Do Oil companies pay more for oil when the spot price goes up per barrel or do they have fixed contract price?

It always seems like the price of gas goes up instantaneously when the spot commodity price of a barrel of oil goes up.Do Oil companies pay more for oil when the spot price goes up per barrel or do they have fixed contract price?
The system is not working as simple as you describe it. It is very complex.





Oil companies, the major ones at least, usually pump their own oil. They have exploitation premisions from the countries that they are pumping the oil from. In every contract the case is different. In some cases they pay a fixed amount at the beggining to take the permit in other cases they pay a fixed amount per barrel they pump. The most usualy case is that in these permit they agree on some very complicated formulas that determine the ammount the companies pay to the countries for each barrel. In these case they take under consideration the cost of pumping, oil prices, investements, number of barrels pumped etc.





In any case the oil companies are affected by increased oil prices but not as much as the consumer.





As for commodity markets usually they work with Futures and Options. Both of them are financial products. I will try to make a generalization to explain how they work.





Lets say that you want to buy a barrel of oil in six months. You believe that in six months the barrel will cost 60$. Then you buy a future that worths 60$. In six months you go to the market to buy your barell. If the barrel costs more than 60$ you use your future and take it at that price.If it costs less you do not use your future and buy it normaly. Do not take all these leteraly, the way futures and options work is far more complex and they are also under the supply and demand law.





Please note that oil is not baught only by Oil companies but also countries.





When the spot value goes up usually the future and options value go up. This is not always the case but today in oil market this is the reality. That means that when the prices increases the companies anticipate that in the future when they will need to buy more futures to buy more oil they will have to pay more money. What they do is they sell the oil they allready have at a higher price to find the money to buy the new options and futures.





You can understand now why when the spot prices go up you have an imidiate increase on the gass at the gass station. They will sell oil at higher prices even though they use reserves that they bought much cheaper to compencate for the future prices they will have to pay.





One more reason for the immidiate rises at the gass-stations is the fact that the gass-station owners and gass distributors take advantage of the situation. When all the media say that the prices go higher they find it a great oportunity to take advantage and make more money. Also they have to find the money to buy in the future the more expensive oil.





Please also note that the taxes on fuels, in most countries, are a precentege of its value. So the higher the price the more taxes you pay. Finaly the supply chain of oil is complecated and a lot of different companies take part in it. All of them have a specific margin that they calculate it on the price they bought the oil. The gass that you buy at the pump is much more expencive than the oil that it is pumped at the well.Do Oil companies pay more for oil when the spot price goes up per barrel or do they have fixed contract price?
gke had a good answer - I would also say that in the US and most countries, a bottleneck exists in the oil-gas system at the refinery level. In other words, refineries are running at 95% capacity (essentially 100% of real capacity). So, if oil prices rise 5%, gas prices may rise by a larger rate, as the bottleneck in the system creates an artifical pop in consumer pump prices. While some station operators will always try to take advantage of the situation and consumers, most are simply trying to accurately predict the impact on gas prices of rising oil prices.