Bush announces steps on gasoline prices; from the Times:
President Bush announced a series of short-term steps on Tuesday intended to ease the rise in energy prices, including a suspension of government purchases to refill the Strategic Petroleum Reserve, a relaxation of environmental rules for the formulation of gasoline and investigations into possible price gouging and price fixing.
In addressing energy prices in a speech here, Mr. Bush joined a chorus of lawmakers who have been advocating populist-sounding initiatives to respond to surges in gasoline and crude oil prices and the threat they pose to Republicans in this fall's Congressional elections.
Well, if Carter or Clinton had done this I imagine I would have mocked it as poll-driven posturing. But a foolish consistency is the hobgoblin of little minds, so I have no doubt this Bold Presidential Vision will guide us to a brighter and more fuel-efficient tomorrow, energy-wise.
The Baseball Crank posts his thoughts on energy policy. This sends me into the mental file cabinet for the old econ notes on taxes, prices, supply, and demand because his Point 1 on What To Do is "Cut Taxes at the Pump".
My question is this - let's grant that the current market for gasoline is clearing at a price of $3 per gallon, of which (let's say) $0.50 is taxes.
Suppose we eliminate those taxes altogether. Yes, the gas station owner could now afford to sell gas at a price of $2.50 while preserving his modest profit margin.
But previously I was happy willing to pay $3.00, and frankly, it was of no great import to me as to how that was split amongst the recipients. Consequently, if station owners all try to pass along the tax cut by lowering their price, I expect that I, and others like me, will respond by buying more.
But a tax cut, in itself, does not bring forth new supply. So, either we will have shortages, as stations run out of gas, or prices will quickly rise back to their old equilibrium of $3.00.
My strong impression is that, absent some other mechanisms to reduce or regulate demand - rationing coupons were not attempted by Nixon, but (IIRC) odd/even days fill-up days and forced closures of gas stations on Sundays were - a cut in the tax at the pump will simply reallocate the $3.00 per gallon We the People are paying into a different set of pockets.
Since the Dems are also pandering with a call for a cut in the gas tax, it would be worth having an answer to this.
Hand out stickers with each fill up saying I voted against domestic production and the construction of refineries in the US because I love to pay more for gas.
Posted by: clarice | April 26, 2006 at 11:23 AM
"Consequently, if station owners all try to pass along the tax cut by lowering their price, I expect that I, and others like me, will respond by buying more."
But is this correct? I don't think so. If it were, you'd think the converse would also be true: that as station owners raise the price, you would, and other like you would, respond by buying less. But that hasn't happened, now, has it?
Posted by: Al | April 26, 2006 at 11:26 AM
Forbes has an article stating that in 1980 energy consumed 10out of every ten dollars. Today energy accounts for one our of every 16 dollars. read the whole thing
http://www.forbes.com/home/columnists/2006/04/20/energy-costs-gasoline_cx_ns_0420schulz.html
Posted by: sad | April 26, 2006 at 11:29 AM
I'll add that Tom might want to check the mental file cabinet for the old econ notes to see if they say anything about elasticity.
Posted by: Al | April 26, 2006 at 11:30 AM
Byron York reporting that Rove is scheduled to testify this afternoon on matters that have come up since his last appearance.
Posted by: Sue | April 26, 2006 at 11:30 AM
oops
one out of every ten
Posted by: sad | April 26, 2006 at 11:31 AM
The hobgoblins of small minds, the trolls and the moonbats will soon be joining the flying monkeys infesting the fever swamps of LaLa Land. There they will be sucked down into the mucky ooze and become over geologic time fossile fuel and help bring down oil prices in their first actual contribution to humanity. Provided Ted Kennedy doesn't succeed in preventing drilling in LaLa Land.
Posted by: boris | April 26, 2006 at 11:32 AM
If you're going to cut gas taxes, I'd rather see the $.36 per gallon (here in Indiana) state tax cut than the $.18 per gallon federal tax. At least you have some assurance that you know where the federal tax is going.
Posted by: maddad | April 26, 2006 at 11:32 AM
My sense (dammit Jim, I'm a lawyer not an economist!) is that the main variable is supply - demand is not terribly elastic. And competition is intense; gas stations have a particular incentive to keep costs down on gas because their real profit margin is selling beef jerky and donuts and the rest of the stuff in the mini-mart. I'd be interested to see a study but I would strongly suspect that most (not all) of the tax cut would be reflected in lower prices.
Posted by: Crank | April 26, 2006 at 11:57 AM
OK, Clarice where are you? Why is Rove back up there????????
Posted by: dorf | April 26, 2006 at 12:03 PM
I'll go with AI on the eleasticity issue. Cutting taxes is a nice political pander move but will do zero for supply and very little to demand. There has been some media babble on high gas prices cutting into tourism this summer but it's just that - babble. The cost of a 2K mile round trip in a 20MPG vehicle is affected by the sum total of $50 by a 50 cent deduction or increase in the cost of gas. Fifty bucks isn't going to be a deal breaker on summer vacation plans.
Posted by: Rick Ballard | April 26, 2006 at 12:04 PM
dorf
On another thread Clarice has stated it is related to V. Novak.
Posted by: sad | April 26, 2006 at 12:07 PM
The price at the pump includes tax. The oil companies now know that drivers will pay over $3.00 a gallon. So the companies will charge the most that the driver will pay, whatever the tax component of the price per gallon.
Any lost gas tax revenue would need to be replaced by another source of tax revenue, unless we want to borrow more from China.
