Why has the price of gas gone up?
Posted by Super G on April 22, 2006 - 9:42am
Topic: Economics/Finance
Tags: crude oil, futures, gas prices, grandstanding [list all tags]
There is a pretty good piece on MSNBC that explains how gas prices are set. It is written in a "FAQ" format and does quite a good job of breaking this down for the layperson. I think some of the material may have actually creeped into a report on Friday's NBC Nightly News (link to netcast—not sure if it works).
Ultimately, the price of gas prices is set by the price of crude oil on the futures market, which (I believe) is out of the hands of grandstanding politicians. If this much gets through to the public, I'd say we've made progress. The problem however, is that, in the eyes of the public, we've just replace one mystery (gas prices), with another (crude oil prices).
The fact is that the futures markets is opaque. Sure, financial news services come up with narratives about why the futures do what they do, but they never really cite any evidence for them. Does anyone, even the wise readers of the The Oil Drum, really know the true reasons why crude oil prices are high? Is it because the supply of crude oil is diminishing? Anxiety over Iran and Nigeria? Mere speculation by investors? Chances are that it's all of these things. Investors do things for all kinds of reasons, and they certainly don't act as a monolithic block.
http://www.theoildrum.com/tag/gas_prices (this link will take you to all of our stories on gas prices which go in to a lot greater depth than this post...)
Update [2006-4-22 13:3:39 by Super G]: As pointed out in the comments, the switchover from MTBE to ethanol [as well as the annual transition from winter blend to summer blend] is also contributing to higher prices in the short-term.
Capitalism is based on speculation
Speculation is signaling that
there
is a problem in the oil market.
Wednesday last was the key.
Even at $70 the bbl, crude inventory
still dropped.
In Olden times circa March 2003,
supply would overwhelm the markets
at a certain price, The markets
just had to discover what that price
was.
Today, in Copper, as well as oil,
there is no price that will bring this supply to market.
It is time to remind everyone of my long standing prediction that there will be physical shortages of gasoline this driving season. