As some of you on this site know, I worked for a major oil company for 35 years before I retired in 1998 -- so I know something about the business.

I have been told by those still working that the profit from Premium Gasoline is down substantially from what it was in the 1980's and earlier. That is why many companies are abandoning their higher-cost "Special Premiums -- like BP's "Crystal Clear Ultimate" and Sunoco's 94 Octane Premium.

When I was working, the cost to make premium instead of regular gasoline was in the range of 1 to 2 cents per gallon more while the Oil Company sold it to the dealer for 15 cents more per gallon -- and the dealer added another 5 cents per gallon at the pump for a total of 20 cents more than regular.

I'm now told that the cost to make premium instead of regular gasoline is now much higher (no figures were quoted to me). I suspect that this new additional cost is now in the range of 5 to 8 cents more per gallon. And the cost that can be charged to the dealer and at the pump has not changed -- and in some areas has gone down as premium sales have dropped with the higher cost of all grades of gasoline.

Why am I going into this much detail on this topic. Because I believe there is a push by all oil companies to reduce -- wherever they can -- their cost to make premium gasoline. So in addition to dropping the special premium gasolines, there is now a tendency to no longer use as high an additive treatment rate in premium as was used in the past. In some cases, that would mean only putting in the government-mandated treatment rate for fuel injector cleaner. In the past most companies used a higher treatment rate for premium than they did for regular. I think that now both grades only get the legal minimum treatment.

This means that all of us need to do a periodic cleaning of our fuel injectors (and other intake parts) by using a good quality after-market fuel injector (or fuel system) cleaner (like Chevron's Techron) every so often. I do this every 7.5 K miles (just before each oil change), but you should do this at least every 15 K miles. Follow the directions on the bottle. This self-administered treatment is much cheaper than paying the dealer to manually go in and clean the injectors.

And if you are like me and burn cheaper grades of gasoline in your Max, you should definitely do this treatment every 7.5 to 10 K miles.

 

interesting. I'd like to pick your brain a little more. from what I've read, and heard (I've actually asked the gas tanker truck drivers about this) in some parts of the country all brands of gasoline are the same (e.g. Shell vs. BP vs. the "cheap" places) - different grades are different, but within the same grade they all sell the same product. Now, in other parts of the country some chains have their own wholesale distribution point where they add the additives - and in this case the gasolines are in fact different among the brands. I haven't figured out how to tell where is which, I even talked to an "unmarked" tanker at a Shell station, thinking he also delivered to Citgo, Marathon, etc - but nope he only serviced Shell, and he said the additives are added at the Shell distribution center. But drivers in other areas have said all trucks ship the same stuff.

I think in Michigan they all have to use the same wholesale distributor, so it's all the same gas unless the driver adds the additives himself (which I would highly doubt).

And in michigan, from what I've read, the independently owned retail outlets actually lose $$ on every gallon they sell. A certain oil company owned chain sets the retail price below wholesale (or perhaps they set the wholesale higher than reatail, b/c they also control the wholesale market and make $$ on wholesale gas sold to their competitors) and then counts on food, beverage, and car wash sales to make a profit at the retail level. So the other independents have no choice but to match price and take a loss on the gas, hoping to also make a profit on the food, beverage, and car wash sales. if you're an independent and don't have a good food mart or a car wash, then you're SOL. this just seem ridiculous to me. I can't believe the justice department allows this.

 

I am not sure that I agree with the author of this thread. Granted the profit margin may have eroded somewhat on premium gas, but one could argue that the contribution margin (ie. contribution to fixed costs of producton and profit) on premium gasoline is greater than for other grades. This means that the more premium gas is sold relative to other grades, the more the oil company makes without compromising the quality of the gasoline.

Do the math. If it costs 5 to 8 cents more to make 15 cents more, an oil company would gladly sell all premium gas if the demand was inelastic.

 

I hate that people consider fuel to be such a commodity. If that's how they feel, why don't they drive electric cars, for which all fuel IS the same?