Posted by: Miller | April 26, 2006 at 12:07 PM
The US has enjoyed historically low fuel prices compared to the rest of the world,excluding those countries floating on oil,prices are still low now.
If you want a rallying cry,"Do you want Global Warming or lower gas prices",that should put the left in a cleft stick.
Posted by: PeterUK | April 26, 2006 at 12:23 PM
Bush should re-open petroleum reserve...simple economics...increased supply vs demand. Unless of course the supply bottle-neck is refinery capacity. Decreasing Fed taxes will do nothing...indeed will just piss people off when they see reality unfold.
Posted by: noah | April 26, 2006 at 12:24 PM
sad,
In the 1980's few were paying 50-70 dollars for cable TV, who was paying for internet connections, Americans were only paying for their land line phone - not for 2-3 per household. Add premium cable, broadband connection and even NetFlix and you see that the list of essentials paid every month has grown.
In my household it is $185.00+ a month. At $3.00 gallon with 22MPG
that would get an American 1,356 miles. Only 678 if you're driving a 11MPG vehicle.
CNN & MSNBC keep interviewing people "pawning treasures" to pay for gas, call-ins giving up "food, medicine, clothing" and one lady "my social security" - not one
willing to give up cable tv or cell phone!
Americans just do not realize how rich they are!
Posted by: larwyn | April 26, 2006 at 12:26 PM
It is my belief that competition would hold the price to $2.50. Supply and demand will effect price, so will competition. Since supply, for now, is equal to or greater than demand, the lowest price should prevail.
Posted by: barry | April 26, 2006 at 12:40 PM
"The oil companies now know that drivers will pay over $3.00 a gallon." -- My understanding is oil traders set the price of oil, rather than oil companies.
Any politician who wants to hang out in the North Sea in the middle of winter and get their own damn oil is welcome to try.
Posted by: rez | April 26, 2006 at 12:40 PM
Giving up food, medicine and clothing to pay for gasoline...liar, liar, liar. That is not happening and to report it as such is ludicrous. As larwyn introduces, the math does not add up. Even with the biggest, most fuel-efficient vehicle...the difference between $1.80 and $3 a gallon will not force a person to sell the family silver.
And that doesn't mean that there aren't macroeconomic problems associated with rising fuel prices.
And it doesn't mean that it doesn't (or shouldn't) annoy the hell out of people...which is a real political situation.
Posted by: Epphan | April 26, 2006 at 12:42 PM
barry, you are certainly welcome to any belief you care to espouse...but economic "theory" says you are wrong...and economics is nothing but after the fact correlations all prettied up into a compact guide for the macreconomic effects of policy prescriptions.
Posted by: noah | April 26, 2006 at 12:50 PM
Larwyn
You nailed it. The "necessities" of life today are not the same as the "necessities" of life of thirty years ago.
Posted by: sad | April 26, 2006 at 12:50 PM
The Republicans are behaving disgracefully on this issue, particularly Bush and Specter. Incidentallly, it is not true that the demand for gasoline is inelastic--demand does indeed decrease as prices rise, although the elasticity is much less than for most commodities. As to what the companies charge, they are in competition with one another and if one goes to $3.00 because it thinks consumers will pay that, at least one other will sell at $2.50--if it can do so profitably--because it would increase market share hugely at the expense of the $3.00 gas. If they all agree to charge $3.00, they are fixing prices in violation of Section 1 of the Sherman Act, a felony--and there is absolutely no evidence that this is occurring. But this is a huge oversimplification--the price mechanism in the gasoline market is enormously complex. In any event, those who see corporate wrongdoing behind every price spike are either demagogues or nuts, or both.
Posted by: Other Tom | April 26, 2006 at 12:59 PM
Of course people use more of something when it is cheaper and less of it when it costs more. That is perhaps the most basic law of economics. It is a short description of a market.
And people have most assuredly bought less than they would have were the price still low. Total consumption may be higher now than it was six months ago but it is almost without doubt lower than it would have been were the price still $2 a gallon.
Even AB or Cement could grasp that idea.
Posted by: Barney Frank | April 26, 2006 at 01:09 PM
From Al:
...if station owners all try to pass along the tax cut by lowering their price, I expect that I, and others like me, will respond by buying more."
But is this correct? I don't think so. If it were, you'd think the converse would also be true: that as station owners raise the price, you would, and other like you would, respond by buying less. But that hasn't happened, now, has it?
To which Barney Frank responds:
And people have most assuredly bought less than they would have were the price still low. Total consumption may be higher now than it was six months ago but it is almost without doubt lower than it would have been were the price still $2 a gallon.
Well, my question for Al is, as we puzzle over the impact of price on consumption, has everything else been held constant as the price has gone up? The summer driving season is approaching, maybe the economy is better, more folks are working, etc.
It may be that neither supply nor demand is elastic over a short time period. For example, I can not respond immediately to higher prices by trading in my SUV for a Honda and moving twenty miles closer to my job. But I can cut out the weekend trip to see friends.
I would not be shocked if short-run supply was inelastic; I would be surprised if demand was not.
Posted by: Tom Maguire | April 26, 2006 at 01:21 PM
Unless I'm missing something significant, the continuing increase in demand will continue to drive prices up. Taxes and the SPR (and gasohol and alternatives) is just fiddling on the margin, as is expanding domestic production, though every little bit helps. I'd guess about ten years after we decide to implement the nuclear power and related hydrogen fuel initiatives that were stripped out of the recent energy bill, we'll start to see a significant alternative supply source. Until then . . .
