufacturer, distribution and retailer. Say 15% for the manufacturer - yes, distribution and retail are quite expensive for cheap, mass produced products. That's only EUR 0.60. If you can produce them 20% cheaper, that's EUR 0.10 less. Distribution and retail are as expensive. VAT is EUR 0.02 less and cigarette tax also. Wow, a 20% reduction in production results in EUR 0.14 reduction in retail price.

And then you haven't yet convinced the retailers that they have to try and sell your product - shelf space is limited with the hundred or so different brands and types of cigarettes found in a shop today. That's simple for Altria - they can say you also have to carry their new brand "Marlboro purple" otherwise they won't give you any Marlboro at all, but difficult for a newcomer which can't advertise for his super-duper-new brand.

But you didn't comment at all on my remarks about the value of brands!

[Matteo Martini]

That shouldn't be too difficult. I found the information very simply at the Dutch Ministry of Finance:
[..]

You gave a simple, linear and effective explanation about why there an oligopoly/cartel (call it like you want), in the tobacco industry, the kind of explication I was looking for.
Thanks.
About your point of the value of the brand, I understand that an Ipod can be worth more than a similar Mp3 player which comes from an unknown manufacturer of Taiwan, unless the latter is sold at 30-40$less than the Ipod.
I was trying to understand why the same phenomenon does not apply for the tobacco industry, and you gave me an explanation for that

[Geek Goddess]

I was saying that, without any competitive advantage on each side, competition should leverage profits down.
Since, I can not see which competition advantage has, for example, Exxon, against other oil companies, I would expect oil companies to make similar profits.



I am not sure that drilling is unprofitable, as if it were, oil companies may go bankrupt at the end..


Many companies do go out of business. Some go under because they cannot replace their reserves. "Replacing reserves" is an important indicator of the health of a company, because is they cannot find new reserves to replace what they are producing they will eventually have nothing left.

Large companies sell old fields when the production gets below a certain level. Amoco owned the North Cowden field in West Texas, for example, wihch was discovered in 1930. At one time is had almost 3,000 oil wells. In the late 80s, they sold it to a small independent company. The production dropped to 'only' 20,000 bpd. It was no longer profitable for the huge company, because their overhead is so much higher, and they wanted the cash from the sale to do larger projects as part of BP. The North Cowden field, which was at one time the largest U.S. oil producing field, has changed hands several times in the past 10 years, each time to smaller companies. Those cmopanies have low overhead and can make some profit.

One of my oldest friends is the project manager for a pipeline project in Qatar. Her project budget is about $650 million. I managed a very small gas processing company, whose cash flow is a couple million. She doesn't understand how my company can make money with such 'small' production - her travel budget is more than my operating budget. However, we likely make the same percentage profits.

I think your basic assumptions about profit and competition, in these kinds of markets, needs to be re-thought. Since none of them meet your expectations, that is.

[ddt]

You gave a simple, linear and effective explanation about why there an oligopoly/cartel (call it like you want), in the tobacco industry, the kind of explication I was looking for.
Thanks.
Indeed, the whole structure of government regulations - high taxation, prohibitions on import/export - makes an oligopoly out of it. I wouldn't call it a cartel, as that implies intentional price fixing by the tobacco companies, and I don't know of any signs in that direction.

However, do note that this primarily applies to First World countries, which all have a similarly high tax structure.

About your point of the value of the brand, I understand that an Ipod can be worth more than a similar Mp3 player which comes from an unknown manufacturer of Taiwan, unless the latter is sold at 30-40$less than the Ipod.
Buying an IPod and not a Taiwanese No-name brand is a status symbol, much like smoking Marlboro in the Third World - including that it is "better" in some way. And for that, Apple cashes a hefty profit margin on the IPod. Don't know about the tobacco margins though.

[Skibum]

Buying an IPod and not a Taiwanese No-name brand is a status symbol, much like smoking Marlboro in the Third World - including that it is "better" in some way.

IMO, many times it is "better". Most of the Taiwanese or Chinese no name brands I used to buy seemed to end up costing me more in the long run. They seem to only last until the day after you lose the receipt.

[NoZed Avenger]

I think your basic assumptions about profit and competition, in these kinds of markets, needs to be re-thought. Since none of them meet your expectations, that is.


While I think that you have made a solid point, I must point out that the above method does not appear to be the one used in previous threads on any subject.

Despite a lack of information or spedcific knowledge on any subject, and despite the education, experience, and evidence offered by others, there will be no re-thinking. In fact, even putting the "re" in there is probably over-stating it.

N/A

[Hindmost]

I'm old enough to remember the OPEC embargo in the 70s.

And that the hysterical, scaremongering screaming at the time was that the world would be completly out of oil by, as I recall, the 1990s.

I guess we ran out and someone forgot to shriek it from the headlines.

Tokie

I worked for Houston Lighting and power at that time...there were not any concerns about running out of oil as there were discoveries in the north sea and alaska and in the middle east. A lot of people were actually leaving school back then to go to alaska and work on the pipeline as it was lucrative. It was a matter of production limits and OPEC controlling too much of market that caused the issue.

However, natural gas was perceived as a long term shortage as it was believed there wasn't much around. This was before modern surveys. Several oil execs claimed there was no natural gas in the gulf. That was found to be very false as there is quite a bit of natural gas in the gulf. Now, it is reasonably pentiful in the US and proved reserves have increased over the past decades. Oil has been negative for a long time. There is a lot of speculative reserves of gas which would be nice to have available.

Houston lighting and power was converting their power plants to burn coal while I worked there due to the claims at that time--and they had zero desire to do so because natural gas is clean to burn from a maintenance standpoint and cheaper to construct plants as they are less complex. I personally feel it is irresponisble to burn natural gas for electricity production as it is too valuable a resource. Nuclear and coal should be used along with renewables.

glenn

[blutoski]

Basically, market cap is the value of a compay, that is, its expectancy of profits in the medium-long term

No, there are lots of factors. There are companies that have market cap but no profits. Non-profits have book values, for example.



Basically, you are saying that oil companies do not make exceptionally high profits, it is just the market that is huge, right?
Since the market is worth $4.2T, it is obvious to expect profits in the billions USD per quarter
per player (at least, for the big players)

Basically. That's why you want to pay attention to the percentage of return as a real indication of whether the industry is or isn't competitive. Competition brings profit percentage down, but the net profits could grow if the consumer base grows.

That's why the expression "record profits" is misleading. If Exxon went from an 9% return on $250B in sales, then made a 5% return on $500B in sales, their total profits rose, but their margin shrank - reduced margins means reduced 'profitability' even when there are more profits - a sign of a healthy, competitive industry.



I was saying that, without any competitive advantage on each side, competition should leverage profits down.
Since, I can not see which competition advantage has, for example, Exxon, against other oil companies, I would expect oil companies to make similar profits.

Possibly. Profits are what's left over after expenses, right? So, if different companies have different overhead, their profits will vary. They may be at different points in their investment cycle, have bad luck like losing an asset in Venezuela, mergers, acquisitions, divestitures, spinoffs, ancillary projects like pipelines, ancillary products like natural gas or coal. One company may own patents for a technology that others don't, which means they need to pay royalties to a competitor, which certainly makes the playing field uneven.



I am not sure that drilling is unprofitable, as if it were, oil companies may go bankrupt at the end..

I'm sure that exploration is net unprofitable. That's why the refiners/distributors like Exxon don't do it - they wait for a developer to prove a field, then they buy it from the developer. I was trying to explain above that there are many roles in the industry, with different amounts of players at each level.

There are maybe 5,000 oil and gas exploration companies based in Edmonton alone. Fifteen years ago, these guys were all ga-ga over gold and precious metals exploration. They're the 21st century Bre-X es.

If you want an example of a real monopoly in the oil industry, it's a pipeline operator. Pipelines are often nationalized for this exact reason.


My own experience in this is that I inherited farmland in Lacombe Alberta, and we were pitched by about twelve independent devlopers. We chose one with a good track record with the neighbours. They tapped it, proved there was a producing natural gas field there, and developed it. They sold the field rights to Shell, who built the rigs and pipeline, and they actually send it to Terasen for modification and distribution.

[blutoski]

Something else to consider when evaluating a company's profitability is the TBill rate and the inflation CPI. The TBill rate is currently 3.87 on a 10-year, and the CPI is about 2%. So, if Exxon is making 10% ROI, then it's actually doing about a 4% "real rate of return".

Another factor is that some companies choose not to issue dividends, but reinvest surplus into recapitalization. Microsoft did this for almost twenty years - Microsoft investors saw no profits for almost two decades, but they were much closer to monopolistic behavior than we see in oil.

[Tokenconservative]

I worked for Houston Lighting and power at that time...there were not any concerns about running out of oil as there were discoveries in the north sea and alaska and in the middle east. A lot of people were actually leaving school back then to go to alaska and work on the pipeline as it was lucrative. It was a matter of production limits and OPEC controlling too much of market that caused the issue.

However, natural gas was perceived as a long term shortage as it was believed there wasn't much around. This was before modern surveys. Several oil execs claimed there was no natural gas in the gulf. That was found to be very false as there is quite a bit of natural gas in the gulf. Now, it is reasonably pentiful in the US and proved reserves have increased over the past decades. Oil has been negative for a long time. There is a lot of speculative reserves of gas which would be nice to have available.

Houston lighting and power was converting their power plants to burn coal while I worked there due to the claims at that time--and they had zero desire to do so because natural gas is clean to burn from a maintenance standpoint and cheaper to construct plants as they are less complex. I personally feel it is irresponisble to burn natural gas for electricity production as it is too valuable a resource. Nuclear and coal should be used along with renewables.

glenn

LIAAARRRRRR!!!!!!!!!

WE HAVE RUN OUT OF OIL!!!! WE DID IN THE 90S!!!! LIARRRRRRRRR!!!

By "we," I hope you mean that industry should be encouraged, maybe through lessened taxation, to develop these new (or existing) renewable sources into something a bit more viable?

Or do you mean government should throw its hand in, maybe with a new agency dedicated to forcing Americans, through onerous taxation (whether that's direct or secondary, by taxing oil/gas companies really dun't matter to the avg. Joe's bottom line) to begin building the infratruscture for currently non-viable means?

Tokie

[Hindmost]

LIAAARRRRRR!!!!!!!!!

WE HAVE RUN OUT OF OIL!!!! WE DID IN THE 90S!!!! LIARRRRRRRRR!!!

By "we," I hope you mean that industry should be encouraged, maybe through lessened taxation, to develop these new (or existing) renewable sources into something a bit more viable?

Or do you mean government should throw its hand in, maybe with a new agency dedicated to forcing Americans, through onerous taxation (whether that's direct or secondary, by taxing oil/gas companies really dun't matter to the avg. Joe's bottom line) to begin building the infratruscture for currently non-viable means?

Tokie

You asked a question instead of trying to tell me what I was saying...who are you and what have you done with Tokie?:confused:

Anyhow, the 2005 energy bill provided subsidies for nuclear power...which I agree with. However, the bill was not great since it also provided subsidies for ethanol--which is just a boondoggle in the US if corn is used. Unless switchgrass can be harnessed, ethanol is a waste of money. The bill certainly didn't erase 25 years of poor energy policies.

The bill should have provided subsidies for coal gassification plants and didn't. When oil does become short, energy prices are just going to be too high and it will cut economic growth.

glenn

[Geek Goddess]

You asked a question instead of trying to tell me what I was saying...who are you and what have you done with Tokie?:confused:

Anyhow, the 2005 energy bill provided subsidies for nuclear power...which I agree with. However, the bill was not great since it also provided subsidies for ethanol--which is just a boondoggle in the US if corn is used. Unless switchgrass can be harnessed, ethanol is a waste of money. The bill certainly didn't erase 25 years of poor energy policies.

The bill should have provided subsidies for coal gassification plants and didn't. When oil does become short, energy prices are just going to be too high and it will cut economic growth.

glenn

I read in last month's Economist that the amount of corn needed to fill one SUV is enough to feed a person for close to two years. ( I didn't buy the issue :) so I can't quote their sources). Think about how much of the corn a farmer must harvest just to power the tractors and harvesting equipment. I've heard more than once that corn, being a staple in much of Mexico, has risen so much that they were have food protests in the southern part of the country. People are hungry in many parts of the world, so let's stick our food in an inefficient process that also increases NOx emissions. Yes!!