 

bobo you are absolutely right (you have obviously studied microecon at some point in your life). there are other factors at play besides an increase in production costs that would drive oil companies to abandon super premium grades. BUT, I don't doubt for a second that they are searching for cost cutting measures to preserve/improve their margins (reducing additives, etc). On that point, the original poster may be correct, but perhaps for the wrong reason. It may have more to do with shifting demand from premium grades to lower grades (due to overall higher fuel costs). Since their financial goal is not just a certain profit margin %, but an actual profit dollar amount - if demand slides a bit for a certain fuel grade, the only way to hit the goal (for that grade) is to reduce costs (even if there was no cost increase to begin with). I'm also wondering if their method of fixed cost allocation has anything to do with any cost "increase" for premium - which is really more an accounting thing than a raw material cost thing.

I can relate to their situation - in my current job my only function in life is to deliver PBT (profit before tax) to the corporation for the product lines I manage. My only control levers are price and DM (direct material cost). Allocated fixed/overhead costs are handed to me by the finance/accounting department, and I cannot question them. If they go up for some reason, I have to increase price or cut DM costs to make my PBT goals. Bobo - you might be able to see the fatal flaw in this system of product/market management (death spiral).

 

I am an accountant with 30 years' experience. The allocation of fixed/overhead costs is irrelevant to the profitability of a company. It is only a useful tool for gauging a division's peformance, but is ultimately meaningless to the company's bottom line.

What is relevant is an individual product line's contribution to the bottom line and assuming fixed costs do not change with production/sales levels, then if the revenue for incremental production exceeds the incremental cost of production, the more is contributed to covering fixed costs and ultimately profit.

So in this instance: if an oil company can get an incremental 15 cents per gallon by only expending 5 to 8 cents per gallon, there is an incremental profit per gallon of 7 to 10 cents per gallon relative to selling the same gallon of regular gasoline.

The accounting term behind all this is called "contribution margin analysis".

Be there or be square, lol!

 

I had problems getting on this site to answer some of these points earlier. I certainly understand incremental production cost driving decisions. But net margins on product also drive production decisions.

The cost that I quote in my original post is the refining cost and don't include the transportation and distriubtion costs of premium gasoline.

In the case of BP and Sunoco, all common carrier pipelines needed all of the existing tankage they owned to handle all of the different grades of gasoline that the government now mandates for different areas of the country. So the tanks that had previously been available to handle Crystal Clear Ultimate or 94 Octane Sunoco were taken away from these two companies to handle the mandated grades. These two companies found that they could only sell these unique grades of gasoline where they owned tanks to hold their unique product. The volume of this product they could sell fell substantially -- so both have gone to making premium to industry specs so that their premium could be stored in tanks with other companies premium. The cost of building new tanks to keep their product in the wider market was too high -- given the reduced margin for premium. In the 80s I suspect that both companies would have ponied-up the money to build new tanks given the higher margins their unique product made back then. Not today -- these products are gone -- probably for good.

Other points in the above e-mails: For all refineries, the production costs for premium does change with increased production -- the cost of high-octane blend components increases as internal production is used up and outside components must be purchased to make additional volume. So a refinery will make premium up to the point that incremental production costs equals incremental revenue -- for the last gallon produced.

The point in my original post is that oil companies want to return to the high margins they previuosly earned on premium. By reducing the cost of additives (that does not show up in existing engine performance) the company can increase premium margins. I suspect that most companies are doing this -- I do not know this is happening, but I know how industry thinking goes.

Many people do not consider premium gasoline as a commodity -- and the oil companies hope that this belief continues. But the fact of pipeline distribution is that it is a commodity product. The only difference between each brand of premium (and regular) gasoline is the additive package that each company puts in the gasoline as it is loaded into a tanker truck that delivers the product to a gas station. Given this only way to differentiate their premium product, there are likely a few companies trying to compete with their premium by doing a better additive treatment of their premium. As with my other comments, here I am only speculating and have no direct knowledge.

bobo is correct that even at the higher costs, oil companies still have a big incentive to sell additional premium gasoline -- up to the point that a given refinery runs out of enough higher octane components to make all of the gasoline that refinery can produce. No company wants to go out in the market to buy high-octane components -- althought in the 80s a few did that from time to time depending on each refinery's operations.

