Energy

Gas Prices Redux

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The Cincinnati Enquirer looks hard at high gas prices in the heartland and concludes with these soothing words from an industry spokesman:

John Felmy, chief economist for industry group the American Petroleum Institute, recently testified before Congress that a review of market fundamentals shows prices are driven by tight supply.

"There is a fragile balance between the world's supply and demand for crude oil," he said, noting the world market, not oil companies, sets the price for a barrel of crude oil, which cost $62.46 at Monday's close on the Nymex. He said U.S. gasoline production is at an all-time high despite some refinery interruptions that have been blamed for price spikes.

Felmy defended the oil industry against accusations it's not doing its best to keep a lid on prices.

"Some are again accusing the industry of illegal activity," he continued. "Our industry has been repeatedly investigated over many decades by the Federal Trade Commission and state attorneys general. Of the more than 30 investigations that we are aware of, all have resulted in exoneration."

More here.

Reason's Ron Bailey gives some more context here.

NEXT: Right All Along, Unfortunately

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  1. Wait, tight supply? I thought that was impossible.

  2. The economic ignorance behind the idea that a price can be somehow illegal is stunning. It’s the economic equivalent of criminalizing witchcraft.

  3. Wait, tight supply? I thought that was impossible.

    You thought that it was impossible for governments to block oil production and refining resulting in ample supply not being delivered to the people demanding it?

    You can see a similar effect with corn prices. They have risen partly because governments created an inefficient, subsidized, fuel market for corn to be used in, increasing demand and price. The increaded demand results in an insufficient supply, for now.

    Oh, maybe you thought supply chased demand instantaniously, like some sort of Star Trek episode plot vehicle.

  4. Perhaps that should be “instimagically”.

  5. It’ll all be ok when Hugo, er, Hillary, takes teh oil company profits and buys us all a pony to ride around in.

  6. It’ll all be ok when Hugo, er, Hillary, takes teh oil company profits and buys us all a pony to ride around in.

    Good luck Alaska! Hillary is coming for your corporate welfare checks!

  7. The last year my Dad got one of those checks, he finally bought something “for himself.” Rather than pay a bill or something, he bought an M1 Garand .308 and a Marlin 45-70 with a nine shot tube. “For himself,” eh? Both of those have been in my gun safe since he brought them to the lower 48.

  8. The last year my Dad got one of those checks, he finally bought something “for himself.” Rather than pay a bill or something, he bought an M1 Garand .308 and a Marlin 45-70 with a nine shot tube. “For himself,” eh? Both of those have been in my gun safe since he brought them to the lower 48.

    Nice guns!

    Is he going to donate the rest of his checks to the bridge? 🙂

  9. Nah. He’s in Idaho now. FWIW, even though he’s a Bushfart he really hates Don Young. But the politicians up there are really playing to a captive audience.

  10. But the politicians up there are really playing to a captive audience.

    Especially since their escape boat just crashed.

  11. The bottom line here is we need to get away from oil but I also wanted to note that credit card companies also play a role in the gas price craziness.

    The interchange fee, the charge that merchants must pay credit card companies when customers swipe credit cards, forces gas station owners to increase the price of gas.

    “Harajli took a delivery Friday at $3.22 a gallon; his markup includes 6 cents for taxes and 5 cents for credit card fees.”
    From Detroit News

    I’m working with the Merchants Payment Coalition and these fees may not seem like much but the average family pays about $300 a year in fees while the credit card companies enjoy about $30 billion a year.

  12. all have resulted in exoneration

    Should have at least spelled it EXXONeration.

  13. feeguru,

    Other than their own choices in payment, who is forcing these merchants to accept credit card payments?

    Also, who is preventing them from passing credit charges on seperatly?

    I want names so they can be dragged through the streets in tar and feathers! Especially if it is that one guy (who is still unnamed) who sets pump prices all around the world in such an “unfair” manner!

  14. I don’t know how you cave-people have managed to get out of bed. Here in the glorious future of 2002 we get around in hovering bubble cars that are powered by pure imagination and some little itty-bitty guy underneath going “bbbt-bbbt-bbbt” with his lips. Why can’t you cave-people design a car that runs on something other than this gas-o-line you talk about?