[Matteo Martini]

I read in last month's Economist that the amount of corn needed to fill one SUV is enough to feed a person for close to two years. ( I didn't buy the issue :) so I can't quote their sources). Think about how much of the corn a farmer must harvest just to power the tractors and harvesting equipment. I've heard more than once that corn, being a staple in much of Mexico, has risen so much that they were have food protests in the southern part of the country. People are hungry in many parts of the world, so let's stick our food in an inefficient process that also increases NOx emissions. Yes!!

The quote is here (it is one year, not two):
The grain required to fill a 25-gallon SUV gas tank with ethanol, for instance, could feed one person for a year.
http://money.cnn.com/magazines/fortune/fortune_archive/2006/08/21/8383659/index.htm
BTW, the problem could be the fuel, the problem could also be SUVs..

[Matteo Martini]

No, there are lots of factors. There are companies that have market cap but no profits. Non-profits have book values, for example.


OK
But, book value is also expected to generate profits.
At least, market cap has to do, if not with real profits, with expected profits, right?
If you expect a company to make no profit in the future, why buy stock at all?


Basically. That's why you want to pay attention to the percentage of return as a real indication of whether the industry is or isn't competitive. Competition brings profit percentage down, but the net profits could grow if the consumer base grows.

That's why the expression "record profits" is misleading. If Exxon went from an 9% return on $250B in sales, then made a 5% return on $500B in sales, their total profits rose, but their margin shrank - reduced margins means reduced 'profitability' even when there are more profits - a sign of a healthy, competitive industry.


Yes, I agree if we consider the market size, the percentage of profit based on sales of the industry are in line with those of other industries (is it 10%?)
BTW, at $3 per gallon, I think the industry in the USD alone is worth about 1 trillion per year.
Just do this:
Daily, consumption of oil is 20 million barrels;
365 days per year
42 gallons per barrel
USD3 per gallon
Total=USD919B per year


Possibly. Profits are what's left over after expenses, right? So, if different companies have different overhead, their profits will vary. They may be at different points in their investment cycle, have bad luck like losing an asset in Venezuela, mergers, acquisitions, divestitures, spinoffs, ancillary projects like pipelines, ancillary products like natural gas or coal. One company may own patents for a technology that others don't, which means they need to pay royalties to a competitor, which certainly makes the playing field uneven.


Over simplifying, all the points you have mentioned (mergers, acquisitions, divestitures, spinoffs, ancillary projects like pipelines, ancillary products like natural gas or coal) should influence all oil companies (almost) equally, at least, assuming they have an equally capable management.
I can not see why some companies should take advantage of opportunities from merger/acquisitions, while other not.
So, maybe there are other factors, if an oil company keeps posting profits at 10% of the sales, as I do not think luck alone can do.
P.S.
If I remember well, PetroBras was the only big oil company losing assets in Venezuela


I'm sure that exploration is net unprofitable. That's why the refiners/distributors like Exxon don't do it - they wait for a developer to prove a field, then they buy it from the developer. I was trying to explain above that there are many roles in the industry, with different amounts of players at each level.


OK


There are maybe 5,000 oil and gas exploration companies based in Edmonton alone. Fifteen years ago, these guys were all ga-ga over gold and precious metals exploration. They're the 21st century Bre-X es.
[..]

Unfortunately, I have no academic preparation to comment on this.
I guess also developers have to have a business which is not net unprofitable (otherwise, why do it?)
But, I simply do not know enough about this to comment properly

[Matteo Martini]

Something else to consider when evaluating a company's profitability is the TBill rate and the inflation CPI. The TBill rate is currently 3.87 on a 10-year, and the CPI is about 2%. So, if Exxon is making 10% ROI, then it's actually doing about a 4% "real rate of return".

Another factor is that some companies choose not to issue dividends, but reinvest surplus into recapitalization. Microsoft did this for almost twenty years - Microsoft investors saw no profits for almost two decades, but they were much closer to monopolistic behavior than we see in oil.