I will answer sky jumper's questions in another post.

 

Just be thankful that you don't face the incremental cost of premium gasoline that is prevalent in Canada.

I live in a suburb of Vancouver, BC. The last time I checked mid-grade gas was 6-7 cents a litre more than regular and premium was 11.5 cents more. Some stations charge more yet for 94 octane. Premium is generally 91 octane, but Chevron is 92. Husky and Mohawk only offer 94 octane premium gas. No one offers 93 octane.

So the big companies like Shell, Esso, and Petro Canada offer 91 octane gas at about Cdn 43.5 cents more per US gallon than 87 octane (US 38 to 39 cents more). So the differential here is double that of the US.

I use Mohawk or Husky 90 octane gas that is marketed at 87 octane prices.

It works for me.

I live at sea level.

 

I will put an answer to each of your questions inside of the copy of your post.

Answer:There are a number of laws (state and local) that do not allow companies to sell gasoline below costs. It may well be that a large volume operation can be selling product as such a small retail margin (difference between wholesale cost and retail price) that smaller station operators are losing money because this thin margin does not allow them to cover their higher fixed sales costs. If a station operator is losing money they will likely complain to the government about their competitor selling product below costs. I've seen articles in the paper about these complaints in the past.

Given (until about the last month or so) the general shortage of gasoline in the USA, I doubt if many retail operations are selling product with margins so thin. We may see this again this winter given the now large surplus of gasoline now being reported.

 

When I was in Wisconsin last year the retail differential between 87 and 89 was only 5 cents per gallon. The difference between 89 and 92 was an additional 10 cents. So the US historic differential between regular and premium in Wisconsin was no longer 20 cents per gallon, but only 15 cents. I think this was the case in Wisconsin because stations there sell very little of the higher grades of gasoline -- almost all residents buy regular.

Sorry to hear about the higher differentials that exist in Canada. The difference in liters and gallons and US dollars and Canadian dollars make comparisons difficult. Last I saw it took $1.12 Canadian to equal $1.00 US. But this exchange rate changes frequently.

 

I translated my US prices back at an exchange rate of Cdn$1.125 to US$1.00 resulting in a US gallon of premium costing US 38 cents more than 87 octane.

Tourism in Canada suffered this summer in terms of the number of Americans visiting as a result of the strong Canadian dollar and the high price of gas in both Canada and the US. I guess a lot of people stayed closer to home.

On the other hand, I went to Hawaii in November 2003 and paid about Cdn$1.62 to US$1.00, ouch!

 

silvermax - great explanations. thanks.

 

Bobo, I did not pick up on this the first time I read it, but on thinking about it, have come to a conclusion about Canadian gasoline:

It appears that your government has not mandated multiple blends of gasoline for different areas of Canada. While much of the US has mandates that eliminate the many different octanes for premium -- in many places forcing all of the companies to pick a single octane -- your area of Canada has four different octanes for premium gasoline: 90, 91, 92 and 94. Be thankful for this! When the government gets into the business of telling oil companies how to make their gasoline (other than setting maximum vapor pressure), the prices for gasoline goes up.

Where I live in Colorado Springs, we end up having to burn the special gasoline blend required for Denver -- because of the pipelines supplying gasoline to both markets. So when I returned early this week from a visit to Chicago, I found that 87 octane regular in North Platte, Nebraska was selling for $221.9 at all stations near I 80. When I got home to Colorado Springs the next day, the 85 octane regular here was selling for between $2.459 and 2.499 at stations away from I 25. (Prices at a few stations dropped 4 cents, 2 days later.)

My conclusion is that the reduced supply (and higher production cost) of Denver Boutique gasoline has raised the prices of gasoline here by almost 30 cents more per gallon than for a 2 octane higher gasoline produced by some of the same refineries that can supply Denver (and Colorado Springs). I've written a letter to the editor of my local paper complaining about this government mandate costing us so much more for gasoline.

