General Electric was started by famed inventor Thomas Edison to help him sell his new invention the light bulb.
The reason that I bring up each of these companies is that both are still around and thriving today and neither relies in any way on their original products. Motorola sells products that were figments in the imaginations of science fiction writers at the time. GE has turned into a conglomerate that sells just about everything. (They even have delved into mortgages, my business, through their subsidiary, WMC Mortgage)
I bring all of this up because several other companies were also around when these were selling their original products: companies like Amoco, Exxon, and Phillips. Most of the oil companies today were around were created when Standard Oil was broken up. Standard Oil (started by famed entrepeneur John D. Rockefeller pictured below) was broken up under the Sherman Anti Trust Act.
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal".[2] The Act also provides: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations...
In other words, the Sherman Anti Trust Act was created to make sure no one company acted as a monopoly and used their sheer size to stymie competition. (Its last most public use was in the break of AT&T) What about when a group of companies acts no different than one and use their own size to stymie competition? This is a question that I asked when I first started blogging at the famed conservative blogging site, Redstate. If you click the link you will see I was also met with a great deal of resistence by my conservative colleagues.
The question continues to linger in my mind many months later. I have never believed that gasoline acts anything like any market that I know of. For instance, the bedrock of any legitimate market is its insistence that every company in it evolve. The reason that companies like Motorola and GE have not only survived for a century and more is their ability to adapt to their changing market. That is what markets do. Take any company that has been around longer than a few years and you will find one that looks nothing like it did originally. From Microsoft, to Ford, to Walmart, these companies have evolved as the market around them has forced them to. After all, did Henry Ford ever imagine a hybrid, an SUV, or any of the current automobiles when he created Ford?
That never seems to happen to big oil. They continue to sell one product, the same product, in pretty much the exact same type: unleaded. There is frankly not a dime's worth of difference between big oil today and big oil in the aftermath of the Standard Oil break up. I believe this has to do with the make up of the "market": an oligopoly (or as some of you know it a Cartel).
I believe the proof lies in the Latin phrase: Res Ipsa Loquitur (the facts speak for themselves). If big oil is competing in a market, why has their product line stayed stagnant for so long? Why has their market not had to adapt? Let me tell you how I would see oil adapting in a real market. Right now, when you drove to your local ENERGY STATION, you would get a menu of FUELS. This menu could be customized to fit the specific needs of your car. A sports car would get the proper FUEL for that car, and the minivan would get the proper FUEL for that car. In the corner of the FUEL station, there would be an electric stand. There, an electric car could get juiced up.
Does anyone wonder why alternative fuels haven't taken off in automobiles? Think about this. There are right now automobiles that can be powered by alternative fuels. They aren't popular because there is nowhere to fuel them. For instance, if you were to buy an automobile that runs on hydrogen, you would need to go to a government sponsored hydrogen fuel station. There are about one hundredth as many of those as there are regular gas stations.
Why isn't there a hydrogen fuel tank in some of these gasoline stations? After all, given that each of the big oil companies clears at least ten billion dollars in PROFITS every year, they can certainly afford the research and development to put them into at least a few of their stations. They don't. The only sort of alternative fuel tank that they are willing to put in is E85 fuel tanks. That runs on ethanol and ethanol has recently been frowned on as a serious alternative energy source. Hydrogen, on the other hand, is run on water which is quite plentiful.
So, why don't we see hydrogen fuel tanks in gasoline stations the way we sometimes see E85 fuel tanks? I think the answer lies in the same reason that companies can make billions per year peddling the exact same product they were also peddling almost one hundred years ago. They aren't competing in any market. They never have, and they will do everything they can to keep their arrangement the exact same it always has.
Like I said...Res Ipsa Loquitur...The facts speak for themselves. These companies have billions they could spend on R & D. My vision could be a reality in years if not months if they wanted it to be. The fact that it isn't speaks for itself.
27 comments:
There is an important distinction
between big oil and GE/Motorola
which you overlook in your analysis.
