The Ridiculousness of Gasoline Prices
You don’t have to be paranoid to believe that the White House orchestrated the extraordinary drop in U.S. gasoline prices just as mid-term elections crucial to the Republican Party were approaching last fall.
But while the Bush administration probably would like to take credit for that, it can’t. The president of the United States may be a very powerful dude and this one might be a son of the Texas Oil Patch, but the arcane machinations of the giant oil companies and the global oil market are beyond even his long reach.
The reason that American motorists were paying nearly a dollar less at the pump last November than they were 10 weeks earlier was banal in the extreme:
It was hedge fund investors who were betting the ranch that there would be a repeat of the devastating 2005 Atlantic hurricane season who sent prices — and oil company profits — soaring.
These investors had poured gadzillions of dollars into long-term positions in oil, gasoline, natural gas and other energy commodities and took a bath last August when the 2006 hurricane season forecast was radically downgraded. Gas prices plummeted as a result.
The reason that American motorists are now paying nearly a dollar more at the pump than they were last November is equally banal:
There has been an uptick in the never ending violence in Nigeria, a major oil exporter, concerns over the forthcoming hurricane season and the usual yada yada by oil companies making obscene profits that they are having difficulty with their refinery infrastructure, all exceeding lame exuses since there are ample supplies of gasoline, natural gas and other energy commodities at the moment.
The whole subject of gasoline prices makes me want to tear out my few remaining hairs.
On the one hand, oil companies are so rapacious and so powerful that even congressional efforts to bring them to bay won’t get anywhere.
On the other, U.S. gasoline prices have been historically low compared to the rest of the universe, although I don’t like paying 40 smackeroos for a fill-up of regular unleaded any more than you do.
On the third hand, continuing U.S. reliance on foreign oil and the failure of government and industry to get behind alternative energy resources in a really big way is beyond dumb.
On the forth hand, we have the usual muddled BS of some analysts saying that prices will spike this summer and others saying that they will go down.
Bottom line:
Get over it, bucko.
The oil companies will do damned well what they please when they please and for whatever reason they please.
For other bloggers’ takes on this mess, check out Captain Ed Morrissey at Heading Right and Dave Schuler at The Glittering Eye.
opinions powered by SendLove.to
35 Responses to “The Ridiculousness of Gasoline Prices”
Can be people claim in one sentence that Al Gore is correct and that everything must be done to save the environment and then in the next sentence they complain about the high price of gasoline. The easiest method of shrinking the nation’s carbon emissions is to raise prices. Higher gasoline prices also make the alternatives more viable.
Superdestroyer:
You are correct and then some. To date, driving habits have not been appreciably changed by higher gas prices, although there has been the beginning of a shift away from gas-guzzling SUVs to more economical cars.
With so many people commuting long distances and many families having two or more cars, I wonder where the fail safe point will be before people truly feel the pain? $5 a gallon? $6 a gallon?
[...] The Moderate Voice – It was hedge fund investors who were betting the ranch that there would be a repeat of the devastating 2005 Atlantic hurricane season who sent prices — and oil company profits — soaring. These investors had poured gadzillions of dollars into long Read More . [...]
My wife and I own a F-150 crew cab and a Ford Edge. We also have three children. And I can tell you honestly the our driving habits have changed immensely. We’ve cut out a family vacation to Georgia (we’re in Michigan and love to drive there). The Edge gets better gas mileage so it’s become the primary vehicle (even though it’s not as spacious as the truck). No more frivolous driving around to the corner store. Etc… Etc…
I feel the pain now. And want it to go away but have accepted that this is the norm. Gas is now a REAL bill in my household and must be managed. And folks would be wise to do the same.
I don’t have an intelligent comment, but I did LOL when I saw the graphic on this post. In fact, I’m still laughing. Odd, ain’t it, how the truth can be both funny and sad at the same time?
The yearly May accusation that so-called “Big Oil” is at the root of increased gas prices is getting tiresome. Gas pricing is complex, to say the least, and few, not even me, understand it fully.
What’s most troublesome to me is that most of the American public thinks that cheap gas is some kind of entitlement. I think Dave Schuler has the right idea.
Entropy:
I was in the process of adding a link to Dave when your message was posted.
No, gasoline is not an entitlement, but Big Oil is a form of organized crime, as far as I am concerned. How do you explain its unwillingness to upgrade a woefully inadequate refinery infrastructure while raking in billions and billions in profits? It’s called controlling the market.
Currently our issue is increased demand coupled with limited refining capacity. Side issues include iraq/nigeria, increased logistical issues with ethanol.
We could probably cut 10% off that price with another refinery. But OTOH, this will help cause us to hopefully shift to more fuel efficient vehicles, which is not a bad thing. I know I am eyeing a new diesel jetta wagon to be introduced early next year.
