The real story on gas prices

[aquapub]

Contrary to what some unthinking, class-warfare conspiracy theorists on the left might speculate, there are real answers to the question of why gas prices are so high (and with Hurricane Katrina, why they are only going higher).

For those who do not understand the futures market, it is where companies who rely heavily on fuel prices can buy a contract to get their petrol at the fixed, current rate for so much time. When companies get worried about instability with oil distribution, they buy up futures, which is one of the things that drive up gas prices.

According to the Congressional Research Service (a branch of the Library of Congress which did the research from which the landmark 2005 energy bill was passed) these are the substantive issues behind the hikes:

-Decisions by the Organization of Petroleum Exporting Countries (OPEC)
cartel, after having reduced production quotas in 2002, to raise them only
slowly and reluctantly;

-Unexpected demand growth in China;

-Disruptions in oil production in major exporters, including Venezuela, Iraq
and Nigeria;

-Decline in the value of the U.S. dollar, the currency in which oil is traded in
the world market, compared to other major currencies, particularly the Euro.

-Uncertainty and fear of major disruptions in Iraq and Saudi Arabia, in the
context of the war in Iraq and the threat of terrorism.

-U.S. demand for gasoline has increased as economic growth has resumed.

-Domestic refining capacity has declined, both in number of refineries —
from 324 in 1981 to 153 in 2002 — and in total capacity — from 18.62
million barrels per day (mbd) in 1981 to 16.78 mbd in 2002.

-The structure of the refining industry has changed. In 1981 most refining
capacity was owned and operated by integrated oil companies that supplied their own crude oil, refined it, distributed it, and marketed the products.
Refining was only one part of the company’s profit-making operation, and
frequently was not an important profit maker. Now the refining industry is
characterized more by independently owned, nonintegrated firms. When
refineries are the sole source of revenue to the owners, it becomes more
important that the operation be profitable, leading to pressure to raise prices.

-The refining industry has been operating with lower inventories of both
crude oil and gasoline, as a means of cutting costs. The side effect has been
reduced ability to meet unanticipated demand, leading to greater price
pressure.

-Gasoline markets are fragmented regionally because air quality requirements
have led to numerous different formulations to meet varying standards. In
meeting demand for these regional formulations, called “boutique fuels,”
refiners lose flexibility to meet local variations in demand elsewhere,
leading to increased price pressure.

-With domestic refining capacity constraints, a greater proportion of gasoline
demand is being met with imported products. Foreign refiners typically
manufacture products designed to sell in the international market, not the
special product “boutique fuels” demanded by a significant share of the U.S.
market.

-Refiners have had increased costs in the past year to comply with new
requirements to limit sulfur content and to switch from the oxygenate
additive MTBE to ethanol.


This is what is actually going on. Let liberals swim in their baseless invective against Bush and his mythical, "oil buddy," Disney villain plot to plunder the world all they want. These are the facts.

 

[Diogenes]

Good analysis. Thanks for posting.

 

[LaMidRighter]

Good analysis. Thanks for posting.

I concur, it was a very good post.

 

[JustMyPOV]

I also agree that your post was thoughtful and full of interesting facts. This does not change that fact, however that the administration has done little-to-nothing to help alleviate the pressure on the market. The new standards that were brought to us by the Department of Transportation were a joke. They don’t even require today’s SUV’s to get the gas mileage achieved by Henry Ford’s Model T. I would think that with all of our technology, it wouldn’t be a particularly hefty challenge for auto-makers to rise to. Once again, however, the blatant corporate favoritism that this administration has become famous for shines through.

This is not to say that I blame the President completely for the energy crunch. Much of the fault lies with the American people themselves. There is no reason that we all can’t change our habits a bit and use less petroleum.

-JustMyPOV

 

[Diogenes]

This does not change that fact, however that the administration has done little-to-nothing to help alleviate the pressure on the market. The new standards that were brought to us by the Department of Transportation were a joke.

