No matter what state the economy is in, there is one commodity that will always represent a universal currency: energy. Although there is fluctuation in the price of oil, it is only due to fluctuation in the value of the dollar. Because oil is not an unlimited resource and the economy is not doing so well, many oil-producing countries are looking to get more money from international companies, such as Exxon Mobile, to do business in their countries. For example, Brazil just discovered a large amount of natural gas (estimated at 50 billion barrels) off one of its coasts. Because of this, Brazil is looking to increase the cost of allowing Exxon to obtain that gas from 50% of Exxon’s total profits (considered to be on the lower end of the spectrum) to about 80%.
Exxon’s profits haven’t been very high lately for several reasons. First, the cost of producing gasoline is extremely expensive. When you factor in the costs of transporting the oil from international soil to the United States (Exxon has to pay to burn fuel too), refining, and distributing the oil, the profit margin on selling oil is already severely limited. Also, because the economy isn’t doing well, the economy is unable to support high priced gasoline. If Exxon started charging $5/gallon of gasoline, it would not equate to higher profits. Instead, it would result in a decrease of gasoline purchases because of the high rate of unemployment.So, what does all of this mean? When the economy is strong, companies can take measures to increase their profits margins. When the economy is down, however, companies must take opposite measures to give people the opportunity to purchase their products or services. For example, many McDonald’s owner/operators are not thrilled about the new breakfast dollar menu. McDonald’s breakfast is the single-most profitable meal of the day for many franchises, and offering some of those menu items for a dollar (several of which are actually at cost) decreases the profit margins. McDonald’s chose to introduce this dollar menu when sales were being hurt by the economy to give people more of an incentive to eat their food in hopes that they will purchase more than one item (preferably off the dollar menu). In the same way that McDonald’s offers special deals on its food items when the economy is down, Exxon can’t afford to increase the cost of gasoline to the American public, even if the countries from where Exxon obtains the oil increase the cost of doing business.
I don't really see how you can compare a McDonald's dollar menu item to gasoline. If you want to get technical, the elasticity of the products is completely opposite. People can get any other item for breakfast and go anywhere else if McDonalds did not offer something "affordable" for them. McDonalds is catering to their market and the idea is that they will buy the other more costly items as well. Gasoline is necessary for pretty much everyone...and there aren't a whole lot of options especially considering price mimicking companies.
ReplyDeleteAs I mentioned in a previous comment, there are certain things (like energy and oil) that will always represent some kind of value or currency no matter the state of the economy. A loaf of bread will always contain value because it is something people need to survive and cannot do without. Oil and energy get people from point A to point B, light their lightbulbs, etc. and that is something people need. Tiffany diamonds, however, are a more flexible expenditure and do not hold as much value in a down economy because people can do without them. Anticyclical goods, commodities, and services are what can hold real value that is less volatile and does not fluctuate as much, as compared to more procyclical or flexible expenditures.
ReplyDelete