Posted by: Cecil Turner | April 26, 2006 at 01:32 PM
The mistake here seems to be thinking that "demand" has any relationship to what consumers do.
Oil is traded on the futures markets, which sets the price based on a number of factors, of which supply and demand are but two, and not the most significant.
From a supply perspective there is practically a glut in the market, as reflected in high oil inventories held around the world.
The futures markets are betting that there will be disruptions in the oil supply in the future, and that is driving up prices in the present.
Posted by: flenser | April 26, 2006 at 01:35 PM
sad,
It is worse than that - just look in peoples' closets.
In the 1980's I maintained the following in shoe wardrobe:
Pumps for work:
Black, cordavan and taupe
boots to match winter coat.
Pumps for dress (higher heel):
Black & taupe & red
Casual:
"sneakers" 1 clean 1 yardwork,
"weegans" boots
Formal:
Years old strappy sandals that
matched my years old cocktail/formalwear.
I polished my shoes on regular basis and knew my "shoemaker's" name and family history.
That was it. Compared to my daughters now, I was definitely shoe/clothing deprived/disabled/poor. And I was always well dressed and appropriate.
Go look in your/your girlfriends/wife's closet now. And with that "metro male" promo - bet the men's closets are overflowing too!
Really think that most Americans could go a month before they actually had to do any laundry - just used all the clothes and linens they have stashed.
Posted by: larwyn | April 26, 2006 at 01:39 PM
Actually upon further review i have changed my mind...cutting add on taxes would reduce the price at the pump! But it would also marginally increase the demand which is the last thing we want to do!
Posted by: noah | April 26, 2006 at 01:39 PM
In a capitalistic society the market sets the price of gasoline, in a socialist society the government sets the price of gasoline. Look at the world, look at history. Do you really want the government to set the price of gasoline, comrade?
Posted by: Lew Clark | April 26, 2006 at 01:43 PM
From a supply perspective there is practically a glut in the market, as reflected in high oil inventories held around the world.
Do you have any autohoritative source for this. You are probably right, but its not something I have seen anywhere in the media. Not surprising that they dont understand and therefore cant report but if you can show me I would appreciate it.
Posted by: Gary Maxwell | April 26, 2006 at 01:46 PM
Over the short term, gasoline demand is very inelastic, and even over the long term it's not real elastic. (That this proves that there is not a monopoly in gasoline is left as an exercise to the reader.) Or, translation, small changes in demand or supply require large changes in prices to bring the quantity demanded back into balance with the quantity available. Large changes is price in EITHER direction.
Supply is probably more elastic (I'm not familiar with those actual numbers), but less elastic over the short run. If they cut the 50-cent/gallon tax, then the profit margin will instantly go up by 50 cents per gallon, but that will put tremendous pressure on supply. Because for every gallon that they don't come up with, they just missed out on a relatively huge profit. That supply pressure will get responded to, and that will bring prices down -- and, because the demand elasticity works both ways, prices will move down a lot from a small boost in supply.
After Katrina, the oil refiners went into emergency mode and delayed periodic maintenance in order to run flat out and replace the damaged refinery capacity. What we are seeing now is that the refiners have got to get some shutdown in or risk damage to refineries, and we're just going to have to suck it up until they get caught up with maintenance and remaining hurricaine repairs.
cathy :-)
Posted by: cathyf | April 26, 2006 at 01:53 PM
The truest pattern in all of this is:
The Dems scream the loudest when they are most culpable.
Republicans need to be quick off the mark and as soon as oil goes up all the spokespersons should be out their pointing to DEM voting record over 30 years and there embrace of the radical Enviros.
Using gas/oil to produce electricity in this country is so wasteful - when we have so much coal.
Not to mention the hypocracy of that "union supporting" party - plenty of good "union" jobs still in coal industry and transportation industy that gets the coal to the utility plants.
See the Susan Estridge (sic) column at Fox.com - the Dems can't verbalize THEIR POLICIES because they conflict with each other.
I thank new media for this exposure. Before they could send out letters and hold meeting with each individual constituency - now we know what they are saying and writing. Hence they are afraid to actually say anything other than BUSH BAD - WE "BETTER'!
Posted by: larwyn | April 26, 2006 at 01:56 PM
Regional differences in taxation are visible in state-by-state price comparisons. I don't see any reason to doubt that Houstonians would pay as much for gas as Bostonians, but it doesn't mean that gas stations are able to charge Boston prices. A station that tried to do so would be quickly underbid by another station willing to capture a greater market share with a smaller profit margin.
Gasoline is a commodity, and it's effectively impossible to capture much of a profit on a commodity in a normally-functioning market. If gas stations were getting an extra 50 cents per gallon, hell, I'd think about quitting my job and starting a gas station. It wouldn't last.
Posted by: Ted Barlow | April 26, 2006 at 01:56 PM
larwyn:
My sister says it is the difference between WANT and NEED. I drive less live close by work and combine different errand trips. I usually but one or two new spring /'winter
outfits, re-use clothes and make do with the shoes I have. I don't have a cell-phone and have cut out I'M feature on my daughter's.cell. One family computer and my one luxury cableTv which I held off on for 8 years. You can economize and buy gas where it is the cheapest. We have a Get-Go station where we buy food which enables you to get discounted gas with every 50$ you spend. It's a challenge but not impossible.My retirement benefits are doing fine and I purchase plane tickets 6 months in advance to get the discounts.