In all markets quoted, the 20 cents per gallon retail differential for premium is in effect.

In Des Moines, Iowa (the cheapest location on my trip), 89 octane mid-grade only costs $1.999 -- because the state cuts gas taxes for gasoline blended with 10% ethanol. In this case it is 87 octane regular blended with 10% ethanol to get 89 octane.

 

bobo - I think you and I are talking about 2 different things re: cost allocation. I'm talking about how allocated costs effect future business decisions at the product level - not corporate financial reporting after the fact (which the act of allocating costs does not impact, as you correctly state). However, at the product line level, business decisions extend beyond simple contribution margin (at my company, that is) - we also account for allocated fixed costs, which are allocated as a % of revenue equally to all product lines. this allocation % changes every quarter, and product managers react accordingly to meet their own individual financial goals. this is obviously not optimal, and in my opinion has resulted in some very poor business decisions. I think you are overlooking this phenomenon when you dismiss cost allocation as irrelevant to profitability - there is a link. in fact, the whole activity based costing revolution of the 80s and 90s was designed to correct this situation. but ABC has not yet been widely adopted or correctly implemented by those who are actually making the real decisions that generate revenue and profit. case in point - my company, a massive $60B American icon that still tries to cover mis-allocated fixed costs by raising the price of an unrelated product. this ultimately leads to significant product positioning and pricing problems.

my suspicion was this could be happening at big oil too. but silvermax has debunked that theory.

 

I retired from Big Oil in 1998. At that time we had departmental P&Ls that tended to drive some business decisions. These P&Ls were based on attempting to set industry transfer values for products going from refining to marketing. For a number of years I was the guru of setting transfer values in my company. We concluded that if both refining and marketing were slightly upset at the values being set, we were doing our job correctly -- no one would say that they liked the values we set. They were always too low for refining and too high for marketing. The philosophy of transfer values was "what would a stand alone refiner charge a stand alone marketer for each grade of product?" And then put a location value on those monthly numbers to account for transportration costs from each refinery to each terminal.

I saw some instances where transfer values caused some bad business decisions. To make the best business decisions, departments needed to look at both transfer values and incremental product costs. I think that generally happened, particularly in refining.

 

I agree with SilverMax04 completely re: his last paragraph.

Many a company has made poor business decisions based on transfer pricing and cost allocation methodologies that ultimately adversely affect the corporate well being. Accounting case studies and exams are replete with examples. Such methodoligies are most often used for performance assessment and bonus calculations.



On a separate note, SilverMax, the 90 octane gas locally is not premium. It is the lowest octane sold at Husky and Mohawk gas stations and is 10% ethanol blend, as is their 94 octane. Mohawk also has a 92.

My Maxima runs superbly at sea level and altitude on the 90 octane gas and my fuel economy has not been compromised one iota. Again, it is the same price as 87 octane at all the other stations and 6 or 7 cents/litre cheaper than the competitors' 89 octane. It works for me.

 

If you blend 10 % ethanol into 92 octane premium, you end up with 94 octane. If you blend 10% ethanol into 88 octane gasoline, you end up with 90 octane. The only question I have is where does Mohawk get 88 octane (sub-mid grade)? Does Mohawk have their own refinery there? If they blended 10% ethanol into 89 octane mid-grade they would have 91 octane. Also, for most places in the US, the mid grade gasoline is a blend at the terminal (when loading into trucks) of regular and premium grades in the proper amounts to get the desired octane and based on the octane of the two components. For example, if you blend equal amounts of 87 octane regular and 91 octane premium you would get 89 octane mid grade. If you are blending 87 and 93, you would reduce the volume of 93 octane to 1/3 (33.33%) and the volume of 87 octane would be 2/3 (66.67%).

All of this is approximate and the actual final octane depends on a number of factors, but assuming straight line blending is a good basis for determining the percentages.

The exchange rate at close of business today was 1.125 Canadian to $1.00 US. So Bobo's basis for now is better than mine.

