Why don't oil companies compete with each other on price?

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Just wondering... why isn't there competition between, say ARCO vs. ExxonMobil vs. ShellWhatever vs. Amoco, etc., which would bring the retail price of gasoline down? There is competition in most other industries, i.e. Sprint vs. AT&T vs. Verizon vs. SBC vs. Cox, etc. If there are 2 gas stations owned by different oil companies across the street from each other, why doesn't the competition for the gasoline dollar make them lower their prices?

[Name removed]

1. Deleted message

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[KlatooBNikto]

2. They are essentially monopolies and act in concert.

[ProfessorGAC]

5. Actually, That's Not Necessary

The price of oil is a commodity on the world stage. They have no desire to squeeze suppliers, because the oil industry has always operated on a cost-plus basis. They take the cost of raw material (crude oil) add the price per gallon to refine and distill, add a factor of overhead absorption and then add a profit margin to the overall cost.

Since that profit margin is a fixed percentage of total cost, they have no incentive to push crude prices down, because they make MORE absolute profits and cover more overhead when oil prices are high. It costs them not a dime more to refine a barrel of $50 crude than a barrel of $30 crude. But, 18% of the former is $9/bbl. while it's only $5.40/bbl. for the latter.

Secondly, the science and art behind refining is a highly mature one. The cost to refine a ton of crude oil is the same in almost every refinery built since 1960. So, there isn't much competing on price, because there's barely any difference in the cost to produce.

Lastly, the cost of the crude is nearly 80% of the cost of unleaded gasoline at market. (Not at the pump, because of state, federal, and road taxes, which differ by region and locale.) So, there isn't much marginal difference to work with between firms.

They don't need to collude. The industry is too long in the tooth for tech advancements to provide any significant low-cost producer advantages. So, it's reached a point where it essentially costs everyone the exact same amount to produce 100 million bbls. of gasoline. The only way to compete on price would be to cut one's own margins, not by cutting costs. While i don't like the fixed margin structure, it is what it is, and they aren't going to voluntarily cut their own profit margins.

Last point: While i'm seldom a proponent of microeconomic thinking, this is one case in which there is absolutely zero incentive for anyone to compete on price because demand is so high. One won't sell a drop more gasoline if one's price is 2 cents a gallon lower. They sell every single gallon they bring in as crude, so what benefit exists to compete on price? Answer: None.

The problem isn't collusion or price fixing. The problem is the world uses too darned much oil.
The Professor

[KlatooBNikto]

12. Professor, thanks for the lucid explanation. One lingering question

though. How is it that in a product like gasoline, in which prices are, as you say, predetermined, one can produce large changes in demand by dropping prices? I was referring to a local gas station that offered a large drop in price and you couldn't get within three blocks of that place.

[ProfessorGAC]

13. Narrower Focus

If that guy who owns that station wants to increase overall traffic through his store then he can take a lower margin on his sales. He, however, is competing with other stores for the ancillary business, not to sell more gasoline.

He already could sell all the gasoline his tanks can store, so such a pricing strategy MUST be based upon either the ancillaries (convenience goods, coffee, soft drinks etc. where the mark-ups are VERY high and profits are strong) or on creating a new customer loyalty leverage. (Which i doubt, because that's so unlikely to work.)

The cost to that station of the gasoline is still the same at wholesale. Nobody has sufficient buying power to affect the market price of unleaded gasoline. It's sold on the Merc and CBOT like soybeans or corn, for goodness sake! But, if that owner is willing to cut the store margins to the bone, the increased traffic through the store buying coffee for a $1 (when it costs 8 cents to make a cup of coffee) or to pay 80 cents for 15 cent pack of gum, etc., then the lower gas price is a risk intended to increase customer flow.

Now, to the technical point: The shift in supply and demand works both ways. When demand is high, the price can go up to what the market will bear. When the demand is high however, the turnover of inventory can be increased by reducing the prices. It's the corrolary to the former. When the demand is very high, and the market will bear high prices to meet that demand, lower prices will attract customers. Gasoline demand are highly elastic. Price goes up demand stays the same. Price goes down, the overall demand (regional) stays the same, but the market share goes up for that one station. If everyone lowered the price to the same point, you would no longer have a problem getting within 3 blocks of the place.

The supply & demand curves are not really as two dimensional as they seem or normally explained, because the consumer behavior variable is not included in the pure theory. But trust me, that variable is there.
The Professor

[firefox]

3. The object of business is to make money

They are not concerned about low prices when they want high prices. Look at the BS people were supposed to swallow when the 6 major oil companies merged into the three giants under the mantra that there would be economy of scale. It wasn't about economy, it was about raising profits. There is no way that these three super mergers should have been allowed to happen. But the fascist chose Bu$h as there puppet and the rubber stamps for the mergers came with blinding speed after the inauguration.

What's funny is that you never hear oil companies refered to as the all powerful three or hear them mentioned in the same sentence. Ask anyone what the three major US oil companies are and nobody will be able to answer you.

[Inland]

4. They do.

But with all businesses, at some point they either hold the line on price or go out of business.

I suspect that stations across the street from each other keep a very close eye on the price posted. But they still compete with stations five minutes away.

[dweller]

6. huh? they are competing with each other

to see which one can suck more money from the people.

dp

[spanone]

7. Colusion...there are not supposed to be monopolies...

yet damned near every gas station on every corner changes their prices at the same time/same day. Coincidence?

[ProfessorGAC]

9. Read My Reply Above

Collusion has almost nothing to do with it. Nature of a mature industry where demand outstrips supply.
The Professor

[Spider Jerusalem]

8. Part of the reason...

is that crude oil follows a speculative market-based pricing model, and once costs of refining and transport are added in the profits aren't as much as you'd expect. The current wholesale cost per gallon is in the neighbourhood of $1.60-1.80 (some slight variations in different locations). The profit margin to retailers is pennies per gallon.

Another part of the reason is that they don't NEED to; for most people in America, what they sell is essential, so they can charge whatever the market will bear.

[Cats Against Frist]

10. I believe it's called "price fixing"

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11. Collusion seems to be the more profitable alternative for....

...oil companies, just like back in the good old days of Rockefeller and the robber barons at the end of the 19th century.

[barb162]

14. oligopolies dominate the market so there isn't much

competition to begin with and the supply is tight and the demand is great. They can sell all they want, so why drop the price.

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15. Isn't it time to break up the oligopolies, end the collusion/price fixing?

[barb162]

16. that's a really loaded question...if anything the oil companies have

been merging over the years and the government hasn't been stopping it.

I think the real problem is supply will keep getting tighter and demand will keep rising, or in other words, peak oil is rearing or has already reared its ugly head.