Big oil produces a commodity and
GE/Motorola produce products. Commodities are produced today essentially as they were 100 years
ago. Examples in addition to oil:
Copper, gold, sugar, corn. The reason this is so is because commodity producers cannot realize
added value by differentiating themselves. It makes no difference
whether you buy gas from Exxon or
Chevron or Shell but it makes all
the difference whether you buy a Ford or a Buick or a Lexus.
As convenient as it might be to blame "big oil" for the high gas prices the fact is that all oil
producers sell their product as
the same international oil price
which is quoted each day and changes each day. No company which
is part of big oil has the ability to set its own price.
With all due respect,
what you are saying is that this doesn't sound like an industry that would be viable for the long term. There is no differentiation except in price. If price is the only thing that sets any of these companies apart why are all eight making so much money all at once, and no one tries to undercut the rest on price? Why, in 80 years, after all those profits have none of these companies ever ventured out of this commodity industry into an industry they could differentiate in? Why, with all the profits being made by all of them, has none of them ever tried to differentiate on price? Again, Res Ipsa Loquitur.
I agree that their unit costs are roughly the same, which goes again toward saying that they are in an industry that shouldn't be fruitful in the long run. That doesn't mean their prices would be the same especially with each making so much money.
Why is it that every other other industry in which there is a commodity is so much less fruitful? The fact is that successful companies in commoditized industries expand into other industries as they become more successful.
You are basically saying that we have a bunch of companies making billions of dollars yearly in a business that doesn't sound, according to your description, to be fruitful in the long term, and yet despite all of their earnings none of them make any move to expand their business into other areas.
Big oil, does NOT, sell their product at the going rate for oil. Their product is NOT oil. It is gasoline which is derived through a process by them from oil into the gasoline that goes into our car. I agree that they all buy the oil on the market at the same price, however these companies determine on their own what the final price of the gasoline that they create from the oil is.
"Big Oil" sells more than just gasoline. There are hundreds of petrol by-products that feed into the profit margin of oil companies.
Hundreds???
None that you can mention by name though. Whatever other businesses that big oil is in it is a negligible part of their bottom line. The tens of billions that big oil makes in pure profits every quarter comes overwhelmingly and nearly exclusively from the gasoline that we put in our car.
Would you be willing to pay $ 90/ equivalent gallon for hydrogen? It costs more energy to recover hydrogen from water that it returns when it is burned to power a vehicle. Bad choice for thermodynamic reasons.
Mike I think you need to do some homework, turn off the "mainstream media".
You are barking at an industry that has more government regulation than most. And less profits than some other companies that should be considered monopolies also, (MSFT, GOOG, INTC,etc..)
Although 2 years old, this article tells the real story
http://www.financialsense.com/Market/cpuplava/2005/1109.html
Why would you bring up government regulation? That is nothing more than a trojan horse. Whether or not gasoline is regulated is a separate issue from the players turning it into something other than a market.
I find it revealing that in all of the negative responses, I have gotten none that address any part of my piece? If big oil is on the level why have they never in almost one hundred years changed their product line? Every other industry revolutionizes over such a long period of time, and gasoline remains no different today from that of its beginning.
What I want is for our country to become energy independent. First of all, hydrogen, like any other product, gets cheaper once it is mass produced, and thus quoting a price based on its current use is just another trojan horse. There are hundreds of alternative methods by which we can power our automobiles, and yet in nearly one hundred years none of them are any more than a blip. How is that possible if big oil is the market all of you claim?
Mike, my feeling is that government regulation restricts the evolution of any industry, that is why I brought it up. Heck if Al Gore gets his way I won't be able to go jogging any more because I might go over the government allowance for daily co2 emissions.
"Necessity is the mother of invention",
gasoline has been very cheap historically, why change a good thing?
The last and only other time energy independence has been discussed was the 70's, when oil and gasoline were expensive, as they are today.