 

SilverMax04:

Husky Oil owns Husky and Mohawk gas stations. Husky Oil is a public company trading on The Toronto Stock Exchange. It produces a lot of heavy oil and is controlled by Hong Kong billionaire, Li Kai-Shing.

The 90 octane gas is available only in Greater Vancouver locally. 40 miles out of town it is not available, but 87 octane non-ethanol gas is.

Locally, all Husky and Mohawk gas is ethanol blend. Husky locally has only 90 and 94 octane, while Mohawk locally has 90, 92 and 94 octane.

I am not sure where the refinery is. I suspect in Calgary or Edmonton as I believe the only refinery in Vancouver is owned by Chevron, but I could be wrong.

 

you sound confused. how does something irrelevant and meaningless adversely effect a company? and why are case studies filled with examples? and why have many companies spent millions on ABC methods?

I stand by my earlier post (which you now seem to agree with). allocated costs directly effect future business decisions, and profitability. I deal with it every day, so I know I'm right.

 

I am not confused. Allocation of fixed costs is simply that. You can allocate fixed costs between divisions and products until you are blue in the face, but if the level of fixed costs can't be reduced the contribution to a corporation's profitability won't change one iota.

The allocation of fixed costs should not affect a division's decision making process as they have no control over those costs. If they can, in fact, reduce those fixed costs as a result of optimizing product/sales mix then they are relevant, but if they can't they aren't.

What is relevant is revenue/price and variable costs which ultimately affect the contribution to profit.

Take off your division hat and wear a corporate hat!

 

you are wrong! take off your accounting hat and open your eyes to what people are doing with the reports you produce! have you never heard of the cost allocation death spiral in your 30 years' of experience? do you even know what activity based costing is? I clearly overestimated you.

again - this thread is not about the mechanics of financial reporting after the fact - it is about how costs affect decisions. variable costs are only part of the equation!

like I said before - the simple act of allocating fixed costs can cause product managers to make bad pricing and product positioning decisions. this has a direct negative impact on the bottom line. period.

you seem absolutely deaf to what is happening on the front lines of business.

I am done with this thread.

 

Your paragraph below simply reiterates what I have been saying all along!
What part of that don't you understand?

When I stated that accounting case studies are replete with examples of this, what part of that did you not understand?

Thankfully, you are done with this thread!

 

is that really the best you can do? your childish actions explain why you are clueless, contradictory, and a plagiarist. the history of this thread confirms it.

 

Your, sir, are an id!ot! Take your e-thuggery somewhere else.

Obviously, your comprehension of the English language leaves something to be desired.

 

You both seem to be saying almost the same thing -- in different ways. Stop being so mad at each other and listen to what each of you is actually saying. I have difficutly disagreeing with either of your cost accounting points, and do not see why you are so mad at each other because you each choose to state your points in slightly different ways.

 

You're right SilverMax_04. However, sky humper couldn't see that. I wasn't the one that got mad. Perhaps there was a failure to communicate clearly.

However, I take exception to being lambasted by sky humper who, it appears, is trying to pick a fight with me. So let's call it a day and move on.

 

good read, up until the last few posts. someone always has to be 'that guy'

 

The price difference between grades for Citgo gas is 5 cents in the Carolinas. And it also tends to be the cheapest. I love it.

 

Oil companies are still making money hand over fist and scoring record profits, that should offset any wrinkle in the profit margin of making premium wouldnt it?

 

It would... if they were nice people.

They are not nice people.

Plus, I'd imagine they'd need the money for the HUGE restructuring they'll have to do as other fuel sources become available/necessary.

 

The really "big" profits are made on crude oil production. For many years the refining and marketing of oil products (gasoline and distillate) was a low-profit business for the industry. Now that product demand in the USA is exceeding the industry's ability to make product, prices have gone up (in addition to the increases caused by higher crude oil prices). This requires that substantial finished product be imported into the USA to meet the current demand. The higher cost of this imported product pushes up all gasoline prices.

