Gas Price Gouging's Eternal Return

|

President Bush will announce later today an investigation into possible price gouging in oil markets. The Cato Institute's Jerry Taylor explained a while back why anything substantial other than good old fashioned supply and demand–combined with a complicated system of taxes and regulation from the goverment–forging oil prices is extremely unlikely. In a study that you'd think Bush might remember, as it was only last summer, the FTC agreed, finding no collusion in the forging of oil prices.

Taylor further explained, along with Peter VanDoren, that when that system of supply and demand leads to rising prices–even higher prices in certain areas, and pump prices rising faster than oil prices–that shouldn't be the government's business anyway.

In the May issue of Reason–you'd have it already if you were a subscriber–Ron Bailey explores the likely future of the oil economy in the midst of "peak oil panic."

NEXT: On Her Majesty's Secret Service

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Much of the supply problem is the government’s fault to begin with. Balkanization of gasoline markets due to region or even city-specific blends means that supply shocks can’t be remedied by bringing in outside sources of gas. In some places, like California, supply problems can’t be remedied even if California dropped its state-specific blend (which is designed to solve an emissions problem modern fuel-injected cars don’t have): no eastward pipeline can be built to serve them because the environmental lobby makes it impossible to get approval for one.

  2. How about this: We have the investigation, but on one condition – if (errr…when) nothing serious turns up, every politician who signed the bill must make a full, public apology for their mis-guided witch hunt and admit that the were flat-out wrong (again).

    Actually, it is kind of fun to try to get someone whining about “gouging” to define exactly what “gouging” is. Whatever it is, it ISN’T raising prices in response to increases in demand, declining supplies, or feedstock price increases, all of which are putting pressure on the oil business.

  3. This is just an attempt to appear to do something in the face of rising energy costs and dropping popularity. Remember the steel tariffs of 2002 to help Republican candidates in Pennsylvania? Ten bucks says that this investigation will be as fruitful as OJ’s search for the true killers.

    As an aside, how does the high price at the pump jibe with the whole “War for cheap oil” meme of the radical left?

  4. Gouging would only occur if there was some sort of collusion in the industry. Gasoline seems to have enough competitors though that collusion seems quite unlikely

  5. I have had a fun 15-minute break trying to find actual evidence of oil/gasoline price gouging via Google (basic search: oil price gouging evidence). Basically, I came across two types of sites:

    1: The common man or liberal politicians claiming that a some surge in oil prices (9-11, Katrina, etc) is “clear evidence” of price gouging.

    2: News reports citing government studies that found NO EVIDENCE of price gouging. These covered both a broad expanse of time (basically, as old as the internet) and a wide area (I found such articles from Australia, Canada, and Europe in addition to the US).

    Seems that people whine about this everywhere, everytime, and anytime anyone seriously investigates, they come up empty. That shouldn’t be a surprise, as petro has far too many players for an oligopoly to hold.

    A few of the articles, however, did note that some gas stations committed fraud (for example, advertising one price but charging another) or broke state laws (by raising prices during an emergency, Heavan forbid!). Unfortunately, they confused this with gouging, whatever “gouging” really means.

  6. I’m terrible at economics and I’d appreciate anyone’s take on this study, which implies that only gouging can explain unprecedented profits. What I really need is a remedial class in economics, but I’ll settle for your opinions for now.

  7. This whole gas/fuel situation is like DEJA VU for those who remember the 70’s……..shortages, high demand/low supply….every year, the world over is subject to disaster by storms, hurricane, etc., even after things settle down…..we are still paying the higher price……….Surprising to me these huge oil companies don’t have insurance to cover their loses in the case of such events, rather than passing on higher costs to recoup their loses.

  8. Most Americans believe in government intervention to at least some extent. The left has one ideal for intervention, and the new Dubya led right has another ideal.

    Unfortunately, high gas prices seem to unite both camps, and common knowledge of free markets goes out the window.

    It is for this reason that I suspect the libertarian platform is never going to be popular in this country. People seem to need their government big, just like they need their God to be powerful and available at a moments notice.

  9. “peak oil panic”

    I like to be ahead of the crowd, so I’m planning a total peak oil panic for next week, just so I can say “been there, done that” when everyone else starts sounding like some old Dennis Weaver interview from the ’70s.

  10. Isn’t “price gouging” only considered to be so when the resource or items being sold at such a huge profit are vital to life and limb? Things like “we have food, pay us everything or die starving?”

  11. Price signals will never exist in the soap opera media. They’re too complicated.

    Anything involving a fallacy of composition (example : if everybody stands on their toes, then everybody can see better) is beyond the capablility of soap opera women, and so will be edited out of any story. If you make these women uneasy, they tune out, and the you can’t sell their eyeballs to advertisers.

    Soap opera women edit every public debate as a result.

    Have you ever wondered why every news story about an airplane crash is impossibly wrong? It’s because they’re not even trying to get it right. The chief thing is to avoid offending women. Explanations are secondary. A correct explanation will be actively edited out and replaced with an incorrect one that’s simpler and woman-friendly.

  12. Because there wasn’t collusion last summer, there couldn’t be collusion this Spring.

    We know nothing can go wrong, at least nothing that justifies government oversight, because Cato told us.

    I don’t know if there is any collusion going on or not, but I know the two arguments Brian Doherty offers don’t settle the issue.

  13. Ron:

    Splendid misogyny. I would like to subscribe to your newsletter.