Every spring we go through the same charade-except now the summer driving season starts after Easter instead of Memorial Day.
We get the same old soaring prices and the same old excuses from the Democrats- who want to investigate profits for the evil greedy oil companies-from the Republicans- these are just the variable normal business cycles of the oil industry-supply and demand accounts for the gouging and we just need to drill in Anwar, and from the oil executives themselves- who this year claim that their refineries are offline for maintenance.
Then the middle-class gets irate, suburban moms pawn their jewelery to fill up the tank, SUV sales tank, but we all keep driving. We may eat out less or put more on our credit cards, but nothing really ever changes. I am honestly at the point where I think our government is so broken that it is incapable of responding to any changes in the energy market.
I knew it wouldn’t be long before someone blamed Big Oil, even though the same kinds of people want high fuel taxes (they haven’t had to pay them yet).
DLS- If you’re referring to me, I was blaming everyone – for making the same useless excuses year after year.
The need to move to more fuel efficient vehicles does not excuse price gouging by big oil companies.
As a nation, we can certainly organize toward alternative energy and punish anticompetitive businesses at the same time.
“I am honestly at the point where I think our government is so broken that it is incapable of responding to any changes in the energy market.”
While a conversion to libertarianism won’t necessarily get you lower gas prices, k, it will help rid you of the angst you feel over putting your faith in government to provide solutions…LOL!
If we had government regulations and aggressive subsidies going to the research and expansion of alternate fuels we wouldn’t have this problem. People would not expect cheap fuel if we weren’t encouraged by the government to continue the way we live. Lets face it, our society is built on the ability to travel long distances, and rather than trying to solve that problem the administration has only given lip service to the issue.
Either we are going to have to change the way we live or we need to develop a cost effective alternate fuel. That is not going to happen with this administration, because of their ties to big oil. Big oil is not going to help because all they see are dollar signs and cannot see past that to the looming economic crisis. I don’t know if these people ignore the potential danger of a fuel shortage and high prices, or if they are ignorant of it.
Kritter said:
> If you’re referring to me,
> I was blaming everyone
I wasn’t referring to you, K.
> Either we are going to
> have to change the way
> we live
You’re free to change your own way, but not to change mine. I’d travel supersonically if it were affordable.
> or we need to develop
> a cost effective alternate
> fuel.
*WHEW* At least you realize it has to make economic sense!
Casual- I am a libertarian about social issues- I think govt should stay out of our bedrooms and not try to legislate morality.
But, I think government has become an enabler of gouging- look who we have in our top 2 positions. And it was Cheney who allowed the oil execs to write the energy policy. But as I said before, I blame everyone involved, including consumers who refuse to demand more efficient fuel standards in their cars or give up SUV’s. Dems have been ineffective on this issue, Pubs don’t even make oil execs swear in when giving testimony on Capitol Hill. We no longer seem to be innovative in solving these kind of problems. (or any other for that matter) For the record I do think prices are being manipulated by purposely restricting competition and keeping refineries offline to decrease supply during the peak driving season.
Chris, it’s completely within your power to punish them right now: don’t buy so much gasoline. It’s as simple as that; the oil companies profits would fall if demand fell, but we want our cake and eat it too. We keep the demand high and inelastic by choosing not to conserve.
Kim, if you reread your comment, I think you might see that it was a bit incoherent because you explained (well) how we bring the high prices on ourselves by the choices we make, and then you closed by saying that the problem is that our government doesn’t work. What would you have government do in this case, and why put the blame there instead of accepting that consumers have to lie in the bed of our own making?
Shaun,
I think there is a strong desire in the oil industry to build more refineries, but a combination of NIMBY, environmental concerns, and other factors have thus far prevented an expansion of refinery capacity. Add to that the various State requirements for boutique fuels in the summer to reduce smog and increased demand for fuel in the summer and you have a decent explanation for the yearly spring rise in gas prices (and also the yearly fall decline in prices).
Simply standardizing low-emission fuel across regions, if not nation-wide, would go along way to reducing the cost of fuel in the summer.
But overall, Dave has it right – we only need to look in the mirror and at our own lifestyles to see why we’re in the situation we are.
Kim,
My last comment was cross posted with your last one, so I now see your answer to the questions I asked you about the role of govt.
Shaun Mullen wondered:
> I wonder where the fail
> safe point will be before
> people truly feel the pain?
> $5 a gallon? $6 a gallon?
Shaun, years ago when I lived elsewhere (I’ve lived and traveled all over the USA, largely traveling by road), I asked someone in Belgium about this. I was aware that here the demand for gasoline is inelastic — people will, if they must, make budget changes elsewhere rather than in reducing fuel use, as a rule — but at some price, the demand should begin to be elastic.
