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The petro industry works on a fixed proportional margin basis. They do NOT pick a desired dollar margin for each gallon of gas and then pass on the raw material cost increases. The margins are a fixed percentage of RMC plus all direct and indirect burden of manufacture.
So, (i'm making these numbers up for simplification: - Let's say they want $0.15/gallon at an oil price equivalent of $0.75/gallon with total burden of $0.15/gallon, which would mean a sales price of $1.05/gal, and an operating profit of 14.3%, and margin over cost of 16.66% (again, it's higher, but i'm using simple numbers for illustration), instead they say: - They want the 16.66% no matter the change in oil prices, or a cost plus system. So, when oil prices rise to $0.90/gallon and their total absorption is still )$0.15/gallon, they add the 1/7th margin to $1.05, yielding a sales price of $1.225/gallon. They then make an extra 2.5 cents on every gallon. So when oil prices go up, profits go up!
I know the finished gas is sold on the commodity markets, but trust me on this. This is the financial philosophy they use, and the data indicates that despite the supposedly free market of the commodity exchanges, what i describe is EXACTLY what's happened since at least 1980. The data makes it abundantly clear.
So, the petro folks like high oil prices because it drives their absolute profitability higher. The Professor
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