Do you think it is a proper role for the government to ration your consumption of whatever you want to buy? Do you know of any case (since WWII) where gasoline rationing worked?

They don’t even require today’s SUV’s to get the gas mileage achieved by Henry Ford’s Model T. I would think that with all of our technology, it wouldn’t be a particularly hefty challenge for auto-makers to rise to.

Actually, it's a very difficult problem. There is a reason that the Model T was nicknamed Tin Lizzie. The VW Beetles that were so popular in the fifties and early sixties have been illegal since Ralph Nader raised such a storm about safety concerns which could only be solved by making the vehicles stronger (and hence heavier). You can have good gas mileage, or you can have safety; not both. People who drive SUVs have opted for safety.

 

[Dezaad]

Do you think it is a proper role for the government to ration your consumption of whatever you want to buy? Do you know of any case (since WWII) where gasoline rationing worked?

He said nothing about rationing. You've put words in his mouth. He did mention, in so many words, some form of regulation. This is entirely different, and regulation is ALWAYS what is required if a community wants to enhance "The Commons", and spread the sacrifice made for The Commons equally.

I use the word "The Commons" in the broadest sense. In so doing, I am including energy independence as a component of The Commons.

If we believe that energy independence is in the public interest, and that it benefits citizens more or less equally, then it is a thing that ought to be required of, more or less, every citizen.

It is a false dichotomy to claim that safety is exclusive of fuel efficiency. It is also false to claim that the problem is overly difficult to solve. However, you correctly point out that comparing the Model T and modern vehicles is erroneous.

In any case, if we decide that energy independence is necessary for the general welfare, then we should tax those who do not conserve. Those who do not conserve can thus make their share/contribution to energy independence by using the tax money collected from them to subsidize research to make producing alternative energy more efficient (and thus more competitive compared to foreign sources of energy).

This type of regulation is the least disruptive to market processes, and forces everyone to contribute to restoring/maintaining American economic independence. It is also likely to be alot cheaper in the long run than taking over or defending portions of the Middle East in order to ensure the flow of energy.

 

[Androvski]

Petrol/gas prices in my local garage 96p per LITRE=$1.76USD

 

[Diogenes]

He said nothing about rationing. You've put words in his mouth. He did mention, in so many words, some form of regulation. This is entirely different, and regulation is ALWAYS what is required if a community wants to enhance "The Commons", and spread the sacrifice made for The Commons equally.

You can ration openly and honestly, or you can do it under the guise of "regulation." In either case, you are interfering with the freedom of the citizenry to spend their money as they please. It's interesting that you should bring up The Commons - the economic essay on The Tragedy Of The Commons makes interesting reading although it comes to a much different conclusion than you do.

 

[SKILMATIC]

Yeah the answer to this problem is taking iraqs oil. But noooooooooooooo you liberals would have a hissy fit and say the only reason we went to war was for oil. Well quite frankly I dont know about you but I hate paying over 3bucks a gallon.

Or we can all transfer to using hybrids.

 

[ALiberalModerate]

Yeah the answer to this problem is taking iraqs oil. But noooooooooooooo you liberals would have a hissy fit and say the only reason we went to war was for oil. Well quite frankly I dont know about you but I hate paying over 3bucks a gallon.

Or we can all transfer to using hybrids.

Or the government could increase CAFE standards and put out an energy policy that weighs its spending and investment towards efficency, conservation and alternative fuels instead of give aways to the oil industry.

 

[scottyz]

-Unexpected demand growth in China;

China's economy was growing at the same rate(8% a year) during the Clinton admin. but gas was cheaper. Why is this?

This is what is actually going on. Let liberals swim in their baseless invective against Bush and his mythical, "oil buddy," Disney villain plot to plunder the world all they want. These are the facts.