I agree with the energy independence stance, because of the economic and political benefits that would be created
" Dire situations inspire ingenious solutions. If worse comes to worst, people will apply all their imagination and skill to deal with the problem."
We are not there yet.
Most people (unless your from the tri-state area) think terrorism is a figment of Bush's imagination. In my opinion only when a major oil producer or pipeline gets struck and a calamity ensues will you see the Government sit down with the Oil companies and Auto manufacturers to usher in alternate fuels on a national scale. The infrastructure costs are to great for any company to risk undertaking them on their own.jmho
By the way I can think of a few industries that haven't changed much in 100 years, we are still sitting on porcelain bowls, electric wires still hang on wooden poles, and Coca-Cola the real thing.
First, soft drinks have evolved. There are all sorts of soft drinks that are around now that weren't around in the beginning: caffeine free, sugar free, diet, soft drinks that give you a jolt, you name it.
Second, no amount of government regulation will explain away an industry that has been totally stagnant for 100 years. My industry, mortgages, is regulated as much as any and it has evolved and evolved plenty. Telecom is hyper regulated as well and you can now make long distance calls through the internet.
I don't know very much about toilets except that it isn't nearly the profitable industry that oil is and that most of the players produce toilets among a large product line.
Oil is a "good thing" only in that it is readily available and it is only readily available because gasoline is served at gas stations. It isn't cleaner than hydrogen and nothing is more readily available is water, which is what many hydrogen fuel cells are made of. It certainly isn't cleaner. There are plenty of alternative fuels that could easily be considered better. Furthermore, it is undeniable that gasoline made from oil isn't best for every single person and yet every single person has it.
Again, I don't buy companies with this much money and resources not evolving their product lines if this really is a true market, which is why I don't believe it is.
That said, everyone is entitled to their opinion and I enjoy the debate so far.
Come on Mike, the gasoline of today bears no resemblance to that of Henry Fords era. Unlike some soft drinks, all of todays gas formulations did not exist even 35 years ago
Your argument that the gasoline industry has remained stagnant does not hold water. They have revolutionized their product enough to hold off the introduction, on a large scale, of alternative fuels.
They have managed to do so while still being heavily regulated by Government pollution standards. I don't see the soft drink companies being told how much caffeine, or sugar, or carbonation they can put in their drinks.(although if Hillary gets elected that might happen)
I think your beef should be with the auto manufacturers. Why haven't they introduced 100 mpg engines? No they can't be the bad guys, after all, they aren't making BILLIONS OF DOLLARS in profits.
Oil companies historically average about 5% profit. I wouldn't enter a business that had their cost of infrastructure and R&D to only make a 5% profit on average.
It seems to me the auto companies will introduce that 100 mpg engine before we see hydrogen filling stations in our lifetime. Thanks for the discussion.
I am having trouble understanding exactly what is so different between the gasoline now and 35 years ago. We have had unleaded for as long as I have been alive and it has been by far the most popular for at least as long. It sounds to me as though any changes have been forced upon the industry by a misguided government not by any natural evolutions of any market.
When I go to buy soda, there are literally dozens to choose from from root beer, diet, caffeine free, sugar free, etc. etc.
Gasoline comes in four varieties and one is by far the most popular.
I know what gasoline's profit margin is however it is gigantic compared to any other that is a commodity. As the first poster pointed out, gasoline is differentiated in price only. If that is the case how can anyone afford to make five percent? If price is the only difference why aren't all the companies trying to undercut each other? How is an industry where price is the only variable able to pull things off so that eight companies all make billions at the same time and no one tries to under cut anyone else to gain more market share?
I don't have a problem with the auto industry because there is no doubt that autos are a market. Once the market, the consumer, demands that cars be built that run at a hundred miles to the gallon they will.
You claim that petorleum has beaten other technologies but that is bunk. It has not. It has been chosen because it is most profitable by the very companies that could make all these other technologies viable. Why is it that no gas station has a hydrogen fuel tank as one of its tanks? Why not? With each making billions it would be a drop in a huge bucket to roll out a hydrogen tank in certain select locations for a test market. That doesn't happen.