  14. Because there wasn’t collusion last summer, there couldn’t be collusion this Spring.

    Better check that the sun rose this morning, too. Just to make sure.

  15. Because there wasn’t collusion last summer, there couldn’t be collusion this Spring.

    Look! Collusion!

    Where? I don’t see it?

    It’s where the prices went up! Now it is over there! And there! Its all around me! aaaaaaahhhhh!!!

  16. Les,

    It’s the other way around. The study claims that unprecedented profits explain the “gouging.” Rest assured that this ‘study’ was written by someone as economically illiterate as you claim to be.

  17. Les, this study BTW is an example of site example #1 noted in Chad’s earlier post, “claiming that a some surge in oil prices is ‘clear evidence’ of price gouging,” i.e., ignoring the possibility that supply and demand might have anything to do with it.

    Chad,

    Thanks for the public service. Now, that’s good research!

  18. What this seems to tell me is that calls for alternative fuels fall on deaf ears until and unless you can get the alternatives down below an energy equivalent of $3.00 per gallon of good ole rotten dinosaur carcas.

  19. We have got to get a huge windfall tax on the oil companies. They are making too much money. Exxon made too much. There has got to be some upper limit to how much a company can make. Billions and billions of dollars is too much. A tax will bring down the cost. The price is too high, therefore they are gouging. They need to be investigated. They must be gouging if the price is high. Everybody has got to drive and SUV, it is the only way to go. Everyone wants the biggest! We got to get more cheap oil so everybody will be able to drive a big SUV.

  20. Everybody, keep in mind that the Joe who posted at 9:16 am is not the joe that we all know and love (the one who posted at 8:29 am).

    Carry on, but be careful to aim at the proper targets.

  21. So Congress will give us a “windfall profits” tax coz the oil companies are making too much money.

    So, tell me, are these the same geniuses (genii?) who suspended the federal royalties on extraction a few years ago coz the oil companies weren’t making enough money?

    HEY GUYS!! what say we try a novel approach. Get rid of the subsidies, get rid of the punitive taxes*. Let the oil companies make money when times are good and when times are bad tell ’em to suck it up and get over it like everyone else.

    *I reluctantly support road taxes only because right now they are the only proxy for a user fee for highway construction and maintenance.

  22. If the price is high it can only mean one thing, they are gouging. A punitive tax to take away their profits will encourage them to lower their prices to a fair level that we can all aford for our big SUVs. Also, the tax proceeds should be given away as an incentive to buy an SUV. Maybe a tax break on SUVs to make them afordable and offset the cost of gas. If the price is high they are gouging, the price is high so the must be gouging.

  23. I think the government needs to go after the people who make the most on the sale of a gallon of gasoline and take a chunk out of their take instead. But when does the government ever go after itself like that.

  24. Fake Joe, if you want to do a good parody of the real Joe you need to drop the whole “hooray for SUVs” bit.

  25. “We have got to get a huge windfall tax on the oil companies. They are making too much money. Exxon made too much. There has got to be some upper limit to how much a company can make. Billions and billions of dollars is too much.”

    Well I’m glad you are around to let us know when “too much money” is being made. Maybe you make too much money, hmmmm, let’s take some of yours too while we are at it. Or this guy or that guy.

    Command and control economies don’t work. Listen if the oil companies were colluding then they would have raised the price steadily for no reason for YEARS and you would be paying $7.00 a gallon.

    Blame OPEC countries. They are the colluding ones, which I also believe they have a right to do.

    There is no such thing as price gouging. There is only supply and demand. If you don’t like the price, get a bicycle, it will be better for the environment in the first place. Been thinking about it myself.

  26. The chief thing is to avoid offending women. Explanations are secondary. A correct explanation will be actively edited out and replaced with an incorrect one that’s simpler and woman-friendly.

    Uh-huh.

  27. “Isn’t “price gouging” only considered to be so when the resource or items being sold at such a huge profit are vital to life and limb? Things like “we have food, pay us everything or die starving?”

    Oh, you mean like when the government taxes me for buying food, water and clothing? Oh, no, THAT’s okay. But companies charging more than they did 5 years ago for a commodity that is not inherently vital to our survival? Criminal!

  28. Hey (J)oe with the capital ‘J’:

    You’re pretty funny.

    ” Also, the tax proceeds should be given away as an incentive to buy an SUV.”

    Though I think you may be on to something here.

  29. I would like my government to investigate the continued high price of caviar. Thank you.

  30. I got this juicy bit from the Associated Press:

    “Asked if Bush had any reason to suspect market manipulation, McClellan responded, “Well, gas prices are high right now, and that’s why you want to make sure there’s not.””

    Mind you, this is a Republican talking.

    I was in a wine shop recently and Dom Periogne (sp?) is really, really expensive. Something’s up. I’m writing to the Justice Department as we speak.

  31. Deus Ex – Don’cha see, it was all a plot for the big oil companies to get cheap oil which they’ll sell to Americans for inflated prices so they can get even richer, and this explains their windfall profits! What’s that? Most US oil firms were against the invasion? Iraq still isn’t producing very much in the way of oil? Futures markets? Uncertainty? Huh? Um…Hey! Look, behind you! *scurries off*

  32. Car rentals from Enterprise are $36/day here in MD, but only $18/day in CA. Something’s up. Let’s have a federal investigation.