I agree that Microsoft has a monopolistic attitude, having something like 95% of the market of OSes on generic desktop and laptop machines (i.e. non-Apple).
One thing you can say about Microsoft, is that the software business is connected to the computer business, which has seen a fantastic technological growth in the last 30 years.
Once (when) Moore`s Law will hit an end (and it will, eventually) Microsoft will be dead.
Well, it is also true that oil will also finish, but peak oil will eventually be determined by depletion of the resource, not by the end of a technological growth

[Matteo Martini]

Indeed, the whole structure of government regulations - high taxation, prohibitions on import/export - makes an oligopoly out of it. I wouldn't call it a cartel, as that implies intentional price fixing by the tobacco companies, and I don't know of any signs in that direction.

However, do note that this primarily applies to First World countries, which all have a similarly high tax structure.


Basically, if I have well understood, it is a de-facto oligopoly, with hefty margins, so far, if you are in.

IMO, many times it is "better". Most of the Taiwanese or Chinese no name brands I used to buy seemed to end up costing me more in the long run. They seem to only last until the day after you lose the receipt.


Buying an IPod and not a Taiwanese No-name brand is a status symbol, much like smoking Marlboro in the Third World - including that it is "better" in some way. And for that, Apple cashes a hefty profit margin on the IPod. Don't know about the tobacco margins though.

The tobacco margins seem to me to be great, AFAIK, at least in absolute terms.
I agree that having an Ipod is kind of a status symbol, but you have to consider that it is new technology and it is not a consumable product, I frankly doubt that people would keep buying the same Ipod all over again, when they already have one, like they keep buying cigarettes.
About cigarettes brand loyalty, I know it exists, but I think the real point why we do not see new players in the field, ws already well explained by others above

[blutoski]

OK
But, book value is also expected to generate profits.
At least, market cap has to do, if not with real profits, with expected profits, right?
If you expect a company to make no profit in the future, why buy stock at all?

Sure, expected profits influence stock price. The question is one of timeframe. Some companies frustratingly underperform year after year.




Yes, I agree if we consider the market size, the percentage of profit based on sales of the industry are in line with those of other industries (is it 10%?)
BTW, at $3 per gallon, I think the industry in the USD alone is worth about 1 trillion per year.
Just do this:
Daily, consumption of oil is 20 million barrels;
365 days per year
42 gallons per barrel
USD3 per gallon
Total=USD919B per year

Looks right. The US is approximately 25% of global consumption, and the dollar-value is in the $4.2T range.



Over simplifying, all the points you have mentioned (mergers, acquisitions, divestitures, spinoffs, ancillary projects like pipelines, ancillary products like natural gas or coal) should influence all oil companies (almost) equally, at least, assuming they have an equally capable management.
I can not see why some companies should take advantage of opportunities from merger/acquisitions, while other not.
So, maybe there are other factors, if an oil company keeps posting profits at 10% of the sales, as I do not think luck alone can do.

Nobody said it was luck. As pointed out, as an industry matures and if the product is a commodity, the players should start to resemble each other more and more. Margins should become more similar among participants, and should be increasingly sensitive to management and operations.

Ultimately, the real returns should look similar across players, and should resemble the premium for industry-wide risk.

In any case, the players had different starting-points, so it's unfair to expect them to have identical operations at this point. Many countries are happy to sign exclusive contracts, and this makes their connections to production heterogenous.

Another is that there are a fixed number of facilities, and some own and others have to lease from or subcontract to an owner (pipelines are a good example of this - redundancy is pointless). I also reiterate that technology is not equally available to all, as that is the point of patents.

Patents are themselves a legal monopoly. A friend of mine's dad made millions by developing a way to extinguish derrick fires with a special laser that evaporated sand. He wasn't making much money until Gulf War I, but recouped his investment in three months during the reconstruction. He sold this technology to ESSO, and ESSO charged royalties to any competitor or subcontractor that used it.





P.S.
If I remember well, PetroBras was the only big oil company losing assets in Venezuela

It was just an example. Think of what happened to the Russian companies that had agreements for some oilfields in Iraq, or Shell, which owned interests in Sudan. Lots of examples of total losses.