Bush wasn't in the oil business for 25 years? Condi didn't serve on the board at Chevron for 10 years? Cheney's Halliburton didn't drill oil wells and work with Iraq? Donald Evans wasn't a member of the board of Sharp Drilling, an oil industry contractor? Lawrence Lindsey wasn't a consultant to Enron on issues relating to natural gas? Lewis Libby didn't hold substantial stocks in energy companies such as ExxonMobil, Enron and Texaco? Karl Rove never held substantial stocks in companies such as Enron, Royal Dutch and BP Amoco? Nah.. I'm sure they all gave up their interest in Oil when they signed on with Bush. :lol: :lol:

 

[Dezaad]

You can ration openly and honestly, or you can do it under the guise of "regulation." In either case, you are interfering with the freedom of the citizenry to spend their money as they please. It's interesting that you should bring up The Commons - the economic essay on The Tragedy Of The Commons makes interesting reading although it comes to a much different conclusion than you do.

It takes more than just reading The Tragedy of the Commons in order to understand what the commons really is, how to properly maintain it, what should be a part of it, and why it exists. It serves as a beginning to understanding, however.

The Commons are the societal benefits that are created, maintained and/or owned by the people in common. Such as public lands (as you've brought up, indirectly), which is where the term originated. You seem opposed to The Commons. Secure borders are part of The Commons. The ability to protect our national interests militarily is part of The Commons. Should we, in ridding ourselves of The Commons, do away entirely with the publicly maintained military? Or do you have a market solution for having a military as well? :roll: Having a military prevents people from spending their money as they wish, does it not?

Perhaps they'd rather not spend their money on a military, thinking that someone else will, and spend their money on, say, a new car loan. Which IS precisely what The Tragedy of The Commons suggests they will do.

In the same way, people will generally not contribute to energy independence, if it is more expensive to them personally than if they do not do so. Which is ALSO precisely what The Tragedy of the Commons suggests they will fail to do.

Obvious in the story of The Tragedy of the Commons is that the public will not commit to preserving a public resource, or commit to creating one without it being required of everyone, by law, to do so. Implicit in the story is that if it is desirable for a thing to be managed well, and it need not be part of The Commons in order to be so, it is probably best that it be made into a private asset. Owners preserve things better than the public when they can be given property rights over a thing.

Which ALL serves to prove my point. Energy independence is not a thing which can be parceled up and owned by individuals. IF energy independence is desired to be made part of The Commons, it is a thing that will have to be developed and maintained (at first) through some form of regulation.

The suggestion I have made is the kind of regulation that is most like a market solution, which I believe is usually the best solution. And you are right, to a certain extent I am saying that if the nation determines that energy independence is worthwhile, then people will not be able to spend all their money as they see fit. Just like they are not able to spend all their money as they see fit when we decide as a nation that clean air or clean water is in the national interest. Or a military.

Unless you are a pure libertarian, then you must admit that some things have to be maintained by telling people they can't spend all their money as they see fit, and that some things are worth having that require telling people that.

If you are a pure libertarian then life will be nasty, brutish and short when you succeed in getting what you want.

 

[Diogenes]

Unless you are a pure libertarian, then you must admit that some things have to be maintained by telling people they can't spend all their money as they see fit, and that some things are worth having that require telling people that.

Agreed. It's called "taxes" when the government decides how your money gets spent, and we have a political mechanism in place to determine the amount of the tax and where and how the money should be spent. Some of us remember the terrible (and unnecessary) fuel shortages in California when the government was in charge of allocation, and recognize that a free market does a better job.

 

[Dezaad]

So. If the free market always does a better job, then:

If we as a nation decide that the majority of us want energy independence as part of the commons, so that we don't have to operate our foreign policy with a view to preserving access to foreign energy sources, how do we get the market to yield this result?

 

[Canuck]

A handfull of companies own all the refineries and the under capacity is built in to assure that shortages will occur from time to time that spike the gas and oil prices generating alot of extra profits for those very few companies

Saudi Arabia has offered to build refineries in the US for FREE
and just recently Kuwait offer to build them
the companies and the govt. said no why?
because they are comfortable with the built in under capacity

Alot of people always think that companies are good and that they have america's best interest at heart LOL
they are raping you and you open your legs wider

 

[Diogenes]

If we as a nation decide that the majority of us want energy independence as part of the commons, so that we don't have to operate our foreign policy with a view to preserving access to foreign energy sources, how do we get the market to yield this result?