Posted by: maryrose | April 26, 2006 at 01:57 PM
Once again Cathy nails it!
Posted by: noah | April 26, 2006 at 01:57 PM
If anybody wants to understand any of this the best primer is any book by Julian
Simon.
As flenser says most of this spike is due to political considerations which are relatively uncontrollable and relate more to fears of potential supply disruptions.
But for any natural supply and demand imbalances the market will as always eventually balance.
A short history in my field of expertise. In 1992 the courts effectively closed the National Forests to logging. The price of raw logs and consequently lumber essentially tripled in one year. Mills scrambled for supply, timber owners basked in their new found wealth which many said would last for the foreseeable future. Unfortunately for them that furture lasted about one year as prices peaked in 1993. At those prices private timber owners dumped on the market timber they had held in reserve at lower prices and new products and imports became economically more attractive. There is always an alternative, admittedly more readily available in some industries than others.
Canada and Venezuela together have somewhere between 500 billion and 1.5 trillion barrels of oil sands, a good portion of which is recoverable at 35-45 dollars per barrel. So the long term supply is extremely elastic. The short term supply of crude oil is also presently sufficient for current demands. The supply bottle neck we face is in refined products which are rather more domestically produced than crude oil. And new refineries are about as easy to get through as a new nuclear reactor.
Posted by: Barney Frank | April 26, 2006 at 02:01 PM
According to this article, Price Elasticity of Demand, the short-term elasticity of demand for gasoline is 0.2, and the long-term is 0.7.
cathy :-)
Technical note... Elasticity is defined as or, for those calculus minded, with a value greater than 1 defined as "elastic" and a value less than 1 defined as "inelastic".Posted by: cathyf | April 26, 2006 at 02:03 PM
Gary,
I can't remember the source but I just heard yeaterday that worldwide crude inventories are at four year highs.
Posted by: Barney Frank | April 26, 2006 at 02:04 PM
Gary,
If you sift a bit here you will find the supply figures to which Flenser refers. Crude stocks are up over last year as are general gasoline stocks. "Reformulated" stocks are down a bit but that is explained at the site.
Posted by: Rick Ballard | April 26, 2006 at 02:07 PM
From a supply perspective there is practically a glut in the market, as reflected in high oil inventories held around the world.
I admit being too lazy to read up on this, but ISTM the inventories we're discussing are a relatively small buffer on total consumption. Demand, viewed as a long-term phenomenon appears to be rising, largely due to industrialization in the far east (i.e., China). And, having recently visited, I can assure you there's a bunch of them folks and the place appears to be goin' great guns (note: this is the kind of master-of-the-obvious first-hand reporting only former Marines can provide . . . hence the relatively modest demand for our services).
Posted by: Cecil Turner | April 26, 2006 at 02:12 PM
maryrose,
Proves you're not calling CNN to report you are "giving up" food to pay for gas.
Gary M,
Supply are oil has been reported on CNBC daily. Suppy is high for oil - LOW for GASOLINE.
Outlawing the additive that now must be sustituted with ethanol is big problem.
Pipelines not availiable for ethanol to refiners delivery - they are using trucks!
Tanks that contained the now "outlawed but prior required by
law additive" must be totally emptied and cleaned out. Gauges reset to for correct proportions of mix.
Local Gas stations have to have their tanks cleaned out too. Why some have run out of gas.
As the DEMS wouldn't allow the Fed's to guarantee the liabilites to the oil companies producing and using the additive, until it could be phased out - we are in this rush.
The use expires in May - almost looks like the DEMS have there own Rove. All of this was done in Energy bill last year. Devil always in the details and Republicans blind to what was going to happen in April/May 2006 -
Dems were just waiting to spring trap.
Posted by: larwyn | April 26, 2006 at 02:14 PM
Be a little cautious about "four year highs" and the like. There has been a huge increase in the wealth of the Indians and Chinese over a very short timeframe, and they together make up just under 40% of the planet's population. Going from bicycle-owning level of wealth to car-owning level of wealth is a huge betterment of these people's lives, but there are a LOT of these people, and that's a huge increase in demand.
(Just to make clear -- that is a direct and craven appeal to self-flaggellating liberal guilt. When you whine about having to pay an extra $50 for your vacation you should be ashamed that you are begrudging some desperately poor person the chance to get a better job which is accessible by scooter but not bicycle.)
cathy :-)
Posted by: cathyf | April 26, 2006 at 02:22 PM
Cecil
Demand, viewed as a long-term phenomenon appears to be rising,..
I don't see any disagreement with what I said. The market costs of something are not based simply on such factors as supply and demand, but on what the markets think future supply and demand will be.
In this instance, the markets are betting that supply will be disrupted by war and/or terrorism. They may be right, and they may be wrong. There is ample recent precedent for the markets valuing things incorrectly.
But based on current supply and demand, prices look skewed.
Posted by: flenser | April 26, 2006 at 02:28 PM
To really analyze that properly, you need to look at the shapes of the curves in the futures markets for crude oil, gasoline, natural gas, and also all of the option volatilities. And you need to look and see how things have shifted around in the recent past. There's plenty of very good-quality data, it just takes some analysis, and I haven't looked at those markets in years.
But anyway, there's the good-news, bad-news approach to the analysis. Worst case: the crazies go off the deep end requiring nuclear weapons. The cost of extracting oil from the giant nuclear wasteland forces the price up. Best case: everything is wonderful, everybody in the whole world becomes filthy rich, and so they all want to consume oil, forcing the price up.