There are alot more than just 4 varieties of gasoline. Gas is reformulated by region ( Gas sold in high altitude states for example ( Colo, Wyo, Parts of Utah and NM ) is different. California has a different set of gas regulations. There are seasonal differences ( cold and hot weather changes). and yes, some differences in the forulations between brands. Then there are "off-road and Farm Blends". And then the same holds true for Diesel Fuels, Specialty fuels for Marine use ( both diesel and gas), Then there's Racing fuels, Piston engine avaiation fuels, Jet Fuel ( different for Commercial and Military ), and of course, home heating oil ( big swings in seasonal demands that impact refining capaties ), "Bunker Fuel" - Used by Lage ships. Motor oil, Lubricants,
Then oil is the source for Plastics of all types, various chemicals are petroeum based.
Plus companies such as ExxonMobile see themselves as "Energy Companies" not just oil, They have Natual Gas and Chemical compents as well. So when the time comes when Hydogen powered vehicles ( whether direct or via fuel cells ) become cost effective, You'll still be buying the Hydogen from Exxon!!!
Take a look at this
http://www.energy.ca.gov/gasoline/whats_in_barrel_oil.html
Note that california requires that Gasoline contains ethanol. The primary problem with all "alternative fuels" is that they still cost more to produce than petroleum based gasoline.
The "marketplace" WILL eventually sort it out. In the meantime the law of unintended consquences will prevail. Witness the current rise in the price of grains as goverment subsidzed ethanol production has shifted the production of food to be replaced by "fuel" farming production.
Ethanol needs energy as part of it's conversion process. At the moment, it still requires more total energy to grow, harvest, and process plant material so that it can be converted to ethanol than is produced.
The basic math is that it takes 3/4 of a gal of oil in the form of fuel and fertalizers to grow, process and produce a gallon of ethanol. But a gallon of ethanol has only 60% the energy value as a gallon of oil.
When the math changes, then alternative fuels will be the norm. ( and they will still be sold to you by the BIG ENERGY companies like ExxonMobile. and they will still make a profit doing it.)
And, yes, I am an Exxon stockholder.
( any you may be as well)
Ted, that is all pure nonsense. First, consumers don't have access to racing and engine fuel. Of course, the cars that run at indy get upgraded fuel from your local Chevy for obvious reasons. That doesn't mean that oil companies somehow have created a separate fuel for mass marketing.
Second, all your supposed alternatives must be hidden because no one ever talks about them. You claim there are differences between each company's fuel and yet mention nothing about what difference. More importantly, I never hear Amoco et al mention how they differentiate from their competitors. AT&T, Sprint, etc. are painstaking in trying to point out differences in their phone service, and yet oil does nothing of the sort. Every other industry I know has each company be painstaking in pointing out differences in their products from the competition, but not oil.
All of these supposed differences must be lost to the consumers because they have no idea.
As to ethanol that is a creation of the last ten years and only because everyone knows that ethanol is not a viable option.
Actualy Indy cars run on pure ethanol, not gasoline, but that's beside the point.
Back in the 60's and 70's Gasoline brands were actauly advertized on TV promoting the various addatives and differences between the brands. At one point Premium SUNOCO was tinted Blue to differentate it from other brands. EXXON gave away little "Tiger tails" that attached to your gas cap to show you had "A Tiger in your tank!". There used to be "service attendants" who pumped your gas for you. They gave away road maps. All posible because selling automtive gas was MUCH more profitable as a percentage of the price at the time.
But now automotive gas has been commoditzed and people buy from the station with the lowest price regardless of the brand. The local dealers make thier money from snack foods just like the movie theaters do. Auto fuel is a low margin busness. Talk to your local gas dealer. So much so that EXXON is looking to sell off much of thier company owned retail gas stations.
see http://www.msnbc.msn.com/id/25126563/
After the gas shortages of the late 70's, most of that type of avertizing differenation ceased, but there are still differences between brands.