Allow more drilling. Allow more refineries to be built. Re-examine the Clean Air Act to continually review whether the boutique fuel requirements are really necessary and doing what they are supposed to do. Allow nuclear plants to be built. Revise the Endangered Species Act to prevent frivolous lawsuits from the environmental Luddites.

 

[Napoleon's Nightingale]

You can ration openly and honestly, or you can do it under the guise of "regulation." In either case, you are interfering with the freedom of the citizenry to spend their money as they please. It's interesting that you should bring up The Commons - the economic essay on The Tragedy Of The Commons makes interesting reading although it comes to a much different conclusion than you do.

So explain to me why Microsoft was broken up but the government allowed the oil companies to merge into 5 big oil comapnies. You can also explain why the price of gasoline goes up, in some areas, more than 65 cents overnight and why it's cheaper in some areas than in others. You'll also need to explain why gasoline is so high when there are huge tanks full of it that aren't part of the reserves that are just sitting around full of gasoline instead of being used. The oil companies make billions of dollars in profits per quarter. That fact doesn't jive with the information you've posted.

 

[nkgupta80]

So explain to me why Microsoft was broken up but the government allowed the oil companies to merge into 5 big oil comapnies. You can also explain why the price of gasoline goes up, in some areas, more than 65 cents overnight and why it's cheaper in some areas than in others. You'll also need to explain why gasoline is so high when there are huge tanks full of it that aren't part of the reserves that are just sitting around full of gasoline instead of being used. The oil companies make billions of dollars in profits per quarter. That fact doesn't jive with the information you've posted.

right, no company really has a country's welfare at heart. These oil corporations are too global to care. They onyl go where the money is. And being well managed companies, they would take the long-term into consideration. The only reason a corporation's goals would meet the goals of the US or another country is because the country's long-term success goes hand in hand with the corporation's long-term success.

 

[Napoleon's Nightingale]

By the way Diogenes..Iraqs oil production is at 100% again so maybe you can tell me why we're spending billions of dollars sending them oil.

 

[scottyz]

So explain to me why Microsoft was broken up

Microsoft was never broken up. That decision was reversed after Bush took over.

 

[Diogenes]

So explain to me why Microsoft was broken up but the government allowed the oil companies to merge into 5 big oil comapnies. You can also explain why the price of gasoline goes up, in some areas, more than 65 cents overnight and why it's cheaper in some areas than in others. You'll also need to explain why gasoline is so high when there are huge tanks full of it that aren't part of the reserves that are just sitting around full of gasoline instead of being used. The oil companies make billions of dollars in profits per quarter. That fact doesn't jive with the information you've posted.

Microsoft was broken up? Like AT&T? Into what?

Gasoline is cheaper in some areas than in others because of transportation costs from the refinery. The retail price can go up 65 cents overnight because the sale price of gasoline is not based on the cost of the gas in the station's tanks, it's based on the cost to refill those tanks tomorrow or the day after. Retail gasoline dealers only make the big bucks when the price is going down.

Under the Clean Air Act, EPA has passed regulations that require something like 40 different formulations of gasoline for various areas of the country, and this can result in Nevada (for instance) having plenty of gasoline that they can't ship to California because it doesn't meet the standards for California.

If you really want to bring the price of gasoline down (eventually), push for a nuclear power plant in your town, and a refinery to produce gasoline from the oil that the power company will no longer be burning.

 

[Napoleon's Nightingale]

Gasoline is cheaper in some areas than in others because of transportation costs from the refinery. The retail price can go up 65 cents overnight because the sale price of gasoline is not based on the cost of the gas in the station's tanks, it's based on the cost to refill those tanks tomorrow or the day after. Retail gasoline dealers only make the big bucks when the price is going down.

