Ask the blogger

Another reader emails:

You just answered a reader question about oil prices, I hope you'll answer one about oil company profits, too.

My understanding is that oil companies buy crude oil from various places, refine it into gasoline, and sell that gasoline to stations around the country where we pump it into our cars. Recently, the cost of oil has skyrocketed, as have oil company profits. My understanding of the oil companies' defense of their profits when grilled by Congress
a while back was "It's not our fault that we're doing well: we don't control the cost of oil -- we can't help it that it's expensive, and when gas is expensive we make more money."

This seems exactly backwards to me: what kind of industry sees profits go up when its costs go up? Shouldn't expensive crude oil be terrible for an industry buying that oil and selling a derivative product to customers used to it being very cheap and lightly taxed?

If you answer this I might ask why so many economists want to get rid of the penny at the same time that businesses seem perfectly happy to buy them on their own accord.

Last question first: businesses like pennies because they believe that pricing something at $4.98 is psychologically different from pricing it at $5.00. Economists hate pennies because you shouldn't have a unit of exchange that can't buy anything. Pennies cost more to make than they are worth, and then waste valuable human time carrying and counting the things.

First question last: there are multiple oil industries. Not everyone extracts oil; those that don't are seeing their margins decline, just as you would expect. It is the companies that own oil fields which are posting high profits.