I guess also developers have to have a business which is not net unprofitable (otherwise, why do it?)
But, I simply do not know enough about this to comment properly

Just consider the lottery example. 99.9% of participants lose money. But they keep buying tickets anyway because of the possibility that they will win (profit). It's similar in exploration. Most of those companies are penny-stocks, and rarely trade on exchanges at all. The investors refer to themselves as 'players'. Shares and bonds for these firms are usually sold by stock promoters, which is a profession I have little respect for.

Also consider the reality about all businesses, regardless of vertical sector: something like 75% of new businesses fold between their first and second year.

[Geek Goddess]

The quote is here (it is one year, not two):
The grain required to fill a 25-gallon SUV gas tank with ethanol, for instance, could feed one person for a year.
http://money.cnn.com/magazines/fortune/fortune_archive/2006/08/21/8383659/index.htm
BTW, the problem could be the fuel, the problem could also be SUVs..

OK. My sedan holds 17 gallons. My little car holds 11. They hold enough to feed someone for an average of six months. Still a stupid way to use food.

[roger]

Matteo, you are having trouble communicating, and understanding other's posts, because you are using the language of business very imprecisely. You willy-nilly use profit to refer both to the rate of return, and the # of dollars earned over a period. Then you mix concepts - relating market cap to profitability - that are only very loosely correlated.

For example, suppose I argued that people who eat more food are fatter. Well, that is clearly wrong. If you are training for a distance sport for the olympics, you may require daily calorie intake in the 5 digit range, and be very thin. It is correct that for the same person, at the same activity level, more eating = more fat, but you can't say that more eating just means more fat for anyone/everyone. This is what you are doing with profit vs market cap. A single businesses' market cap will certainly grow and shrink as its future expected profits rise and fall, but it is a fallacy to conclude that a large market cap reflects large profits.

Your other big problem is you confuse rate of return with net income. I can make a Billion dollars a year, but if it requires a 1 trillion/year investment, that is a business no one wants to own (a 0.1% rate of return). Yet when talking about it, you would just say 'huge profits' or the like.

This has been explained many times in this thread, and you have yet to show understanding of this simple concept.

To answer just one question you have raised - why do profits rise when crude rises:

assume a profit rate of 10%, and production with 1 billion barrels of crude:

crude = $1/barrel, profit = $100M, profit rate = 10%
crude = $100/barrel, profit = $10B, profit rate = 10%

That is of course way to simplistic, profit rate would change in any real world example, but I'm sure in the latter case you would be crowing about the huge "profits". In reality, both investments are equally profitable - a stock holder would reap the same rewards in either case.

You could answer these questions quite easily yourself if you used the terms correctly and understood what they mean. So long as you persist to avoid learning these meanings, you will be like the poster who insists that any person who eats 4000 calories a day must be fat, despite the large numbers of athletes who disprove that conclusion.

Exxon makes "huge profits" (numerically large number of dollars) because they are one of the biggest companies in the world and sell a mind boggling amount of products derived from crude. Their having a huge market cap is a reflection of the size of the company - they sell a lot of oil products. Their rate of returns are nothing extraordinary. If you want to really understand the company, go to Edgar, pull up the last 10 years of annual reports, and read the accounting statements.

[Matteo Martini]

OK. My sedan holds 17 gallons. My little car holds 11. They hold enough to feed someone for an average of six months. Still a stupid way to use food.

Two things I would like to notice:

1) Lula says that there is room for both using corn for ethanol and food: http://www.reuters.com/article/environmentNews/idUSN1628734720070416
Brazil's Lula: ethanol no threat to food supply

2) There is room for improvement for getting ethanol from corn, in a more efficient way, I have read few articles on this, I am quoting few of them:

http://www.whybiotech.com/index.asp?id=2213
Higher Corn Yields are Making Ethanol More Energy Efficient

www.greencarcongress.com/2005/06/new_enzyme_for_.html
Green Car Congress: New Enzyme for More Efficient Corn Ethanol Production

EDIT:
I do not know if this is possible, at least in theory (I can not see why not), but I think using an hybrid engine electric/ethanol could bring down ethanol consumption at even more acceptable levels.
I think a lot has to be done in building more fuel efficient cars

[Matteo Martini]

Sure, expected profits influence stock price. The question is one of timeframe. Some companies frustratingly underperform year after year.