Looks to me like either way the price goes up!
cathy :-)
Posted by: cathyf | April 26, 2006 at 02:41 PM
Cathy,
My point about a 'four year high' in inventories is that the price of crude has risen even while inventories have built, indicating the rise is more due to Iran, Nigeria etc than an actual supply crunch. The Saudis have been saying, correctly, for around a year that crude supplies were exceeding demands.
Posted by: Barney Frank | April 26, 2006 at 02:41 PM
I'll still make the Julian Simonish bet (albeit a small one) that crude oil prices, adjusted for inflation, are lower in ten years than they are now.
Posted by: Barney Frank | April 26, 2006 at 02:46 PM
Hmmmm.
Maybe I'm scum but if I were a gas station owner I'd keep the prices the same and tell everyone the price increases matched the reduced taxes.
*shrug*. Hey. I didn't say I was a nice person.
Posted by: ed | April 26, 2006 at 02:47 PM
You can't make any profits by raising your prices if you don't actually sell anything after the price rise!
cathy :-)
And since I'm scum, if I owned the gas station across the street from you I would cut my prices by 5 cents per gallon. That way I get 45 cents multiplied by my sales plus (what would have been) your sales.Posted by: cathyf | April 26, 2006 at 02:57 PM
This page gives a lot more detail than most want to digest:
http://tonto.eia.doe.gov/oog/info/twip/twip.asp
The DOE attributes the rise in price to a "dramatic drop" in inventories. Since supply is almost completely inelastic in the short run, there will be little or no drop in price due to a reduction in taxes on gas. To check: draw a vertical supply curve (zero supply elasticity). Then the price is entirely determined by demand. Since we are running our refineries at full capacity, there isn't any more gasoline to be had. The relaxation of the EPA mandates on switching away from MTBE will provide a little more gas in some markets.
What I find interesting is that there are a lot of capacity expansion projects in the works that will significantly increase world production over the next five to ten years. So oil prices may decline a lot in the future.
Posted by: JohnH | April 26, 2006 at 03:03 PM
Do you think the politicos screeching about profits today will have any sympathy for the bankrupt energy companies then?
cathy :-)
Oil has always been a boom-and-bust business. There is surely lots and lots of money being left on the table today, and it is making some people quite giddy about all sorts of alternatives and conservation schemes. But in 5-10 years a lot of those people will have lost their shirts because the people who are successful first will drive the prices down and drive the other new entrants to ruin.Posted by: cathyf | April 26, 2006 at 03:11 PM
Larwyn
You are so right. A college dorm room thirty years ago with a single roomate, my own dresser and closet, and instant acess to a shower and toilet, without waiting, was a standard of living increase for me. My oldest child leaves for college this fall and will have to share a room for the first time, try to fit all of his things into a small, non-walkin closet, and have to share a bathroom.
Posted by: sad | April 26, 2006 at 03:14 PM
if you remove the taxes and demand drives the price of oil back up to three dollars it will increase the price of crude oil driving down the demand world wide, increasing the supply that goes here. if you tax gasoline you just decrease the demand here
Posted by: john doe | April 26, 2006 at 03:15 PM
cathyf..History proves you right In the end consumers will opt for the least expensive energy. Hence the grand photovoltaic project in California that once appeared in every DoE and alternative energy picture book is non operational. The start up costs were high, the project took off with lots of tax incentives, but when other sources proved cheaper, the tax breaks were stopped and the project mothballed.
Posted by: clarice | April 26, 2006 at 03:31 PM
I don't see any disagreement with what I said.
Nor do I, but then I am an economic dunce and really didn't understand what you said. I agree with you that market forces are predicting the future . . . my point was simply the predictions make some sense based on energy usage trends.
In this instance, the markets are betting that supply will be disrupted by war and/or terrorism.
There is no doubt conflict drives up energy costs; conflict in the Mideast even moreso. I also would rate the chances of an Iranian conflict as better than a 50:50 at this point, which would presumably drive oil prices through the roof. Personally, I think the market is lagging a bit.
Posted by: Cecil Turner | April 26, 2006 at 03:50 PM
There's a good post up by James Hamilton at:
http://www.econbrowser.com/
'Contango, speculation and the price of oil'
The gist of which is that speculators have driven futures' prices up (and thus increased inventories to be sold in the future) because they expect supply disruptions.
Thanks to the whackoes in Iran, Chavez's megalomania, Nigeria's terrorism troubles, and the ongoing shortage of production in Iraq.
Posted by: Patrick R. Sullivan | April 26, 2006 at 03:52 PM
Also, if demand for gasoline is inelastic (as most economists think it is, at least in the short run) that means current taxes are being paid by the customer at the pump. So, if those taxes are reduced the reduction should be passed on to the customer.
Posted by: Patrick R. Sullivan | April 26, 2006 at 03:59 PM
Cecil
In 2002 oil was $18/bbl. Today it is over $70/bbl. This has not been due to any corresponding spike in demand, or drop in supply.
The markets have already factored potential disruption due to a middle east war into their calcilations. I'd say that given that we are already paying the price for the war, we may as well actually have it.
More generally, I'm just trying to knock down the assumption which some people have that the price of oil, or anything else, is based on "supply and demand." It's not, really. It's based on some guesses about what future supply and demand will be.
Posted by: flenser | April 26, 2006 at 04:06 PM
In 2002 oil was $18/bbl. Today it is over $70/bbl. This has not been due to any corresponding spike in demand, or drop in supply.