  33. The toenails in my right foot seem to be growing at a faster rate than in my left foot. I will have my Senators look into this.

  34. Dropping the 54 cent/gallon ethanol import tariff might help a little bit.

  35. I am glad the 8.29 am was the real joe. I was just going to so that that post is right on: what I wanted to say, but worded better.

  36. We women get offended very easily, which is why the media lies about airline crashes, and printing these lies requires a lot more ink than printing the truth, and the ink is made of petroleum, which is why gas prices are so high.

    Or something like that. Ron Hardin can fill in the missing details, I’m sure.

  37. The oil industry should fight back: instruct all gasoline stations to display the price of gasoline on their signs WITHOUT federal, state, and local taxes, then itemize it on the receipt just like when you buy some chips in the mini-mart. When people in states like CA see an extra 50 cents per gallon in taxes, they might start asking some real questions…

  38. The oil industry should fight back: instruct all gasoline stations to display the price of gasoline on their signs WITHOUT federal, state, and local taxes, then itemize it on the receipt just like when you buy some chips in the mini-mart. When people in states like CA see an extra 50 cents per gallon in taxes, they might start asking some real questions…

    Here in Canada we see the pie chart from 2004 on some (all of?) the pumps.

    39% tax
    2% profit
    41% (IIRC) petroleum costs
    18% marketing

    I like your labelling scheme even better. I am generally skeptical of government regulation, but when the regulation is requiring consumer information, I am all for it. I especially like it when the information is required to be provided and formatted to help consumers avoid prevalent misconceptions.

  39. Ron Hardin is a bigoted idiot.

  40. No no no, Joe, Ron is right. We women are responsible for the high price of oil–think of all the oil used to power toilet-paper factories, and manufacture cosmetics, not to mention the gasoline we burn driving to voting booths on election day. . . speaking on behalf of American women, I would like to apologize in advance for the sickening economic roller-coaster ride y’all are about to take, but it serves you dumb fucks right for letting us out of the kitchen in the first place.

  41. A 6 pack of apple sauce cups just went up from $1.89 to $2.23. Somebody investigate this!

    And a 2 liter of diet Coca Cola is around $1.69, while a 2 liter of diet Pepsi is $0.99 (last time I checked, anyway). Something is rotten in the state of Safeway! Get the Senate on this pronto!

    On second thought, don’t investigate. Packets of Ramen went from $0.19 (with the discount card) to $0.15 (with the discount card). If investigators start poking around, there’s no telling what Safeway might do in retaliation!

  42. “A 6 pack of apple sauce cups just went up from $1.89 to $2.23. Somebody investigate this!”

    The apple sauce cartel is at it again, see COLLUSION!

  43. Remember how factual and non-emotional the media used to be before women started dominating it? Like when the Spanish-American War started due to Hearst’s dry, logical reminders to “Remember the Maine”?

  44. Jennifer: See, world’s gone to pot since y’all were given the vote! End women’s sufferage now! [/Ron Impression]

  45. Lurker-

    Thing is, I buy diet soda and unsweetened apple sauce, to avoid enriching the corn syrup cartel.

  46. On second thought, don’t investigate. Packets of Ramen went from $0.19 (with the discount card) to $0.15 (with the discount card). If investigators start poking around, there’s no telling what Safeway might do in retaliation!

    If Safeway has any practical ability to retaliate against its customers it means that the market is already badly busted. By definition.

    It is funny watching a scientist try to wrap his head around antitrust. Like watching a toddler try to catch a pigeon. It is funny when they fall square on their pampered rears and laff it off like a joke.

  47. If only we women were capable of the logic and non-emotionalism of men like Dave W., maybe then Ron would have more respect for us.

  48. Ron Hardin,

    Thanks for the misogynistic rant. I was pretty bummed-out today but now I’m lauging even as I type. It’s all at least half true.

    The apple sauce cartel is at it again, see COLLUSION!

    It’s due to high demand for pork chops.

  49. I guess a forgot a couple:

    Some claims of collusion are false, so all claims of collusion are false.

    The creation of absurd strawmen disproves the existence of legitimate cases.

    Gotcha.

  50. Jennifer is correct. I did take a couple of wrongheaded, mean swipes at her one day out of an abundance of emotion. (In mitigation: I used to get unfairly attacked on here quite a bit, but not by Jennifer). It has been interesting for me to contemplate where I lashed out more viciously at Jennifer because she is female or because I was fed up and she just happened to be the next poster to cross my path. I hope it is the latter, but how well does each know his own heart of darkness.

    Not sure what Jennifer’s problem is with my logic. As far as I can tell, we agree about more than we disagree about, but maybe not.

  51. joe-

    All joking aside, there are some perfectly good market forces in place to explain rising gas prices:

    1) Risk premiums due to recent events in the Middle East. (Not just Iraq, I’m also thinking about the recent attempt to bomb a major Saudi oil facility.)

    2) Rising Chinese demand.

    3) A weak dollar means that oil prices rise in dollar terms (since the dollar is the currency of international oil markets, AFAIK).

    4) If you believe Jennifer, then maybe, just maybe, some of the cheaper fields are running low. I know, the Saudis assure us that isn’t the case. And if you can’t trust absolute monarchs, whom can you trust?

    Put that together, and it’s pretty easy to see why gasoline is expensive.

  52. Although he’s phrasing it in a deliberately inflammatory manner, I don’t actually see anyone rebutting the underlying thesis of Ron’s point on the nature of news coverage.

