BP Pipeline Shutdown - Neglected Factors and Incomplete Information
There certainly are many factors that I couldn't consider in my previous post because the data is unavailable.
The most important is the operation cost. Profit is defined as revenue minus costs incurred. The costs that BP incurs are not available, so my post only shows how BP's gross revenue increases. I don't know what the effect will be on the operation cost. To repair the pipeline will certainly cost BP some money, but will it be more than the increased revenue?
There are other factors as well, as this is a greatly oversimplified analysis. For example, for BP's daily oil production, the only data available was the yearly production value, which I used to calculate an average daily value. The actual daily value may not be so constant due to several factors. One factor is something called demand elasticity. Essentially, as the price goes up, the amount that consumers purchase goes down. Therefore, BP's production may decrease as the price goes up. Much like the electricity market, however, gasoline is very demand inelastic in the short term, i.e. as the price goes up, consumers still purchase about the same amount, at least in the short term. Therefore, a short-term increase in oil price is not likely to have much of an effect on the global demand for oil.
A much more complete and scholarly analysis has been promised by the Dark Wraith. As of now, it's not up yet, but I'm sure it will be soon.
posted by Immoral Majority at 8:50 AM
2 Comments:
Yes, BP really wants its competitors to have increased market share... that will surely result in increased gross revenues. And yes, it costs more to repair a pipeline than it does to maintain it.
Oh, and you might want to revise your "calculation," given that the price of a barrel of oil is now below what it was the day before the BP pipeline failure.
If this was some sort of intentional & malicious act, the guys at BP really fumbled on this one. If they were the only actors in the entire industry, they could've reaped a huge award. But since they are one of many actors (both on the supply and demand side), they are not incented to disrupt their own supply.
Sunday, 20 August, 2006
Thank you for your comment.
When considering BP's costs incurred, you have to consider the fact that the entire oil field is shut down, so while their operating costs would be increased to repair the pipeline, they would be decreased by not pumping oil out of the field. Despite that, though, I never claimed that BP's costs incurred would decrease, I simply showed that when a 2.5% decrease in BP's production results in a similar increase in prices, there's a good chance that they will be making more, not less money.
Certainly, I don't know what the outcome will be for BP's profits this summer, as no one can predict what oil prices might be. We'll see at the end of the summer.
Monday, 21 August, 2006
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