Well, at the least, the growth in demand is much more modest than I'd assumed:
(I also liked the rest of that article, particularly the bit about technological developments at the end.) And I'm giving this up as a bad job, cuz you're makin' my head hurt.Posted by: Cecil Turner | April 26, 2006 at 04:21 PM
Supply are oil has been reported on CNBC daily.
That might explain why I did not see it! I dont watch MSNBC or NBC either.
If I am reading what Rick linked we have increased our oil stored but gasoline demand is down somewhat from last year. So that means we have a crimp in the supply chain, ie I am betting refineries. Ding Ding Ding. What part of hurricane destruction has not been repaired yet? Is there any move to permit more refineries. How about a push with the American people paying attention to drill in ANWR? Does the Republican leadership not recognize when the news cycle shifts to their benefit?
Posted by: Gary Maxwell | April 26, 2006 at 04:26 PM
To Flenser or anyone else who really understands this stuff. Given that most holding or storage capacity must be limited, and we are at a high in stocksm, there must be some terminal point where you cant buy and store the raw petrol anymore ( except for the Strategfic Petrol Reserve which is using a huge hole in the ground). What does a trader do with futures that are coming for delivery with no place to put them? Sell to whom and at what price? Default on taking delivery? Is this a possibility given the huge prices and increased stocks?
Posted by: Gary Maxwell | April 26, 2006 at 04:34 PM
Tom says:Well, my question for Al is, as we puzzle over the impact of price on consumption, has everything else been held constant as the price has gone up? The summer driving season is approaching, maybe the economy is better, more folks are working, etc.
It may be that neither supply nor demand is elastic over a short time period. For example, I can not respond immediately to higher prices by trading in my SUV for a Honda and moving twenty miles closer to my job. But I can cut out the weekend trip to see friends.
I would not be shocked if short-run supply was inelastic; I would be surprised if demand was not.
Well, Tom, I'm no economist (dammit Jim, I'm a lawyer not an economist! - shoot, Crank already used that joke). But I think that gas is, in the short run, pretty inelastic. I don't have any fancy studies to link to, like Cathy did. But I will link to Jane Galt.
Posted by: Al | April 26, 2006 at 04:35 PM
flenser is correct on this. Supplies are actually at the high end. I am sure there have been increases in demand as well, but there is no corresponding shortage. In fact there is nothing in terms of the laws of supply and demand that can really justify such a swift and huge increase in price.
I heard on the radio a little while ago that consumption is down. And I would not be surprised if some people were not having trouble buying gas. I know I have to drive to do my job. I doubt if I am all that different from most people. Gas is not a luxury in our society.
Posted by: Terrye | April 26, 2006 at 04:38 PM
This one seems topical:
Posted by: Cecil Turner | April 26, 2006 at 04:48 PM
Who were the two brothers that tried to corner the silver market about 20 years ago. Oilman Hunt's two boys I think. It blew up on them. Maybe the same will happen with traders with noplace to put their overpriced oil. I think a default on accepting delivery means you are liable for the entire contract and dont get the oil either. May be some big pain coming for traders if supplies are up and demand is flat or down slightly. Maybe George Soros is playing? That would be too delicious.
Posted by: Gary Maxwell | April 26, 2006 at 04:54 PM
My old bit was the Great Karnak routine... put the envelope up to your head and pronounce $80. Get mystified looks... open the envelope and announce: The cost of a barrel of oil necessary to make the Athabasca Oil Sands a viable economic alternative and give Canada the largest oil reserve on the planet. Cue audience laughter.
So, in 2004 a great thing happened: oil stopped flowing *north* across the US and started flowing *south*. Canadian companies were asking about storage facilities... not for their incoming needs but their outgoing needs. Welcome to the world of the Oil Sands and US Oil Shale. Chevron invested $70 Billion dollars in Canada last year and is investing more the next 5 years. Canada's output looks to increas year on year for the next decade, at least. I welcomed them to becoming the New Oppressors of North America.
For when their production gets REALLY going, they will act to stabilize the US domestic market and the world oil market at a new level, even as older petronations start to suffer lags and shortfalls. It will take a few years, but that is in the cards now.
Mind you, in the long run the US will still need to invest in a new energy industry, but agriculture just doesn't cut it. I look at an Energy Independence Policy that does not require agriculture or any of the standard renewables. All of them require a new industrial infrastructure, which the Nation will need in any event. A forward looking one for the 21st Century is necessary. I further cut down the alternatives the alternatives by pointing out that the entire set of cropland in the US would be necessary for bio-renewable.
My preference is to look towards the future of energy and be there *first*. We gave that away once and we will be running out of time to re-do that today. Canada's oil sands and our own oil shale will buy time, precious years and even a few decades. But then what? The time to build for the future is today, not when it is pressing us hard and others are already there to deny it from us.
Posted by: ajacksonian | April 26, 2006 at 05:06 PM
Tom,
I'll leave the economic debate to others, just want to nitpick this:
"...of which (let's say) $0.50 is taxes..."
That's only 15% of the total. In New York State, it's closer to 33% of the total price. The governments of NYS and NYC love high gasoline prices. Not only is there a 8.625% percent sales tax, there is also a gross receipts tax.
Ain't no way, any government is giving up any part of that revenue stream.
Posted by: patch | April 26, 2006 at 05:24 PM
Barney Frank said:
"I'll still make the Julian Simonish bet (albeit a small one) that crude oil prices, adjusted for inflation, are lower in ten years than they are now."