  15. I would get 16 cents back from my credit card company for each gallon of gas at that price, so 5 cents for fees isn’t a big deal.

    I get over $300 returned to me each year from two of my credit cards.

  16. Maybe the oil companies are right and that their colossal profits are simply a result of supply and demand.

    But I’m not too sure I simply want to take their word for it.

  17. It’s also interesting that the media is considered “liberal” yet newspapers will run blatant oil industry propaganda pieces like this one, assuring us that “experts” know that everything is on the up-and-up and giving an industry spin doctor space to state his case without challenge.

  18. There’s been no new gas refinery capacity built in the United States for over 30 years. There’s been an attempt to build a new refinery near Yuma, Arizona, that’s been in process for over a decade and is still trying to obtain necessary regulatory approvals.

  19. Dan T. falls for the needle-in-haystack accurate quote to be found about the energy industry, in a haystack of industry bashing articles and fabrications as “proof” that they are not biased.

  20. I’d say many of you have fallen for something – a newspaper article that tells you what you want to hear even though it’s clearly just uncritically passing on industry spin.

    Another clue: people are concerned about high gas prices, yet the Industry Spokeman tells us that companies have no control over the price of crude oil. Which may be true, but we’re not interested in the price crude oil.

  21. Just once, I’d love to see an oil company executive point that taxes on gas exceed the oil company’s profit margin. Therefore, maybe the government is the one who should stop gouging their customers.

    Any beds on which senator would tear off his face and bite the exec with his reptilian teeth?

  22. Dan, sweetie,

    How can a price be wrong? Let’s assume that the oil companies all enter into an agreement with secret handshakes to jack up the price of gasoline. They are well within their rights to do so!

    If people think the gas is worth this higher price, they will buy it. If not, they won’t. The oil manufacturers owe you not a thing. They are not your slaves. You are not some baron and they the peasants tilling your land.

    Of course, if they charge too high a price, they will attract competitors who will try to enter the lucrative gasoline market… But oh look, you and your friends are there to stop people from building additional refineries.

    God, it’s like reading a transcript of the Salem witch trials.

  23. God, it’s like reading a transcript of the Salem witch trials.

    You know, I dislike economic ignorance as much as anybody else, but I’m going to go out on a limb and say that the oil companies are probably quite capable of taking care of themselves, and aren’t really in any danger of being driven out of business.

    Mind you, I’m not saying they should be harassed or anything, I’m just saying that they probably don’t need much sympathy because they are probably quite capable of taking care of themselves. That’s all.

    I’ll save my sympathy for businesses facing greater peril, like those that the IJ defends.

  24. Fundamentals of the free market — price is not related to cost in anyway.

    Price is what customers will pay. Cost is what the supplier pays to make & distribute what the customers want.

    If price is lower than cost, the business disappears. If price is higer than cost, the business continues. If price is way higher than cost, competitors will flood the market with lower price products. Everything comes to equilibrium somewhere that is “fair” to suppliers and customers.

  25. Dan T.

    It’s also interesting that the media is considered “liberal” yet newspapers will run blatant oil industry propaganda pieces like this one, assuring us that “experts” know that everything is on the up-and-up and giving an industry spin doctor space to state his case without challenge.

    With apologies to Mr. Colbert: Economic reality has a well-known pro-oil industry bias.

  26. Of course things come crashing down when the state intervenes to fix problems that don’t really exist.

  27. Another clue: people are concerned about high gas prices, yet the Industry Spokeman tells us that companies have no control over the price of crude oil. Which may be true, but we’re not interested in the price crude oil.

    The bulk of the population are lemmings and will follow any charismatic leader of the cliff.

  28. How can a price be wrong? Let’s assume that the oil companies all enter into an agreement with secret handshakes to jack up the price of gasoline. They are well within their rights to do so!

    According to whom?

  29. Fundamentals of the free market — price is not related to cost in anyway.

    Wrong – the costs associated with producing something affects the supply and thus the price.

  30. Wrong – the costs associated with producing something affects the supply and thus the price.

    Bullshit Dan T. This is the most common mistake made by people bitching about prices.

    The price is solely dependent upon what people will pay. That is why so many business fail. Their costs exceed the price that people will pay for their products.

    Until people stop buying gasoline, it will not hit is maximum price.