Automotive gasoline represents around 50% of the product line of "Big OIL", and only a small part of the profit. It's just the most visable part. Most of the profit comes from other sectors of the business.
The media always promotes the suppossed "big profits" in terms of a total $ figure, but that is because volumme is way up. As a percentage of the volume, the profit is not as large as in the past. But that's not a very good headline.
A few things, I don't care what they did in the 60's, I know there is no difference between any of the companies peddling gas and yet they all seem to make exorbatent amounts at the same time.
I also know that people DON'T buy the cheapest because they all cost the same. People buy whichever is closest to them at any given time.
Furthermore, comparing profit margins of gasoline to other products is misleading. Gasoline is a commodity and thus only price is different, and thus, their profit margins are exorbatent because they all should be competing strictly on price. Yet, they aren't.
Again, we have an industry that somehow peddles the exact same commodity now nearly a century after it was discovered that it did when it first came to fruition. The product mix is basically the exact same with little differences, and yet, all the players make a huge amount of money. Of course, if they were in a market that would be impossible.
You keep coming back to this and ignore the many reasons you're wrong. It's obvious a burning bush telling you wouldn't change your mind. I bet you didn't know when Rockefeller was building his business, he drove the price of kerosene from 26 cents a gallon to 8 cents a gallon through his use of cost cutting. Teddy Roosevelt’s trust busting generally drove prices back up as big companies lost the efficiencies of big volume when they were broken up. He didn't do it because there were consumer complaints, he didn't this it was "fair". The potential for abuse was there but none was documented. Since TR was a "progressive", that's all he needed.
As for alternate fuels, if another source of energy to power cars was as profitable, it would be in use now. Ethanol requires huge subsidies to make it competitive. Hydrogen would require even more. look at the difference in the cost of hybrids versus standard engine cars. Those costs are because of the engine and its electric component. The oil companies are no different than coal mines, copper mines, lumber companies or any commodity based business that is doing things pretty much the same as they were 100 years ago. The technology has changed but the main business hasn't nor needed to change.
I need to point out that you want them to change so you claim they are conspiring to not change yet have no real facts to back up your claims. You infer they are conspiring by claiming because they haven't changed, they must be cheating. That's circular logic.
With all due respect, I have no idea what you are talking about. Standard Oil accounted for over 90% of the market on its own. If you think that wasn't a monopoly you are naive.
I really don't know what you are talking about. The reason that alternative energy sources aren't popular is because gas from oil can be found on every corner whereas alternative energy sources aren't. That's why they aren't cost effective. That is entirely due to the oil companies refusing to introduce any of these alternative energy sources even on a tiny scale. Period.
1) Ok, products that "big oil" produces: Petroleum, tar, paraffin, petroleum jelly, kerosene, gasoline, and diesel. In addition they are used to produce a great many chemical feedstocks and plastics.
2) "Big oil" is NOT an oligopoly its products are not differentiated (i.e.: shell gasoline is almost exactly the same as Exxon-Mobil gasoline or BP gasoline).
3) "Big oil" innovates all the time, they design better and better ways to get crude, tar sands, etc out of the ground, they design better detection methods, they hire scientists to create better ways to explore for more oil.
4) If you want to see "Big Oil" innovate as to a final product it will need some way for them to differentiate their product from everyone else's product.
5) They do sell their products at the going rate.
6) "Big oil" does not produce the majority of petroleum nor petroleum byproducts (gasoline, tar, diesel etc) used in the world today. That is done by government run oil companies.
"Ted, that is all pure nonsense. First, consumers don't have access to racing and engine fuel. Of course, the cars that run at indy get upgraded fuel from your local Chevy for obvious reasons. That doesn't mean that oil companies somehow have created a separate fuel for mass marketing."
Um.... Not true at all, you can buy them just fine, most racing cars use some sort of alcohol (usually ethanol) as fuel. Top fuel dragsters use other types of fuel, but all are available to the public just annoying to get ahold of as the demand is low (you can buy them at race tracks and some airports).