Barney, go to www.intrade.com and trade on the price for the year end. I'm the guy that says it won't be over 55 a barrel at year's end.
Of course, I'm also long on Calderon in the Mexican election.
Posted by: patch | April 26, 2006 at 05:30 PM
aj, energy is mutable, and the technology that sustains us in the future isn't made yet.
==========================
Posted by: kim | April 26, 2006 at 05:35 PM
kim - The energy that sustains us was made some time ago and is only just now reaching the surface of the sun... thousands of years to go from core to surface. Made and just waiting to get out...
And the technology was available in the 1960's, when we had it. Now we have to start all over again.
Energy is mutable to a certain extent, but you always have system losses in the conversion. Nothing is 100% mutable. The question is how best to have the least losses with the most utility.
That is clearly *not* agriculture. Plants do a lousy job of converting energy to long-term storage capabilities.
The technology has been there for decades, the will to use it disappeared. That is the piper we decided to pay... and pay... and pay... and pay...
Now others look seriously at it while we squabble. Perhaps we can fight for liberty then instead of getting it cheaply now and forevermore.
Posted by: ajacksonian | April 26, 2006 at 05:47 PM
I also have never owned a van or an SUV. I would never drive a gas guzzler. I wait to fill up when the price plummets. Drilling in ANWAR is going to be brought up on the Senate floor I heard on Fox Report.
sad;
The first time I slept in a bed by myself because of coming from a family of 7 kids was when I moved out in 76 and got my own apartment.
Posted by: maryrose | April 26, 2006 at 05:55 PM
It's not, really. It's based on some guesses about what future supply and demand will be.
The good guessers get richer and the bad guessers get poorer. A mechanical servo can be based on a predictive model if real time data is not available. The model is adjusted for correction as the data arrives. Nobody would claim that the servo is independent of the data. Instead of the data controlling the servo directly, it adjusts the model which controls the servo.
Posted by: boris | April 26, 2006 at 06:07 PM
hmmm..lots of economic gobbledegook here...here's what I think
the price of gas has never affected my decision to buy gas...I buy whatever I need to work & play...I always try to live close to where I work and can't remember ever thinking I need to cut down on driving.
I bet half the people complaining about gas prices spend twice as much per month on lattes and Evian water.
Also...gas station owners typically make 4 to 5 cents per gallon...they are at the bottom of the food chain.
Posted by: windansea | April 26, 2006 at 06:56 PM
Even when/if oil comes down in price - gasoline $$$ won't come down in same proportion.
no pipelines to take Ethanol from plants which produce it to the far away refineries now that
ALL MUST USE IT vs additive oil companies were mfg
Most of the Ethanol produced in the Midwest was used in the Midwest - now they have to use
expensive truck/rail tankers vs
cheap efficient pipelines to get to all far flung refineries.
Wonder how many gallons of gasoline will be used to ship this stuff all over US = how many hydro carbons released into enviro?
Versus the phasing out of the additive over time until a more economical means of delivering Ethanol was setup.
Setup is the word - and the Repubs bit trying to get the GREENIES votes.
And it only a smidgen less easy to get permits for pipelines than for refineries.
And think of all the Teamster votes
the Dems are going to get for sending out this swarm of tankers.
Is there also going to be a tanker shortage? Hmmmmmm can't remember corp that leases - getting CTIU?? Don't think that is correct, must check and see what stock's done over pass weeks.
Posted by: larwyn | April 26, 2006 at 07:13 PM
Gary Maxwell- did you ever have Mordechai Krienan (sp) for econ at MSU? My favorite prof ever.
Posted by: MayBee | April 26, 2006 at 07:18 PM
There is no doubt conflict drives up energy costs; conflict in the Mideast even moreso
I'm trying to start a grand conspiracy meme that Ahmadinejad is actually an actor being paid by the oil companies.
Posted by: MayBee | April 26, 2006 at 07:24 PM
I am confused in some of what I am reading here because I often can't tell whether the posters are referring to crude oil or to gasoline--it makes something of a difference. Although an increase in the price of crude necessarily makes it more expensive to refine gasoline, an increase in the supply (or inventory) of crude doesn't translate into an increase in gasoline supply if there is no additional refining capacity. I am not certain, but I believe that US refiners are at maximum capacity right now. And I believe that there is not a single refinery under construction in the US today; I'm not sure when the last new one was brought on line. Having represented oil companies in California for many years, I can attest to the extreme political hostility toward the refining industry generally. One of the major oil companies with a refinery in California very seriously considered simply shutting it down about ten years ago rather than put up with the ever-increasing regulatory pressure and the civil and criminal lawsuits that followed every refinery accident and every pipeline rupture.
Posted by: Other Tom | April 26, 2006 at 07:28 PM
Tom,
That's what I said upthread. There is some, not a lot, of excess capacity in the crude oil market, although that is being addressed in many ways. There is very little excess capacity in the domestic refining industry and it is very domestic. Any shortages are far less susceptible to remedy via imports than with crude oil. There have been no new refineries for many years but the existing ones have had their capacity greatly expanded. I imagine that trend will continue rather than the wholesale construction of new refineries which are about as popular as a hog farm.
Posted by: Barney Frank | April 26, 2006 at 07:52 PM
But what's more interesting about these stories is what they don't tell you. For example, the Associated Press reports that "surveys indicate drivers won't be easing off on their mileage, using even more gas than a year ago." Now why is that? If prices are rising, one would expect consumers would use less.