  31. I posted my own take on the gas problem last week at my blog space…

    http://d2brutallyhonest.blogspot.com/2007/05/transcript-html-brutally-honest-rant.html

    The short of it is this: we’ve been playing this same game every year now. The same fingers get pointed, the same blame is assessed, the same ideas are generated, but nothing substantive will EVER come out of the government to resolve it. If something needs to be done about this problem, then WE – the people – have to do it. WE need to, not the government, not the automakers, and not the oil companies. Neither of those other groups will ever lift a finger until WE take those needed steps first.

    If all we do is just bitch about the problem, then that’s all these other groups will do as well.

  32. Carrick, you’re just giving Dan T. some low-hanging fruit to pick. By your own admission, production costs serve as floors on price. And by your own admission, if the gap between production costs and consumer prices becomes large enough competitors will enter the market.

    So prices are related to costs. Insisting otherwise just gives Dan some low-hanging fruit to pick.

    Part of the complexity of the oil market comes from the fact that extraction costs vary so widely across the industry, with some fields being profitable to drill even at very low prices per barrel (e.g. supposedly much of Saudi Arabia) and other fields only being profitable at higher prices. So oil companies with fields that are cheap to drill are making huge profits, while oil companies with more difficult fields are making less. (Apparently Venezuela is lagging other oil producers in profits, because their stuff has more sulfur and hence costs more to refine, and so their crude gets sold at lower prices to compensate.)

    Failure to acknowledge complexity just gives low-hanging fruits to those who want to over-simplify.

  33. How can a price be wrong? Let’s assume that the oil companies all enter into an agreement with secret handshakes to jack up the price of gasoline. They are well within their rights to do so!

    According to whom?

    And thus we see the selfishness of Dan T. He wants gasoline, and if the people who have it want more than he’s willing to pay, why he and his friends will take it anyway.

  34. Isn’t May 15 the day that everyone’s not supposed to buy gas? Unfortunately, I have to return a rental car today, so I can’t participate in that celebration of economic ignorance.

  35. So prices are related to costs.

    In a normally functioning free market, price will come to equilibrium at some acceptable margin above the cost to produce it. This assumes that 1) there is some demand for the product and 2) there is some adequate supply for the product.

    If demand disappears, then the price goes to zero, regardless of the cost to produce. That is why businesses fail. If supply disappears, the price goes to infinity.

    It is when the state get involved that products are sold at less than cost (through susidies) or sold at much higher than cost (because of artificially restricted supplies).

    But there is no magic formula that says price must always be 12% higher than the cost of doing business.

    Dan. T is right only because the market works, not because he actually understands how the market works.

  36. Listen, I don’t have a problem with gasoline or any other good being priced at it’s fair market value.

    The problem is that it’s not exactly clear that’s what the price represents. You guys are assuming that the price of gas is fair mostly because the industry insists that it is.

  37. “There’s been no new gas refinery capacity built in the United States for over 30 years.”

    That’s untrue. There have been no entirely-new refineries built during that period, but the capacity of existing refineries has been expanded by, IIRC, approximately 70% during.

    I’ll look for linky.

  38. Here’s a good start.

    http://wyden.senate.gov/leg_issues/reports/wyden_oil_report.pdf

    Check out the internal oil company documents calling for a reduction in refining capacity to increase profits; the record of refinery closings; and the figure of 1-2% increase in refining capacity per annum during the 1990s, the same period that the closures occured.

    I’m not sure what all of this adds up to, but “the poor oil companies are being prevented from refining enough oil” is nonsense.

  39. carrick, I get what you’re saying, but you’re making fine points in blunt language, and thus giving Dan some low-hanging fruit.

    Stop doing that!

    As to why I don’t shed any tears for oil companies: This is basically a bunch of theater. Prices fluctuate on yearly patterns, and when they do the predictable voices complain, other predictable voices leap to their defense, some press releases are issued, inconsequential hearings are held, those who need to get to vent their spleens, and then life goes on. It’s an inconsequential piece of theater that mainly serves to make those with strong opinions feel better.

    The elephants in the room are things that really matter to long-term trends:

    1) A lot of the world’s oil reserves are under the control of inefficient state-run firms.