  53. it’s pretty easy to see why gasoline is expensive

    That all sounds reasonable. So how come when the price eventually settles down, all the analysts say stuff like “well there was never any danger of shortage… it was overpriced for a while there… it was an overreaction…” I think THAT is what causes all the cries of gouging. People grasp supply and demand well enough — they see these shenanigans, see that it’s not based so much on supply and demand as on stab-in-the-dark guesses.

  54. High gas prices affect only losers who don’t don’t have enough money to make ends meet. When will whiners wake up and realize that reality isn’t constructed to satisfy their every whim? I have noticed that the poor are mostly lazy, fat, and stupid. They’re the ones who want a nanny state to to steal money from the rest of us so they can be lazy, fat, stupid, and content. We should do for them what nature should have done long ago–help them get thin.

  55. T.:

    In any market there are always a zillion reasons why prices can go up. The existence of plausible reasons why prices are going up is a trivial excercise. Just look at Bailey’s posts on rising drug prices if you don’t believe me.

    The question is always whether those plausible reasons are the true explanation or whether they are a convenient false cloak for the excercise of what is called “market power.”

    With that in mind, here is a litle critical poking at your plausible reasons:

    1) Risk premiums due to recent events in the Middle East. (Not just Iraq, I’m also thinking about the recent attempt to bomb a major Saudi oil facility.) Did the oil executives tell Cheney in 2002 to start a civil war in Iraq and to get Iran radicalized? We don’t know. Cheney went to the Supreme Court to keep those meetings a secret. I mean there is market power and then there is MARKET POWER. Secret designs of the secret designers.

    2) Rising Chinese demand.
    Great economies of scale. More money for exploration, for offshore platforms, the whole she-bang. Unit costs go down, not up.

    3) A weak dollar means that oil prices rise in dollar terms (since the dollar is the currency of international oil markets, AFAIK). To the extent this is true, wouldn’t it be impacting a lot of prices besides gas prices just as strongly?

    4) If you believe Jennifer, then maybe, just maybe, some of the cheaper fields are running low. I know, the Saudis assure us that isn’t the case. And if you can’t trust absolute monarchs, whom can you trust? It’s *who* can you trust. I don’t know who to trust on this. I do not trust oil executives on this. I am sketical that a more refined knowledge of the extent of oil reserves would or could cause the quick and transient shifts we see. This causes me to question whether the price reponses that are supposedly in response to supply really are. Then again, Peak Oil sounds plausible to me on its face.

  56. Do you agree with the following two statements:

    1. As a society, we should try to use much less fossil fuel. Global warming is going to happen eventually, and we there is only a limited supply of fossil fuel.

    2. The price system is the best way to allocate scarce resources.

    If you do, then:

    Rising gas prices is a good thing, and we should force them higher until people use this price cue to reduce consumption significantly.

  57. Tom:

    I agree with one small reservation: I think higher gas prices ARE a good thing. Fewer morons driving old cars will make the highways a more pleasant experience for those of us who can afford the gas. The nanny state could give the morons jobs building bycicle paths.

  58. Although he’s phrasing it in a deliberately inflammatory manner, I don’t actually see anyone rebutting the underlying thesis of Ron’s point on the nature of news coverage.

    If anything, my discussion of the factual, logical media coverage that led us into the Spanish-American War underscores it! Can you imagine how history might be different if women had had legal and media-related power back then? We might have been faced with overly emotional slogans like “Remember the Maine!” and bullshit news stories leading us into a totally unnecessary war with Spain.

  59. Addendum: The morons should have to buy their own bycicles.

  60. You know another problem with us women? We’re so fucking sarcastic sometimes.

  61. You know another problem with us women? We’re so fucking sarcastic sometimes.

    I’ve always thought of that as a feature rather than a bug.

  62. I like the idea of breaking down the price of fuel to show taxes and such. Even though you won’t see the taxes until afterward. It would be just like the prepared food tax. It would give people something to talk about. Much better than an abstract pie chart.

  63. I agree, thoreau, that there is a good possiblity that the prices we’re seeing are entirely the result of market forces.

    What I’m not willing to do is make the leap that, therefore, they are certainly the result of market forces. Collusion at this level is a reasonable possibility, and would be incredibly harmful, so it think it is prudent for the government to look into the possibility, in order to stop any wrongdoing that might be going on, and to deter future wrongdoing by making it clear that charges will be investigated.

  64. Dave W – I took a (maybe a couple) cheap shot at you, but only because you insisted on missing the point of one of my posts. Being that you are a lawyer, I figured you were used to cheap shots.

    Having said that, I think thoreau’s first three reasons are still valid. (I agree that shiekhs and oil exec geeks are both untrustworthy).

    1)Most corporations are massively risk averse. While corporations can do stupid things, trying to provoke a war in an unstable country in an unstable region where your company gets 50-90% of it’s product is so farfetched it stretches belief. It’s a lot more likely that they asked Cheney to lay off Saddam, and let the oil flow.

    2)Economies of scale come into play more so with manufactured goods, where overhead & fixed costs can be spread over more and more items.

    3)The weak dollar argument is still valid. It would effect any imported product that comes from somewhere with a currency that has appreciated against the dollar. But keep in mind that our largest trading partner is Canada, who also have a weak dollar of their own. We have been importing a lot more from China – and the Yuan is tied directly to the dollar. Imports from these countries would not change in price. Euro zone and other imports (including oil) would become more expensive.