And some companies over-perform (Google, Apple - recently, ..)
As long as you keep underperforming, expectancy of profits will crumble, and so will do market cap
OK, then.


Looks right. The US is approximately 25% of global consumption, and the dollar-value is in the $4.2T range.


Yes, in Italy and Japan oil is in the 8USD per gallon range (if I do not get it wrong), still the economies are doing well.
Guess a lot can be on using fuel more efficiently.
Wait, I am derailing.


Nobody said it was luck. As pointed out, as an industry matures and if the product is a commodity, the players should start to resemble each other more and more. Margins should become more similar among participants, and should be increasingly sensitive to management and operations.

Ultimately, the real returns should look similar across players, and should resemble the premium for industry-wide risk.


I understand.
Basically, in an industry with little technological breakthroughs around, littel risks and low expectancy for growth (like the industry of salami), the returns should be expected to be low


In any case, the players had different starting-points, so it's unfair to expect them to have identical operations at this point. Many countries are happy to sign exclusive contracts, and this makes their connections to production heterogenous.

Another is that there are a fixed number of facilities, and some own and others have to lease from or subcontract to an owner (pipelines are a good example of this - redundancy is pointless). I also reiterate that technology is not equally available to all, as that is the point of patents.

Patents are themselves a legal monopoly. A friend of mine's dad made millions by developing a way to extinguish derrick fires with a special laser that evaporated sand. He wasn't making much money until Gulf War I, but recouped his investment in three months during the reconstruction. He sold this technology to ESSO, and ESSO charged royalties to any competitor or subcontractor that used it.


I do not know if patents alone can make such a difference between difference on returns between oil companies.
I know they are critical in the semicon industry (the recent patents of Silicon on Insulator by IBM and high-k dielectrics by Intel/IBM are an example), maybe they are not in the oil industry
But, I maybe wrong.
I am not sure if different "starting points" can make that difference, as all big companies are now at least 60-70 years old.
Probably Geek Goddess knows more


It was just an example. Think of what happened to the Russian companies that had agreements for some oilfields in Iraq, or Shell, which owned interests in Sudan. Lots of examples of total losses.


OK


Just consider the lottery example. 99.9% of participants lose money. But they keep buying tickets anyway because of the possibility that they will win (profit). It's similar in exploration.

Mm..
I think at the end you expect to have a profit.
If you expect to have 90% failure rate, as, for example, it happens with venture capital, it is bacause, when you make a profit (10% of the cases), the profit is so big you cover the losses of that 90% and make other profits

[Hindmost]

OK. My sedan holds 17 gallons. My little car holds 11. They hold enough to feed someone for an average of six months. Still a stupid way to use food.

I studied the ethanol thing...knowing how it had to be distilled...the whole concept was a non-starter when using corn. Going on memory here...but if the US took all the corn and converted it to ethanol, it could replace about 8-10% of gas used and would use a lot of natural gas. 80% of the corn is used to feed livestock. So, no more steak. Ethanol can't be pumped around the existing systems and has to be transported by trucks or it will hydrate and lose energy content.

The US uses about 145 billion gallons of gas and about 60 billion gallons of diesel every year. Corn just isn't going to replace that.

glenn

[blutoski]

think at the end you expect to have a profit.
If you expect to have 90% failure rate, as, for example, it happens with venture capital, it is bacause, when you make a profit (10% of the cases), the profit is so big you cover the losses of that 90% and make other profits

Yep. Exploration can really pay off. Look at my Lacombe example: the speculators probably only spent $100k on the consulting geologist and tapping in the area, but sold the regional rights for almost a million. 10x payoff for these guys after only a few months' work, but if they were looking for oil, they'd be SOL.

[blutoski]

Matteo, you are having trouble communicating, and understanding other's posts, because you are using the language of business very imprecisely.

The other thing is misinterpreting simple microeconomic models as laws. There are no markets with infinite players and zero dollar barriers to entry. Capital is not perfectly liquid. Investors do not have total transparency regarding management and operations. Customers do not have transparency regarding product value - branding matters. Forecasts have incredibly wide margins of error. Game theory.