    2) Maybe, just MAYBE, there may be some geological limits that we’re brushing up against. (Yeah, I know, many here will say that’s just crazy talk!) Or at least we’re bumping into geological problems that clumsy state-run firms can’t easily manage. (That second sentence might make some people feel better.)

    3) To whatever extent regulations in the US are a part of the problem, those regulations probably serve more to keep new entrants out of the market, and hence limit competition. I doubt the established oil firms are missing any meals because of that.

    These are the elephants in the room, and a lot of people in all sorts of positions would probably rather not talk about them. So instead, we get this annual theatrical performance that really does nothing.

  40. but you’re making fine points in blunt language,

    Dan hasn’t display the ability to comprehend fine points made in fine language 😉

  41. Isn’t May 15 the day that everyone’s not supposed to buy gas? Unfortunately, I have to return a rental car today, so I can’t participate in that celebration of economic ignorance.

    I bought gas last month, so my not buying today is not an indication of support it is just an indication that I don’t need more yet.

  42. As for the price becoming infinite evidence, I submit this rare commodity.

  43. Dan, Dan, Dan,

    didn’t anyone ever tell you that life (& economics) isn’t fair?

  44. How can a price be wrong? Let’s assume that the oil companies all enter into an agreement with secret handshakes to jack up the price of gasoline. They are well within their rights to do so!

    According to whom?

    And thus we see the selfishness of Dan T. He wants gasoline, and if the people who have it want more than he’s willing to pay, why he and his friends will take it anyway.

    while not trying to speak for Dan T., I assume an objection to the point that oil companies are well within their rights to all enter into a secret agreement to raise prices stems mostly from the idea that such an arrangement would be a form of collusion/anti-trust violation – and they are not within their rights to do so.

  45. I’m not sure what all of this adds up to, but “the poor oil companies are being prevented from refining enough oil” is nonsense.

    Hmm, weren’t oil company profits in the tank in much of the 90s [the era of Wyden’s report]? Back when the Clinton Admin allowed the Exxon-Mobil merger? When we were all enjoying plenty of cheap gas?

    And joe, if the oil companies were all conspiring to reduce refining capacity – how do you get that it increased 70%? Did you take the same econ class as Dan?

  46. I assume an objection to the point that oil companies are well within their rights to all enter into a secret agreement to raise prices stems mostly from the idea that such an arrangement would be a form of collusion/anti-trust violation – and they are not within their rights to do so.

    It may be illegal to do so, but since it’s their property, they are well within their rights to do so. An illegitimate government power does not abrogate a party’s rights.

  47. juris,

    All I did was provide some facts, to refute an indefensible assertion. Stop assigning arguments to me.

    How exactly did you manage to read “I don’t know what all of this adds up to” to mean “I have a carefully developed conspiracy theory that this evidence supports?”

  48. MikeP,

    Arguing for an injurious conspired monopoly that would subvert the benefit of the free market – you are the greater capitalist.

    hardcore, man. hardcore.

  49. I dunno joe, you said that refining capacity went up quite significantly; went off to find a link supporting that and came back with one that alleged the oil companies had colluded in reducing capacity.

    I guess I can see why you don’t know what to make of that.

  50. downstater,

    Antitrust law is nothing but a tool the state wields on behalf of one corporation against another. Considering that the more competitive corporations who are better serving their customers are unlikely to go running to the government asking for antitrust protection, it is pretty clear that it is the anticompetitive corporations that end up using it. The result of antitrust law is commonly a government protected cartel with rationalized market share distribution. The consumer sees no benefit — only a less competitive marketplace.

  51. “I dunno joe”

    The only accurate statement you’ve made on the entire thread.

    “…and came back with one that alleged the oil companies had colluded in reducing capacity.”

    Uh, no, one that says they expressed interest in reducing capacity, but also that they expanded their capacity.

    I know exactly what to make of that report – that it provides factual evidence of the point I was making, and citations to back up those facts.

    BTW, none of your imaginings are evidence against my point – refining capacity has increased, not decreased; the oil companies are not being hamstrung in increasing refining capacity, but are limiting its expansion on their own.

  52. I dunno joe, you said that refining capacity went up quite significantly; went off to find a link supporting that and came back with one that alleged the oil companies had colluded in reducing capacity.