Also, it is not well known -- but true -- that the feds required a further reduction in the sulfur content of all gasoline last spring. This required refineries to invest more money in desulfurizing units (build equipment) to meet this mandate. (There is a time waiver for a few small western refineries, allowing them more time to meet this tighter standard.) The investment and added operating cost of these units increased the cost of producing gasoline and further limited the number of foreign refineries that could make gasoline to these tighter specs. All of this increases production cost and also prices.

Finally, all oil companies keep P&Ls for each segment of their business. The profits from crude oil production do not help make refining & marketing look profitable, if they are not. For many years they were barely profitable (earning less than 5% on invested capital). Now this business is profitable because of the higher prices caused by the shortages and the requirement to import higher-cost foreign gasoline -- which keeps all prices higher.

Hope this helps you understand. But like all good businesses, the refiners and marketers are looking to increase their profits by finding ways to reduce their cost. The additive package is one of the costs they can control (unlike crude oil costs which are set in the global marketplace). They control additive costs by only using the government mandated minimum treat rate in their products, rather than use a higher treat rate that would be better for their customers. The oil business is more and more becoming a commodity business -- with brand meaning less and less. This is being pushed by people (like me) buying the cheapest product and also by the oil companies eliminating unique products (94 octane and Crystal Clear) and reducing additive treat rates.

 

That irks me. Why the hell do so few people care what they put in their cars?

 

This has been coming for some time because of a combination of factors:

- Much higher gasoline prices push consumers to find lower prices and reduce the oil companies incentive to provide superior products at slightly higher prices.
- Government mandates on special grades of gasoline for different areas of the country reduce the available pipeline and terminal tank storage options -- recuding the options for oil companies to offer unique products like 94 octane (Sunoco) and Crystal Clear Ultimate (BP).
- Government mandates on much lower gasoline sulfur content push production costs (and prices) higher.
- Growth in gasoline demand without any new refineries in 30 years (and many old refineries closed 10 years or so ago) increase the need for imported gasoline.

Thus we end up with people not looking for (or interested in) better performance and oil companies (until recently with the fall in gasoline prices) not needing to differentiate their products to sell more -- they are selling all they make and having to import gasline at higher costs.

The two seem to feed on each other pushing the available products down in production cost and price = commodity products.

 

This thread was quite interesting and then quite belittling of the whole .org, sadly. What started out as a good helpful point turned into mud. Before huffing and puffing on all this, those looking to argue should review their micro-economics, monopolies, oligopolies, perfect competition, MR, MC, TR cost curves. If that is greek to you, then don't put on your suit of know-it-all attitude.

I say this because I have learned TONS of great mechanical information that has not only helped me w/ my Max, but my other vehicle as well. It is sad to see this sort of thing going on after having come to believe in this sight as a source for sound advice.

Pump the premium into your car, and move on!

 

i've been busy lately and forgot about this thread.

silvermax, with all due respect, Bobo and I are not saying the same thing at all. re-read the posts carefully, particularly Post 14 and Post 20.

I have consistently (and correctly) maintained that, in the real world, allocated costs impact corporate profits by affecting business decisions at the product level - there are few exceptions to this.

here's a simplistic "textbook" example (real world situations are much more complex/subtle):
a) a fixed cost is allocated to a product P&L --> product managers raise price to maintain "loaded" margins (this is NOT contribution margin).
b) higher price --> lower sales volume --> less allocation base --> even higher allocated cost per unit.
c) higher allocated cost --> even higher price --> even lower volume... and so on until sales and profits suffer greatly - all with the SAME underlying level of fixed costs. as I stated way early in this thread this is called the "death spiral", and is most prevelant in the manufacturing sector. Activity based costing was created to correct this problem, with limited success.