The answer might be in some of the long-term trends that the short-term media lens is too cramped to see. Energy prices may be rising, but energy itself is much less important to consumers and to the overall economy than it once was.
According to the Bureau of Economic Affairs ( see chart here), American consumer spending on energy as a fraction of total personal consumption has declined considerably since 1980. Whereas 25 years ago, one in every ten consumer dollars was spent on energy, today it's one in every 16. In other words, what it takes to heat and cool our homes and drive to and from our jobs and vacation destinations is relatively less costly than it was then.
This goes a long way toward explaining why even when gas prices rise this summer--higher than they were throughout the 1990s--people will still be driving more; it's much more of a value than it was a generation ago.
http://www.forbes.com/home/columnists/2006/04/20/energy-costs-gasoline_cx_ns_0420schulz.html
Posted by: windansea | April 26, 2006 at 08:23 PM
The vision of America running on ethanol is a chimera. ...Thomas Lifson at American Thinker
Surprise! LSM & Greenies are lying to you.
The Real Lesson of Brazil
Many Americans have the vague (and false) impression that a massive conversion to ethanol production eliminated Brazil’s need to import oil. Brazil did indeed promote bio-fuel. But the real credit for ending oil imports goes to those evil oil drillers working in Brazil, unleashed on the environment by the same government earning greenie kudos for biomass conversion
SNIP
...... bulk of what they are doing to gain fuel self-sufficiency is actually drilling for oil. Eighty percent of Brazil’s energy is its own oil. Less than a week ago Brazil declared independence from imported oil amidst publicity for its ethanol promotion. One offshore platform just opened in Brazil’s South Atlantic this past weekend by itself will yield more energy than all the ethanol in Brazil Why can’t the U.S. do the same and drill its own oil? ...
Posted by: larwyn | April 26, 2006 at 08:35 PM
Maybee
Nope I dont think so. Dr Mandelstamm was a hoot. People use to drop in on his principles lectures that did not even take the class because he was so entertaining. It boggles the mind then as now.
I did have the great honor of taking a senior level class Private Enterprise and Public Policy from Dr Walter Adams Professor Emitrius. Hardest class in many ways of all time, but I learned a lot. For many many years I could recite portions of the Sherman and Clayton antitrust acts verbatim. His Socratic method of instruction was almost Paper Chase quality and he did flunk 3/4 of class at midterm one day after drops and adds and then grudgingly ( wink ) agree to grade on improvement. Dont think the fear of failure does not focus the mind! And I had a 2.0 on the midterm.
Posted by: Gary Maxwell | April 26, 2006 at 10:26 PM
Hmmm.
And since I'm scum, if I owned the gas station across the street from you I would cut my prices by 5 cents per gallon. That way I get 45 cents multiplied by my sales plus (what would have been) your sales.
And since there would be a line extending from your station a couple blocks long I'd get those customers that don't want to wait.
...
And then when you ran out of gas I'd get the rest.
:)
Posted by: ed | April 27, 2006 at 12:18 AM
Mean, corporate, price gouging per gallon:
9 cents
Loving, nurturing, good for you government gouging per gallon:
50 cents
I would suggest an EASY button on the pump. If you want to pay the governments outrageous tax on gas, hit the easy button.
Of course all the leftist, environmental Democrats will voluntarily pay the tax.....RIGHT?
Posted by: Patton | April 27, 2006 at 05:29 AM
""""it was of no great import to me as to how that was split amongst the recipients."""
that's interesting, so if the government just confiscated the entire 3 dollars per gallon, you wouldn't really care???
I think you would start to care when people stopped producing fuels.
Posted by: Patton | April 27, 2006 at 05:33 AM
Looks like many have forgotten that we are COMPETING for fuel in a global market, if you don't use it, it doesn't mean it will not be produced.
It will simply go at a cheaper price to those who can then afford the luxury of purschaing fuel.
If we got rid of the 50 cent gas tax and instead ordered a 60 cent mandatory profit per gallon.. PRODUCERS OF FUEL WOULD BE FLOCKING TO OUR DOOR. THEY WOULD BE TAKING THE FUEL FROM CHINA, INDIA, EUROPE WHERE THEY CAN ONLY MAKE 5-15 CENT PER GALLON AND SELL IT HERE.
Then gas 'prices' would fall because companies would be assured more profits for more gallons sold in our market place.
If you are a lawyer, and Europe says you can't make more then 5 dollars an hour
profit on your cases and America says you can make 200 dollars an hour profit..where would you live??
Posted by: Patton | April 27, 2006 at 05:38 AM
I would make windfall fuel profits MANDATORY and that would make producers want to sell here and take away fuel from our global competitors who cannot afford the higher profit margins.
It is REAL DUMB to believe that if you don't buy a gallon of gas for your SUV, the companies will not produce that gas...they will produce it and sell it to people in India, Bangledesh, Cuba who would be priced out of the market otherwise.
Posted by: Patton | April 27, 2006 at 05:42 AM
Patton, have you lost your mind?
Posted by: noah | April 27, 2006 at 10:34 AM
Salute the brave soccer matrons in their suburban assault vehicles, front line warriors in the Carbon Liberation Wars. Gaia has brought them forth in her last agonized effort to escape the permanent deep freeze that is inevitable with carbon sequestration.
I say its broccoli and I say to Hell with it.
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Posted by: kim | April 27, 2006 at 10:40 AM