    Ah, but if the capacity could have been increased by eleventy hundred percent, but they only increased it by 70% THEN we have the true evilness!

    Just like all of these high drug prices Mrs. Clinton keeps talking about. It does not matter that new drugs keep being made and the prices keep coming down, the evil drug companies keep the prices up just to be mean.

    Leftist economics is a strange bird. One must truly know the real motovation of corporate fat-cats in order to understand why they make prices the way they do. Nobody can explainn why gas is not $15/gallon other than ‘corporations’ have not reached that level of evil yet.

  53. It may be illegal to do so, but since it’s their property, they are well within their rights to do so.

    Not according to the patron saint of capitalism. Collusion between producers subverts competition, crippling a market.

  54. You see what facts do to the conservative mind?

    There there, Guy. Deep breaths.

  55. Wow, I am more psychic that I thought.

  56. Not according to the patron saint of capitalism. Collusion between producers subverts competition, crippling a market.

    Unless they have some sort of police power, nothing is stopping substitutes from coming into the market.

  57. Uh, no, one that says they expressed interest in reducing capacity, but also that they expanded their capacity.

    ROTFL, it would be in their interest to reduce capacity so therefore they increased it.

    Wow, you DID take the same class as Dan!

  58. Unless they have some sort of police power, nothing is stopping substitutes from coming into the market.

    Uhm, well, there is a place where they can acquire (or perhaps more properly, rent) a police power to do just that. Funny how that works.

  59. Uhm, well, there is a place where they can acquire (or perhaps more properly, rent) a police power to do just that. Funny how that works.

    If you are talking about some interests using government to suppress competition then you have slipped off the conversation. Or maybe I did because I thought we were talking about natural market forces, not artificial protections.

    Anyway, even with police power, broadcasters and dead-tree media have been pretty frustrated by “teh intertubes” and have had slim luck getting the state to help them fence their market.

  60. I do wonder what the price of a gallon of gas would be if the oil companies had to fund their own militiaries to protect their interests instead of using the taxpayers’.

  61. juris,

    You know what those little lit-up number-thingies spread throughout the report are? They’re called “citations,” and they link to the evidence that proves the claims.

    Yup, they have a ton of documents demonstrating that oil companies (and the Bush administration) were concerned about “surplus refining capacity.” Yup, they have a ton of evidence demonstrating that there were a large number of refinery closings. Yup, overall refinering capacity increases anyway during that period.

    Somehow, the fact that I have provided links to irrefutable evidence of my statements, and stated that I’m drawing any conclusions from it, demonstrates my lack of economic knowledge.

    You should really just slink away now, because you’re just looking like a petulant child who won’t admit that he mouthed off without knowing what he’s talking about.

  62. Dammit, forgot a “not.”

    “…not drawing any conclusions from it…”

  63. No joe, those aren’t links, and in fact you don’t know at all to what they refer – other than what the good Senator claims. Those ‘footnotes’ just aren’t actually sourced.

    Yup, they have a ton of documents demonstrating that oil companies (and the Bush administration) were concerned about “surplus refining capacity.”

    The Bush Administration? In the mid to late 90s? Did you fall off something and hit your head joe?

    Somehow, the fact that I have provided links to irrefutable evidence of my statements

    Except for that part about how refining capacity was increased 70% (when your linkee says it decreased – due to oil company perfidy).

  64. “Isn’t May 15 the day that everyone’s not supposed to buy gas?”

    Yeah, but May 14 was fill-er-up day, so I don’t think the oil companies will be feeling the pain.

  65. I do wonder what the price of a gallon of gas would be if the oil companies had to fund their own militiaries to protect their interests instead of using the taxpayers’.

    I wonder what the price of a gallon of gas would be if the government didn’t use the so-called need for access to oil as justification for a foreign policy that behaves like a bull in a china shop.

    In short, if oil companies were left to defend their own overseas interests — as virtually everyone in this forum would want — oil would be way way cheaper.

  66. Or maybe I did because I thought we were talking about natural market forces, not artificial protections.

    Smith said that producers would seek to evade competition and that it was the role of govt not to let them do so. Certainly, the first step in that is to NOT act as industry’s enforcer. The next steps after that may be active or not.

  67. They are well within their rights to do so!

    Then, why all the fuss about the evil OPEC.