HA. Then maybe you can also explain why gas is $2.88 down the street from my apartment, $2.98 downtown, and $2.73 just a few blocks away. And yes, they're all the same company. You can also explain why I saw a station change the price twice in one day from $2.37 to $2.65 then to $2.73. The price of shipping is already factored into the original price as is the gas tax. Neither the price of shipping or the gas tax have changed but the price of the gasoline itself has. Your summation doesn't account for the billions of dollars in profits the oil companies make every quarter nor does it explain how the CEOS of the companies make millions of dollars per year.

 

[Diogenes]

HA. Then maybe you can also explain why gas is $2.88 down the street from my apartment, $2.98 downtown, and $2.73 just a few blocks away. And yes, they're all the same company. You can also explain why I saw a station change the price twice in one day from $2.37 to $2.65 then to $2.73.

As I explained, the price is set by the individual retailer based on his expectations of the cost of filling his tanks.

The price of shipping is already factored into the original price as is the gas tax.

Not where there is government interference. We had a silly "fairness" doctrine here in Montana for several years, until the people had a chance to vote on it. The doctrine required all gas stations in the state to sell at pretty much the same price. I've got three refineries within 15 miles of my home, and I could buy gas from those very refineries more cheaply in Spokane (500 miles away) than I could from a station across the highway from the refinery.

Neither the price of shipping or the gas tax have changed but the price of the gasoline itself has.

Repeat after me: Expectations of what it will cost to refill the tanks. Expectations of what it will cost to refill the tanks.

Your summation doesn't account for the billions of dollars in profits the oil companies make every quarter nor does it explain how the CEOS of the companies make millions of dollars per year.

The independents and franchisees from whom you buy your gasoline are not getting fat. Independent refineries have also traditionally been an industry with very low returns. There is money to be made producing the crude oil, for those who can do it in volume, but the startup and operating costs are huge also. The proper measure of profitability is not so much the net profit for a few quarters as it is the net profit as a percentage of sales (and/or ROI), tracked quarter by quarter for five or ten years.

 

[Napoleon's Nightingale]

As I explained, the price is set by the individual retailer based on his expectations of the cost of filling his tanks.

Not where there is government interference. We had a silly "fairness" doctrine here in Montana for several years, until the people had a chance to vote on it. The doctrine required all gas stations in the state to sell at pretty much the same price. I've got three refineries within 15 miles of my home, and I could buy gas from those very refineries more cheaply in Spokane (500 miles away) than I could from a station across the highway from the refinery.

Repeat after me: Expectations of what it will cost to refill the tanks. Expectations of what it will cost to refill the tanks.

The independents and franchisees from whom you buy your gasoline are not getting fat. Independent refineries have also traditionally been an industry with very low returns. There is money to be made producing the crude oil, for those who can do it in volume, but the startup and operating costs are huge also. The proper measure of profitability is not so much the net profit for a few quarters as it is the net profit as a percentage of sales (and/or ROI), tracked quarter by quarter for five or ten years.

Exxon-Mobil, Chevron-Texaco, BP Amoco-Arco, Phillips-Tosco and Marathon own over 2/5 of domestic production and the profits rose by 146% between 1999 and 2000 alone. Theres no explaination to account for that other than price gouging on the part of these oil companies. Instead of using it to request permits and build more refineries they're pocketing the money and doling it out in dividends thus fixing the market by keeping the price high.

 

[Diogenes]

Exxon-Mobil, Chevron-Texaco, BP Amoco-Arco, Phillips-Tosco and Marathon own over 2/5 of domestic production and the profits rose by 146% between 1999 and 2000 alone. Theres no explaination to account for that other than price gouging on the part of these oil companies. Instead of using it to request permits and build more refineries they're pocketing the money and doling it out in dividends thus fixing the market by keeping the price high.

That's certainly no evidence of gouging. Oil is a global commodity, and the companies you mention are global companies. If India and China bid up the price of crude, those companies are not morally or legally required to forgo a better deal just for your convenience.