  65. so it think it is prudent for the government to look into the possibility, in order to stop any wrongdoing that might be going on, and to deter future wrongdoing by making it clear that charges will be investigated.

    Isn’t that the FTC’s job on a daily basis? And the Justice Department’s job? And shouldn’t they have some reason to believe that it is worth investing their limited resources on this fishing expedition besides the simple fact that prices are rising?

  66. I don’t know who to trust on this. I do not trust oil executives on this.

    Probably sensible, but unfortunately they are probably the most trustworthy people in the industry. Cuz I certainly wouldn’t put my trust in the Sauds, it’s not likely I’d put trust in the leadership of Iran, nor the state-owned oil industry of Russia…

    Meanwhile, Iraq is pumping oil just fine but they can’t decide on who gets to distrubute it nor who owns the stuff they’re pumping.

  67. “Collusion at this level is a reasonable possibility, and would be incredibly harmful, so it think it is prudent for the government to look into the possibility, in order to stop any wrongdoing that might be going on, and to deter future wrongdoing by making it clear that charges will be investigated.”

    I seem to remember maybe a few years ago that gas prices dropped rather quickly (though not by a lot) once some noise was made that an investigation was imminent. I’ve heard that this is going to be a rough summer, so it’ll be interesting to see what happens now that the noise has been made.

  68. MP,

    Fair points. Don’t get me wrong, there is a lot of demogoguery and posturing surrounding this – absolutely.

    But the behavior of Congressional assclowns doesn’t mean we can be certain there is no problem.

  69. It’s *who* can you trust.

    Actually, it’s WHOM. At least, in the US.

  70. What I’m not willing to do is make the leap that, therefore, they are certainly the result of market forces.

    The more important thing to consider is what is forcing anyone to not make any lifestyle changes whatsoever. Certainly in the short term gasoline demand is inelastic, but over the longer term are people cutting down the miles they are drving or increasing it? Are they purchasing more fuel-efficient cars or are they purchasing less efficient cars? Would it make sense to pay a 30% premium for a car that is only 20% more efficient?
    How much is it going to cost to conduct a thorough investigation versus what the investigation will pay off?

    Let them gouge away (gratuitous Pixies reference). Everyone that wants to adjust will adjust eventually. Beats pissing money away on a pointless government investigation just to placate people who refuse to consider their own personal economies.

  71. Here’s a question: Has there ever been price gouging or collusion or whatever such that people have been brought up on charges for it? I’m talking the oil companies, not those guys that were rigging gas pumps.

  72. There is clearly widespread collusion affecting energy prices.

    Collusion between the government and environmentalists that severely limits our ability to develop domestic sources of crude oil and to increase our refining capacity.

    Collusion between the government and the ethanol industry that places tariffs on imported ethanol. This forces us to buy gas with more expensive ethanol which the government has mandated in collusion with the environmentalists and the ethanol industry.

    Collusion between the government and the domestic sugar industry that keeps tariffs on imported sugar and keeps the price of sugar artificially high (sugar is more easily and cheaply converted to ethanol.)

    We definitely need to put an end to all of this collusion and price fixing.

  73. Isn’t that the FTC’s job on a daily basis? And the Justice Department’s job?

    What did you fall asleep when the Iranian hostages got released there, Rip?

    And shouldn’t they have some reason to believe that it is worth investing their limited resources on this fishing expedition besides the simple fact that prices are rising?

    Antitrust enforcement should be self funding through fines for violations. This removes the budgetary constraints. The real constraint should be that antitrust should no longer be enforced when it no longer increases competitiveness. We are a long, long, long way from this margin, Van Winkell.

    These things said, I agree with T., Joe and SmokyPenguin that it is possible that rises in gas price are really due to valid concerns about a finite, shrinking supply. It is also possible that the price rises are being done to convince the world’s governments to tax gas less. If that is why they spike the prices, then I am undecided as to whether that is a valid reason. The antitruster in me says no, but the libertarian in me says “go!”

  74. 2) Rising Chinese demand.
    Great economies of scale. More money for exploration, for offshore platforms, the whole she-bang. Unit costs go down, not up.

    Dude, you’ve got to hook me up with your source. All I can get is skunk.

    Seriously, rising demand means that unprofitable feilds become profitable, but only if the price goes up. Seriously, if unit prices of oil go down, there’s LESS incentive to develop new resources/exploration methods, not more. There is NO WAY that rising demand creates a short- or even mid-term downward pressure on prices.

    These new technologies, long term, do tend to mitigate the upward pressure of demand-pricing. But the prices are still going to rise significantly. However, even if the investment in these methods jumped quickly with the increase in oil prices over the past three or four years, the first returns on those investments wouldn’t be felt for another 4 years.

    This is not like the technology industry where R&D costs can be spread further over 10,000,000 ipods than 100,000 ipods, driving prices down. Exploration costs diminish in returns as they increase, as big easy targets are found first, and later targets are smaller, more difficult, more costly (per barrel) finds.

    Seriously, with all the upward price pressure, I’m impressed that the price is as low as it is. We could reasonably be paying 50%-100% more without a dime of price gouging.

  75. Dude, you’ve got to hook me up with your source. All I can get is skunk.

    Start by subscribing to a newspaper. I hear all the time about the costs of oil infrastructure, especially in the wake of Katrina. Pipeline costs. Refinery costs.