(Note to readers: Our fuel prices are higher than in a number of other countries as well as lower than in Europe. We are not in any way wrongly “given” “artifically low” prices!)
I asked the guy in Belgium about this because he was obviously facing higher prices in Europe and yet (as is so in the UK) auto use continues to increase. He said he believed that psychological studies had indicated the break-point where demand becomes elastic for the public at large, the value you would like to know, is approximately $8 per gallon.
Additionally, you may find this a curiosity, but while the affordability of fuel is not a concern to me, I surprisingly find myself more sensitive to high fuel prices once they exceed three dollars per gallon than others I know who drive much less. Maybe it’s just resentment on my part about spending so much for “overhead” that goes out the tailpipe, but I have refrained at times from driving, or reduced the trip length, specifically due to high fuel prices.
[...] I do understand Shaun Mullen’s frustration at the rise in prices, and Shaun at least understands the market forces at work. It would be better [...]
Not true, and the fact is supported by the number of refineries shut down and shipped overseas in the past 20 years. Between 1981 and 1994, about 145 U.S. refineries closed.
Refining is a low margin business, though not as bad as it used to be. When politicians tell you our refineries are operating at 95% capacity they are telling you the truth. What they aren’t telling you is why. Mainly because they loose money at 94% capacity.
And more so than violence in the middle east or hurricanes, refining capacity is always the best excuse for increased prices.
I noticed the subject of hedgefunds wasn’t taken tot ask for what it really is….gambling on gambling.
Hedge funds are redundancy personified, and greatly contribute to prices on EVERYTHING being higher than they should be. The very idea is an unprincipled capitalists wet dream in action.
I’ll tell you I find the stock market to be the single worst creation of capitlism as it is nothing more than unearned wealth, but hedge funds couldn’t have been created without that mythical character the devil being part of it.
We are watching betting on betting with the knowledge that the money made from it goes nowhere other than back into the mix. It creates no new jobs (other than hedge fund managers), no new schools, fire stations, police stations, nothing for the common good of the nation that prints that money. It’s literally trapped in the investment world never to be seen again. Infact they’ve even become smart enough to remove most if not all of the taxes on this useless process of hiding money from capitalism.
Hedge funds must go before our economy goes first.
Entropy said:
> but a combination of NIMBY,
> environmental concerns, and
> other factors have thus far
> prevented an expansion of
> refinery capacity.
This also applies to power plant construction (not limited to nuclear plants and anti-nuke insanity) and liquefied natural gas import facilities. (Most new power plants will be gas-fired because of clean-air concerns and anti-nuke hysteria.)
> Add to that the various State
> requirements for boutique fuels
Yes, it’s crazy.
And no, Americans do NOT want government trying to decide what behavior is best for us and what behaviors should be sought through a system of rewards and punishments (social engineering). There should be no varying taxes on engine displacement, horsepower, or estimated fuel consumption, no “fee-bate” structure that transfers income to people who purchase fuel-efficient vehicles, from vehicles that are less efficient.
In the real world, there will still be a need for trucks and even SUVs, and the overall standard for acceptable fuel efficiency still remains the metric magic figure of 10 km/l or 23.5 MPG. Meanwhile, environmentalists are the fuel savers’ worst enemies; we can’t buy modern Diesel vehicles in a number of states dominated by Cyanide Nation non-thinking. It would be great to be able to get a Ford Ranger that would offer 300 lb/ft over 2,000-3,000 RPM while getting 30 MPG on the highway. But this would be simply illegal right now in a number of states. That’s one reason (along with stupidity) why Ford and GM do not sell small, fuel-efficient, attractive vehicles here in the States that already exist and are selling well in Europe. (Stupidity is the only reason in the case of existing gasoline-powered vehicles. Even the young, hip crowd, most favoring the imports, screams that they’d buy those cars if they were offered here.)
…
Regarding supply and demand:
Some additional information for readers’ interest.
1. FTC document. Note that this is done under the Bush administration so you may be somewhat skeptical, but the report is good.
[also tells us what we already know]
“As noted earlier, a substantial body of empirical literature
has shown that, even if the price of gasoline increases relatively quickly and sharply – as it did in
the Phoenix example – the short-run demand for gasoline does not decline much. In other words, short-run demand for gasoline is very inelastic.”
“The average price elasticity of demand for long-term studies (at least one year) is approximately -0.6. This means an increase in price of 10 percent results in a 6 percent decrease in the quantity demanded in the long term.”
http://www.ftc.gov/reports/gasprices05/050705gaspricesrpt.pdf
2. Becker (who can view anything “economically”):
“No one mentioned any oil conspiracy when real gasoline and oil prices declined significantly during the 1980′s and 1990′s. Stagnation in the number of American oil refineries, the havoc caused by Katrina to refineries in the Gulf, rapidly growing world energy demand, and disruptions in the world supply of oil during the past year are sufficient to explain high gas prices without any conspiracy theory.”
http://www.becker-posner-blog.com/archives/2006/04/rising_gasoline.html
3.