  68. Who’s fussing?

  69. I can’t decide if Dan T is utterly clueless about economics or if he is just a really excellent troll. Quotes like his below don’t make the decision any easier.

    Another clue: people are concerned about high gas prices, yet the Industry Spokeman tells us that companies have no control over the price of crude oil. Which may be true,but we’re not interested in the price crude oil.

    Dan apparently does not realize that gasoline is made form crude oil. And when the cost of inputs needed to make something go up it makes sense for the cost of that product to go up also.

  70. Then, why all the fuss about the evil OPEC.

    Yea, who is fussing? That is one of the most ineffective cartels in history. Every time they announce a cutback on quotas the price spikes up for a moment while everybody rushes in to cheat.

  71. The price of refined gasoline is not only affected by the amount of refining capacity but also by all the various government environmental requirements for different blends of gasoline for different parts of the country.

    Substitutions of supply cannot easily be made across regions of the country in response to changes in demand because the blend required in Texas or Florida is different than the blend required in California.

    And of course there are other factors such as the government requirement that ethanol be substituted for MTBE as a fuel addiditive. Ethanol can’t be transported by pineline, it must go by truck or rail so logisitical efficieincies are degraded, etc.

  72. And of course it’s worthwhile pointing out AGAIN that the federal and state gas taxes on every gallon of gas sold far exceeds any profit made be oil companies.

    AND – those gas taxes are supposed to pay for road construction and maintainence.

    AND – the cost of said road construction and maintainence has been inflated for about 70 years and counting because of a political giveaway to the labor unions called the Davis-Bacon Act. As enforced, the Act essentially guarantees that any federal contractor (and state one’s as well) will not be able to use cheaper non-union labor on any construction project. There is no telling how much extra this has cost the taxpayers over the last 70 years but I would imagine the cumulative cost is may billions if not several trillion.

    So “big labor” has a lot more to do with the cost of gasoline than “big oil” does.

  73. The link below is to a historical review of the impact of the previous attempts by the federal government to keep oil prices low using price controls and taxes. It is an interesting read.

    Because price controls and profit taxes can be levied only by the U.S. government on U.S.-based companies, such policies also increase the economic attractiveness of foreign relative to domestic oil. The U.S. experience with price controls from 1971 to 1980 and the Crude Oil Windfall Profit Tax from 1980 to 1988 amply demonstrates the problems.

    The point below is an important one.

    Restricting profit opportunities now would amount to a form of one-way capitalism in which meager profits are allowed but more robust profits are punished. Intervention under those conditions would certainly reduce the incentive to invest in the oil business.

    The politicians aren’t very good at finding oil or refining gasoline. They have an excellent and proven ability to drive investment in petroleum production from the US to other areas.

  74. You know, I dislike economic ignorance as much as anybody else, but I’m going to go out on a limb and say that the oil companies are probably quite capable of taking care of themselves, and aren’t really in any danger of being driven out of business.

    thoreau,

    Reasons such as those posted by TJIT are why I do argue the side of oil companies, no matter how anti-competitive others — or even they themselves — think they are being.

    As it stands, the worst one can say about the present situation is that there is a more or less free market with high producer surpluses that translate into high oil company profits. But any government attempt to address that “problem” will inevitably destroy wealth and make everyone poorer in the short and long run.

    The most likely case, of course, is that the oil companies use their political muscle to collude with a government intent on “doing something”, giving the worst of both worlds.

    Yes, end explicit and implicit subsidies for oil companies. Yes, stop using strategic oil producing regions as cause for expensive and counterproductive foreign policy. But do not botch up the energy market because some companies are making profits. That just makes us all worse off.

  75. hey joe [just doesn’t have the same cachet on a non gun control thread]

    Here’s some data about California. From ’85 to ’95 there was a 20% decrease in capacity (evil oil companies), but nowhere is there noted the big capacity increase you argue is supposed to be there. How about that.

    You be sure and let us know when you actually find some evidence of that 70% capacity increase, ok?

  76. Guy Montag, Visa and Mastercard prevent retailers from charging a separate price for cash versus credit payments. Since they control 80 percent of the card industry, they get to make the rules. I think its great both brands are accepted just about everywhere but more competition and transparency in the industry would be good for business and consumers.

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