    Either that stuf matters in this particular industry sector or it doesn’t. If it does matter, then the new Chinese capital infusion should lower unit costs, or at least tend to. If it doesn’t matter, then we have an example of oil execs lying about the reason they did a price spike post-Katrina.

  76. Why aren’t we moving sources to a more friendly place like Canada and developing refining capability from the oil tar sands? Or how about liquefaction from coal? I understand that it becomes profitable above $35 a barrel.

    We’re abviosly at double that and just making the oil sheiks a lot richer. Will oil ever drop below $35 a barrel again?

    Guys, start growing your beards. Gals, start shopping for burkas. And it’s “turban”, not “turbine”.

  77. I remember the energy crisis of the 70’s and since I have been driving, the price of gas has varied between a low of $.87 per gallon to the current price of $3.00+ per gallon.

    In over 3 decades, I do not recall ever seeing any proof of oil collusion amongst oil companies nor anyone convicted of such.

    It has alwasy been market forces at work that drive the prices.

  78. Here’s a question: Has there ever been price gouging or collusion or whatever such that people have been brought up on charges for it? I’m talking the oil companies

    what a difference a century makes:

    http://en.wikipedia.org/wiki/Standard_Oil

  79. “Either that stuf matters in this particular industry sector or it doesn’t. If it does matter, then the new Chinese capital infusion should lower unit costs, or at least tend to.”

    You are chasing your tail. The rising prices allow for more capital reinvestment, which can come in the form of new drilling, new refining, or new delivery, but when demand grows twice as fast as supply and delivery ehancements, you still get rising prices.

  80. Why aren’t we moving sources to a more friendly place like Canada and developing refining capability from the oil tar sands? Or how about liquefaction from coal? I understand that it becomes profitable above $35 a barrel.

    The possibilities are as follows:

    1. Evil collusion from oil companies who don’t want competition (I personally find this unlikely).

    2. Some ridiculous laws making such things unfeasible (more likely, though I don’t know of any specific laws in this regard).

    3. Maybe those stories about how relatively cheap and easy it would be use of the tar sands or coal beds as a replacement for gasoline were overly optimistic, and won’t actually work as well as we’ve been told they would.

  81. “Or how about liquefaction from coal? I understand that it becomes profitable above $35 a barrel.”

    It’s in work.

  82. If OPEC can’t maintain collusion, I find it very hard to believe anyone else could.

  83. In over 3 decades, I do not recall ever seeing any proof of oil collusion amongst oil companies nor anyone convicted of such.

    Congratulations. You qualify to be appointed as a US judge. You exhibit the one characteristic that is absolutely mandatory whether it is a Republican, Democratic or mix’d legislature that will be passing on your candidacy.

  84. I apologize if this has been explained already, but if the reason for higher prices is beyond the control of the oil companies, why are their profit margins (at least here in California) increasing at rates much higher than the increase of the price of oil? I really want to understand this.

    Please use small words and illustrations with cute forest animals when possible.

  85. joe, the constant jumping up & down of gas prices is a sign of competition. If there was collusion, the price would be high & stable & we wouldn’t be having this discussion because the oil companies would be doing everything they could to make their high price an uninteresting topic of discussion.

    So, suggesting there might be collusion because of unstable gas prices is like checking the fuse because the light keeps flickering on & off.

  86. Why aren’t we moving sources to a more friendly place like Canada and developing refining capability from the oil tar sands? Or how about liquefaction from coal? I understand that it becomes profitable above $35 a barrel.

    The possibilities are as follows:

    1. Evil collusion from oil companies who don’t want competition (I personally find this unlikely).

    Just to explain: the collusion that is feared by the alternative energy sector is that the oil producers can and will lower oil prices temporarily to strategically crush any alternative technology that begins to look large-scale viable.

    Now if prices are set just above supply costs then the oil producers in this kind of competitive oil market will not have the luxury of strategically lowering prices — the prices would already be as low as could be sustained.

    The concern in the alternative energy sector, when trying to collect those investment funds, is that the oil producers can and will price to crush any serious newcomer.

    Obviously, if the oil supply is low enuf, then this strategy wouldn’t work. To me, this says that the investors in a position to know don’t think that the oil market is competitive and that they do have enuf supply to play games with the prices for the indefinite future.

  87. 4. Noone will do anything to change the makeup of the supply until the pressure is high enough and the profitability is there for them to do so.

    As long as there’s enough cheap oil being produced with the current arrangment, nothing will change. Perhaps some even believe it will pass or that Bush can just “fix it”. Besides, I don’t see why oil companies would want to change anything when making massive profits. Will any substantial portion of the money actually go into alternative extracion methods? If so, it could be a good thing.

    We’re of course stuck until new resources are developed but I don’t hear much being announced publicly about any massive efforts to change from drilling to something else. Have prices not been elevated long enough for companies to consider the potential invesment risk low enough?

    Turning the industry upside down for every spike in prices would be foolhearty.

    It still pisses me off when the only solution to less oil supply seems to always be more oil supply.

    I noticed sage +P’s link mentions the cutoff being $40 a barrel, not $35.

  88. Les,

    One of the reasons for increasing profit margins are fixed costs associated with pumping oil out of the ground in California.

    Say it only costs $10 to pump, refine, and distribute each barrel of oil. When the demand for oil increases the price to $70 a barrel, you can see where the increased profit comes from.