“Consumers of auto transportation pay the private costs, but not the social costs generated by auto usage. When the marginal private cost of an economic activity is lower than the marginal social cost, too much will be done. We drive way too much.” [sic]
http://www.econ.ucdavis.edu/faculty/fzfeens/trans/Transport-lecture2.pdf
4.
“The most efficient strategy for improving fuel efficiency and
reducing carbon emissions, would be to increase fuel prices. Yet many attempts to increase gas taxes in the US have failed. There is little support for taxes in general and for gasoline taxes in particular.”
http://www.hgu.gu.se/files/nationalekonomi/personal/thomas%20sterner/pol%20econ%202004v25-03-a011.pdf
DLS, I just cut and pasted your last comment and framed it in virtual gold. Great comment.
“Hedge funds must go before our economy goes first.”
The Washington Postreports this a.m. that “the hedge fund that employed John Edwards markedly expanded its subprime lending business while he worked there, becoming a major player in the high-risk mortgage sector Edwards has pilloried in his presidential campaign.”
Pyst, I trust you will be posting your denunciation of John Edwards in this blog shortly?
I haven’t been backing him for president, and infact find all of the canidates at present to be either fakes, low hanging fruit, stuffed suit politicos, or outright foolishly dangerous.
That good enough for you?
Gore/Clark ’08
On June 26, 2005 the Kansas City Star told the story of how a refinery in Arkansas City Kansas was closed years ago by the oil company that owned it in spite of desperate attempts by the people of the town to keep it open. They even found a buyer for it but the opportunity to sell it to someone who would actually keep producing gasoline there was declined. The only point in the closure was to reduce refinery capacity and boost profits. Yes, there is major NIMBYism in many places but that’s not all there is to the causes of high gas prices. Rampant market speculation is just as much of a cause as anything else. Becker’s mind has been going for a while now.
My driving habits haven’t changed a whole lot because there isn’t much to change. I live approximately nine miles from where I work. It’s a suburb to suburb commute and there is no public transportation. Even if gas prices were to double I’m not in a financial position to sell my house or buy a new car (I don’t drive an SUV, just a Taurus.). The house is pretty much fixed. The car can’t be replaced for a couple of years. Lots and lots of people are in similar positions so of course short term demand is inelastic.
“On June 26, 2005 the Kansas City Star told the story of how a refinery in Arkansas City Kansas was closed years ago by the oil company that owned it in spite of desperate attempts by the people of the town to keep it open. They even found a buyer for it but the opportunity to sell it to someone who would actually keep producing gasoline there was declined. The only point in the closure was to reduce refinery capacity and boost profits.”
Thanks for making my earlier point, Jim S. I saw a report last year detailing how the 6 major oil companies have cut back on their refining capacity, which has helped them reap the obscene profits they have made, at the expense of the American consumer. This is capitalism run amok, but those who speak out against it are made to seem like Leninists, not Middle American consumers that are caught in a bind.
What is obscene profit and price gouging? What is the profit margin of these horrible thieves? At three dollars a gallon of gas it comes to 10 cents. Price gouging? They had 60 billion in profits, but spent 100 billion in exploration and production and that does not include the cost of the crude oil itself. 60 bil doesn’t automatically equal obscene profit and price gouging.
They had 60 billion in profits, and 100 billion on exploration? Prove it, and using oil/gas companies “proof” won’t cut the mustard.
The stock of said companies would be almost worthless if they were hemmoraging money like that LOL.
The post Bones made is completely incorrect, of course. Here is an article from CNN Money reporting on the net profits of just ExxonMobil. For 2006 just this one company made $36.1 billion. Profits for all of the majors have been increasing whereas their exploration expenses have not. This has been noted many places, including this investing web site. In fact ExxonMobil only spent $1.181 billion on exploration in 2006 so I somehow doubt that $100 billion was spent on exploration by the majors.
You did notice production in that statement right? That would include billions being spent on maintenance and upgrading refineries, 20-25 billion for a pipeline from Alaska, ect, ect. It’s funny how the data from your link makes my point. $1.181 on exploration you mention but not $29.528 billion on production. They spent over 300 billion dollars to make a 10.8% profit. You didn’t say if you think that’s to much. Is 10% to big of a return? Who was for bailing out oil companies when they took the big hit in the 70′s and 80′s? Now you’re mad cus they are making a reasonable profit?
[...] The Moderate Voice – We ve cut out a family vacation to Georgia (we re in Michigan and love to drive there). The Edge gets better gas mileage On June 26, 2005 the Kansas City Star told the story of how a refinery in Arkansas City Kansas was closed years ago by the read more [...]