" also know that people DON'T buy the cheapest because they all cost the same. People buy whichever is closest to them at any given time."
Where the hell do you live? Here just outside of dallas we have access to a wide variety of gasoline stations at different prices. I always buy the cheapest.
"I really don't know what you are talking about. The reason that alternative energy sources aren't popular is because gas from oil can be found on every corner whereas alternative energy sources aren't. That's why they aren't cost effective. That is entirely due to the oil companies refusing to introduce any of these alternative energy sources even on a tiny scale. Period."
Again, untrue, most gasoline in the us is now 10% ethanol. Also in some cities (on a tiny scale) there are natural gas resources.
The truth of the matter is that even at 4 bucks a gallon, gasoline is simply the best choice for current technology. In the future as battery technology improves this will change, but for now, gasoline is by far the best alternative.
I bet that's actually true Doc. Where I live on every corner where there is more than one gas station the prices are always the same.
Um.... Not true at all, you can buy them just fine, most racing cars use some sort of alcohol (usually ethanol) as fuel. Top fuel dragsters use other types of fuel, but all are available to the public just annoying to get ahold of as the demand is low (you can buy them at race tracks and some airports).
Racetracks and airports? Are you serious? This is what you call demand. As compared to just about every corner where regular gasoline can be found that isn't exactly the sort of thing that will spawn demand for any alternatives. Sometimes people will need to fill up and not be near a race track or airport. They will, however, always be near a gas station.
Here's another good one from Doc Merlin...
"Again, untrue, most gasoline in the us is now 10% ethanol. Also in some cities (on a tiny scale) there are natural gas resources.
The truth of the matter is that even at 4 bucks a gallon, gasoline is simply the best choice for current technology. In the future as battery technology improves this will change, but for now, gasoline is by far the best alternative."
Now, I am not even sure if what you say is true, but let's say it is. That means in nearly a hundred years, the entire innovation comes down making the gasoline 10% alcohol and 90% oil, instead of 100% oil. That is what you call innovation. What a bunch of nonsense?
The cars today are entirely different from the Model T and yet the gasoline adds another ten percent of another derivative.
If cars were innovated at the same pace that gasoline innovates then we would just be introducing stick shift autos.
Here is my favorite Doc comment...
Ok, products that "big oil" produces: Petroleum, tar, paraffin, petroleum jelly, kerosene, gasoline, and diesel. In addition they are used to produce a great many chemical feedstocks and plastics.
2) "Big oil" is NOT an oligopoly its products are not differentiated (i.e.: shell gasoline is almost exactly the same as Exxon-Mobil gasoline or BP gasoline).
3) "Big oil" innovates all the time, they design better and better ways to get crude, tar sands, etc out of the ground, they design better detection methods, they hire scientists to create better ways to explore for more oil.
4) If you want to see "Big Oil" innovate as to a final product it will need some way for them to differentiate their product from everyone else's product.
5) They do sell their products at the going rate.
6) "Big oil" does not produce the majority of petroleum nor petroleum byproducts (gasoline, tar, diesel etc) used in the world today. That is done by government run oil companies.
So first, you list all these products that they sell and then you proceed to say that they are NOT an oligopoly since the all sell the exact same product with no differentiation. Huh.
The reality that is that the overwhelming portion of their profits comes from one product, gasoline derived from oil. Period. Whatever else they dabble in is window dressing and has negligible effect on their bottom line. Their bread and butter since they began is gasoline from oil. Now, compare that to GE, which once did almost nothing but lightbulbs. Now, lightbulbs are one of many things they do. Motorola used to sell car radios. Now, they probably don't even bother with car radios and if they do it is among a big mix. Compare the cars of today to the cars made years ago. They have evolved like any industry would. Now, compare gasoline of today to gasoline of eighty years ago. it's pretty much the same. That is the point of my piece.
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