  89. I can pay the higher prices for gas. If you can’t, buy a fucking bycicle.

  90. Or find some idiot relative or friend who’s willing to subsadize you.

  91. Lurker Kurt,

    That’s just the kind of simple, no-brainer information I needed to understand all this. And you did it without the cute forest animals, too. Thanks!

  92. “Dude, you’ve got to hook me up with your source. All I can get is skunk.”

    Um.. a slight correction is in order. Skunk is GOOD! Very, very good. Skunk=Good!

    I suggest the terms “ditch” or “schwag” in referring to inferior interstate commerce. It’s also acceptable to angrily mumble that “I might as well be smoking a paper bag!”

  93. I should have said, “…to better understand this.” I’ll probably never understand all of it.

  94. Defense Industry Daily reports that energy conservation is increasingly inportant to the Pentagon. Many are coming to the conclusion that every gallon of fuel is both a logistics and a financial burden.

    While the Defense Science Board in 2001 said the department could significantly reduce costs and boost performance and environmental benefits if it were to make fuel efficiency a priority across its weapon platforms, more recent factors, such as the Gulf Coast hurricanes and rising fuel costs — seem to be spurring a focus on the issue. At the time, the DSB found fuels’ true costs when delivered far into the battlefield could reach hundreds of dollars per gallon.”

  95. Les –

    The guy at the tank farm notices that his inventory is dropping. People are trucking gas away faster than he can get it in.

    So he raises the price _to slow the outflow_.

    Now, the demand for gasoline is “inelastic,” which means it’s insensitive to price. People say all the time that they have to buy it, there’s absolutely no way they can do without it all.

    So naturally the price has to go up a _whole lot_. This causes screaming and anger and outrage, but it cuts the demand, the tank farm doesn’t run out of gas, and there’s no lines waiting for gas stations to open. You can get all the gas you want.

    A side effect is that the guy who owns cheap gasoline has a windfall profit.

    Because, in this condition, the price is entirely regulating demand, and has nothing to do with how much it costs to make (which is so small by comparison that it’s out of the picture). This is not a problem except for the angry and screaming classes, which unfortunately there are a lot of.

    Similarly, in this condition, it has no effect on the price to waive taxes, as some have proposed. It simply increases the windfall profit to the oil companies, because the price cannot fall without running out of gasoline. It has to be that high to keep consumption down.

    In the long term, this high price will coax out additional supply that costs alot to obtain, which is why taxes are bad in this situation. But they won’t affect the price today.

  96. I’ll take hard-working illegal Mexican immigrants any day over whining Americans who think oil companies are some sort of charity. We need more people with a strong grasp of reality.

  97. Rhampton:

    No question it is a big deal. The logistics footprint of the M1a1 is unsustainable in large scale. They will serve as the “tip of the spear” only in future deployments (even in this one, as most of armored cav was sitting tight in Germany). The bulk of fighting will have to be done with mobile, easy to deploy, high firepower units. I think this all feeds into what Rumsfeld has been trying to do, for all that he takes heat for it.

    The trade for mobility and flexibility is the ability to be smashed when you get cornered. Future engagements will feature fast units getting trapped and soldiers all in one unit getting killed.As we have seen, the argument can always be made that there isn’t enough armor on anything. The trade for mobility and flexibility is the ability to be smashed when you get cornered. Future engagements will feature fast units getting trapped and soldiers all in one unit getting killed, and I can say with 100% certainty that people will argue that such a thing never happened in the days of full armored cavalry. Among other things, more armor means more gas.

  98. “Dude, you’ve got to hook me up with your source. All I can get is skunk.”

    Um.. a slight correction is in order. Skunk is GOOD! …I suggest the terms “ditch” or “schwag” in referring to inferior interstate commerce. It’s also acceptable to angrily mumble that “I might as well be smoking a paper bag!”

    Dudes, someone feels your pain.

  99. Dave W wrote:
    2) Rising Chinese demand.
    Great economies of scale. More money for exploration, for offshore platforms, the whole she-bang. Unit costs go down, not up.

    To which I responded:
    Dude, you’ve got to hook me up with your source. All I can get is skunk. with an explanation of why Chinese oil demand wouldn’t create economies of scale in exploration or crude production.

    Dave W ignored everything I said except the first two sentences and posted the following:
    Start by subscribing to a newspaper.* I hear all the time about the costs of oil infrastructure, especially in the wake of Katrina. Pipeline costs. Refinery costs.

    You didn’t talk about this earlier. You’re changing the subject. The first discussion I was quibbling with mentioned that Chinese demand was going to create economies of scale through exploration and new oil platforms, which would effect the price of crude but not for years. In the meantime they’d cause a significant upward pressure on crude oil prices.

    Now, pipeline costs and refinery costs come farther down the production line than crude oil prices. So let’s look at that.

    Either that stuf matters in this particular industry sector or it doesn’t. If it does matter, then the new Chinese capital infusion should lower unit costs, or at least tend to. If it doesn’t matter, then we have an example of oil execs lying about the reason they did a price spike post-Katrina.

    Refineries and distribution pipelines in the US gasoline sector are not effected by Chinese demand.

    Gasoline prices in the US are only effected by Chinese demand in terms of crude oil prices. Once the refineries have bought the crude on the open market, the Chinese demand does nothing to increase or mitigate pricing. Refineries and gasoline-delivery pipelines are market-specific. The Chinese crude demand occurs outside the US gasoline production market. Investment in refinement and distribution infrastructure here would do nothing to meet Chinese demand, so the Chinese won’t invest in it. We won’t see any improvements in downstream efficiency due to Chinese demand.