Bobo has repeatedly denied this reality by claiming allocated costs are irrelevant to profitability (which is only true in the context of historical reporting – which is not what we are discussing here). Just read his Post 20 again. in fact, bobo's first such claim was in direct response to my first post, so he was clearly trying to disagree with me.

fact is, it makes no difference at all if the division managers, SBU GMs, or product line directors can or cannot control the underlying fixed costs that are arbitrarily allocated to them -- they still have to "cover" those fixed costs in their business plans. this leads to all the problems I spoke of before. Yes this is bad, and is not consistent with 1st year MBA school theory - but it is reality for most companies. I have years of first hand experience to confirm it. bobo's last meaningful post is in direct contradiction to this reality (even though he claims to be saying the same thing as I).

furthermore, bobo's "case studies post" is contextually ambiguous at best (what decisions? what managers? corporate mgt? div? BU? bonus calculations??.. whose bonus? and what about product decisions?) and is seemingly contradictory to his other posts. but it doesn't matter because he follows it up with more of his faulty rhetoric on the irrelevance of allocated costs. Again we are not talking about theory, or financial reporting – this thread is about how costs affect decisions in the real world.

but bobo then has the audacity to point back to his "case studies" post with a red herring claim that I was just repeating what he had been saying all along – hogwash! Just read the posts, it's all there.

I have very little patience for such debate tactics, and I rightly called bobo out on it.

As for picking fights – you only need look at who threw out the juvenile html gremlins to know what’s going on there. only children use those things to insult people.

Now incase you’re wondering what my credentials are:
BSEE, MSEE, MBA (U Chicago)
4 years electronics research engineering (not applicable to this debate)
3 years product management for “big telecom equipment”
4 years management & strategy consulting – clients included top firms in telecom, aerospace, heavy industrial & manufacturing
2+ years director of product & business operations for “big telecom equipment”

As an aside, you may be interested to know the majority of my engineering research was devoted to piezoelectric surface acoustic wave technology – which is the same basic technology our knock sensors are based on. In a different thread, Bobo had the audacity to tell me I was full of BS w/regard to my KS theories, despite the fact that I spent several years building, breaking, and testing such devices in a lab.

It seems that Bobo’s MO is to look for opportunities to disagree with people, and if challenged in return, he whips out his condescending tag lines and childish html gremlins. Do a search on his posts and you will see this. I’m at least the 3rd person he has called an idiot over the past year, and I only read a handful of threads on this board.

 

I wondered where you were when this thread just seemed to die. Happy to have your comments.

I have some experience with this in regard to commodity products (gasoline and distillate). In a commodity type market -- where the market is more important in setting the price -- it is harder to raise prices in such a market. When I was setting transfer prices for gasoline & distillates, I was always batteling with Refining and particularly Marketing over where these prices were set. The Marketers knew it was easier to manage the transfer price than to manage the business -- I worked to keep them as real-world as possible and let the P&L fall where it may. When dealing with products that are not in a commodity like market, I can certainly see that your points on trying to capture all allocated costs in the product price can easily become a tactic in that business, as in your example, below.

I agree. Even in the commodity world of petroluem, the marketers worked to capture all of their allocated costs for premium gasoline -- because sales of premium were somewhat less of a commodity than sales of regular. This resulted in my company charging a few cents more than competition for their then unique grade of premium gasoline -- and the market generally allowed our marketers to get these few extra pennies per gallon. But when higher crude oil prices pushed up all prices, customers cut back on premium purchases, particularly our higher-cost premium. When this happened, these higher allocated costs became a fight almost every month -- because Marketing could not recapture them all at the pump and still maintain historic volume levels. We got back to managing transfer values instead of managing the business.

I certainly agree.

Turns out we both got U of Chicago MBAs -- I graduated in 1963. I also have a BSME degree.

Yes, sky, I have had him do the same to me on issues about petroleum and physics where I knew what I was talking about. I won't take the time to post the threads here, but I have had the same treatment from Bobo. Been there, experienced that.

 

greetings fellow GSBer! glad to know another engineer/MBA on the org. I was the class of 2000. I went part time at night and continued to work full time while taking classes. not sure if you know, but they built an incredible new b-school facility down in Hyde Park. it is really nice. I took classes at the Gleacher center in downtown chicago, also a very nice facility. top notch program.

and thanks again for sharing your insights on the oil industry. it's an area of great interest to me, but I know nothing about it.