Marathon This Question Would Be Better Answered

Marathon This question would be better answered either a) if the case had been supplied or b) if I was a petroleum production engineer. In order to determine the impact of changes in the price of crude on the price of gasoline at retail, the different cost components need to be considered. The U.S. Energy Information Administration outlines the different components that contribute to the retail price of gasoline.

The four key drivers of gasoline prices are the price of crude; refining costs and profits; distribution and marketing costs and profits; and taxes. There are also profit margins to retailers and possibly other actors in the industry as well that need to be considered. All told, as of 2009 the breakdown of the different components assuming an average price per gallon of $2.34 at retail was as follows: 61% crude oil, 18% taxes, 11% refining costs and 10% distribution and marketing.

Historically, the price of crude oil was 51% of the price of a gallon of gasoline from 2000-2009. Using these figures, we can calculate the sensitivity of the price at the pump compared to the price of crude. Historic value: 51% @ $2.09 per gallon = $1.0659 per gallon in crude costs. 2009 value: 61% @ $2.34 per gallon = $1.4274 per gallon in crude costs. Thus, when the price of crude per gallon increased $0.3615, the price at the pump increased $0.25.

There was a slight reduction in distribution and marketing contribution to the price at the pump (1.68 cents), a significant decline in refining costs (5.61 cents) and a decline in the tax take per gallon as well (3.86 cents). This indicates that when the price of crude increases, the refiners and even governments see their take reduced, and this allows the price at the pump to increase less than the price of crude.

There will come a point, however, when margins cannot be squeezed any further, and it is at this point when an increase in the price of crude will be passed along directly to the consumer. Massive price spikes such as the spike in early 2008 tend to reflect this. This assessment is based on the assumption that the price of crude is reflective of world demand for oil. This assumes that production levels remain more or less the same.

In truth, production levels do not necessarily remain the same, as they are governed by a cartel (OPEC) that sets production levels in the hopes of achieving a target price range. If production cannot be increased, however, then it should be assumed that if global demand for oil increase, this will increase the price of crude, and that in turn will tend to flow through to the consumer. 3. Given this, Marathon can expect that if world supply decreases by 10%, the price of crude will increase.

This increase may be significant, given the upward trend in demand. Marathon can, however, keep the price at the pump the same. In question #2, it was noted that an increase in the price of crude is often met with reduced margins and/or increased efficiency from producers and retailers. This allows them to lower their cost of bringing gasoline to the pump.

If producers can improve efficiency, they can lower the per gallon cost of getting gas to the pump, and this will allow them to sell to consumers at the same price without sacrificing margins. Alternately, Marathon could simply sacrifice its margins. Recent evidence suggests that oil companies generally prefer not to sacrifice their margins in the face of increased crude oil costs, but simply pass those costs onto consumers, earning record profits for themselves in the process (Goldfarb, 2011).

This is because Americans have become far less price sensitive with respect to gasoline in recent years (Hughes, Knittel & Sperling, 2006). But if it wanted to, Marathon could keep prices the same by cutting into its margins, or even pushing for cost reductions elsewhere in the supply chain. Marathon could also reduce the quality of the gasoline by changing its additive mixture, although this would not have an impact of more than a few cents.

In reality, most of these strategies will need to be taken together to keep prices the same. If the 10% production decline lead to a 10% increase in price, that would mean that Marathon had to absorb a substantial amount (around 14 cents) of this increase. The government is not going to lower its taxes to help out, and Marathon may not be able to squeeze any of its supply chain partners.

In practice, it may be very difficult for Marathon to maintain the price at the pump, which is one of the reasons why oil companies tend to pass the crude oil price increases along to their customers. 4. Although the six-month moratorium and deep-water drilling was lifted in the fall of 2010, if such a moratorium were to be reinstated it would not have a significant impact on the price of oil for a couple of reasons. The first is that the amount of potential oil from such drilling is negligible.

The amount of oil in question in the Gulf of Mexico from the drilling is 80,000 barrels per day (Clayton, 2010). U.S. production of oil is 9.056 million barrels per day. Thus, the drilling represents 0.8% of total U.S. daily oil production. U.S. daily consumption is 18.69 million barrels per day, so the drilling represents 0.4% of daily consumption (CIA World Factbook, 2011). To make up the shortfall, the 80,000 barrels of lost production would be purchased on global markets. U.S. oil imports would increase 0.7% as a result of the moratorium.

These simply are not market-moving numbers. The second reason is that the 80,000 barrels per day in lost production resulting from the moratorium will be absorbed by global production increases, if it is not simply viewed as a rounding error. OPEC controls the price of crude by controlling the supply of oil on the world market. It controls around 35% of global production. OPEC members set their production levels in accordance with estimated demand and estimated production levels of non-OPEC countries. In doing so, the cartel seeks to set prices.

As such, it will set its output levels in accordance with the knowledge that 80,000 bbl/day of production in the U.S. is going to be halted. This.