    Oil is more-or-less fungible on the global market, but gasoline is typically sold on local markets. We bought some refined gasoline from Europe

    Either that stuf matters in this particular industry sector or it doesn’t. If it does matter, then the new Chinese capital infusion should lower unit costs, or at least tend to. If it doesn’t matter, then we have an example of oil execs lying about the reason they did a price spike post-Katrina.

    OK, I was really only looking at the crude-oil price pressure, since that’s the only place where Chinese demand has an effect. Chinese demand for oil increases demand for crude, but has nothing to do with Gulf

    Well Chinese demand WON’T infuse cash into the American refining/distribution pipeline. So all the post Katrina problems are unaffected by Chinese demand.

    Second, expanding refining capacity or pipeline capacity ALSO takes years to come into effect. Due to regulatory costs (mostly EPA) no new refinery has been opened in the US for years. The construction time on those is long, certainly too long to relax gasoline supplies in the near term. The same is true of pipelines. Expanding existing distribution pipelines is a long-term investment, not a short term corrective.

    So there are some grains of truth to your statements, most notably that long-term, the higher gas prices will spur efficiencies in the refining/distribution network. However, this will partially mitigate, but not negate, the rise in raw material costs due to Chinese and Indian oil use.

    * with regards to reading a newspaper, while I no longer work in the oil industry, I have studied the industry from a technical standpoint (not economic) as a part of my geophysics degree. I’m somewhat more familiar with many aspects of the oil industry than general-interest newspapers would normally provide. It was ancillary to my own work, but I have assisted in research in oil exploration and reservoir modelling/production. I don’t claim to be a oil/gas market analyst, but I know enough to work out that Chinese demand will drive prices up, not down, even long-term.

  100. I apologize if this has been explained already, but if the reason for higher prices is beyond the control of the oil companies, why are their profit margins (at least here in California) increasing at rates much higher than the increase of the price of oil? I really want to understand this.

    Please use small words and illustrations with cute forest animals when possible.

    Well, if you are selling nuts, with a tree producing 20 nuts per day, and you have 21 squirrels who can afford to buy nuts, they’ll bid the prices up a little bit, and maybe one squirrel will decide to go without a nut for a day, or use higher-priced alternative food supplies for a day to make up the shortfall. On average, every squirrel will go without a nut once in 20 days. Of course, your riches squirrels will still get a nut every day (that really rich bastard might get TWO every day) but there will be enough penny-pinching squirrels that will cut back on their nut usage that this tight supply won’t cause too much of a price increase.

    Now, suppose there are 40 squirrels. You can plant another tree, and increase your production, but that tree won’t mature for several years. So now, instead of squirrels going nut-free once in 20 days, they’re going to have to go without nuts once every other day. Some squirrels are going to be willing to pay a lot more to buy nuts two days in a row, while other, poorer squirrels will buy nuts every three days.

    So now, through no fault of your own, but based purely on competitive bidding from your customers, the price might double, triple, or even quadruple.

    Viola! Non-colluding, non-gouging price increases, where profits go up for the producer without hanky-panky, complete with cute forest animals.

  101. Viola! Non-colluding, non-gouging price increases, where profits go up for the producer without hanky-panky, complete with cute forest animals.

    That can’t be, it is because of gouging, period, end of discussion.

  102. State and local governments love higher gas prices, at least here in CA. The federal and state excise taxes are a fixed amount, but the sales tax is a percentage. I await to see government duplicity at its finest when states like CA consider windfall profit taxes for petro companies, while disregarding its own windfall profit.

  103. The price of a head of romaine is getting outragous! $4.00? Who’s ever heard of such?

    It’s Big Lettuce gouging us I tell you! Big Lettuce!

  104. Gotta tell ya: I’m now shelling out close to a hundred bucks a month for gas and even on my less than rock-star-level salary, it’s just not an issue for me. Somebody please tell the junior senator of my adopted home state to shut the frig up…

  105. Boycott Exxon Mobil

  106. good old fashioned supply and demand, is a good old fashioned load of crap. Last week in the San Jose Mercury news there was an article that went into how the country of Brazil opened there first oil pump and would now be independant of all foriegn oil. Now im no buisness major. But if a country the size of Brazil (which on the map looks like half of South America)becomes independant there must be ALOT more oil to pass around. So the supply should be up. There again if half of South America becomes independant, and Venezuela had there own oil before, the demand had to have went down. But the prices have went crazy. And to say it takes awhile for this oil to affect the market, the pump isnt one for a fish tank the whole oil industry was bound to know about it, so if they didnt produce as much, or the way things are now not at all then that shows collusion and in turn gouging. Not good old fashioned supply and demand, more like a good old fashioned screwing. Brazils oil is “dirty” oil like ours here in the states have been explaned to me. And ours costs so much more to pump, But if you ride threw Bakersfield when the prices are sky high the pumps are running like crazy. Every company has all the right in the world to make a profit, but dont have the right to rape the public in doing so. And to say oil isnt a vital resource think of the people down south who need there cars to work every day. when a gallon of gas takes a third of what you make that hour, there isnt much left to pay the the house payment or even worse the rent. let them EAT cake huh?

Please to post comments

Comments are closed.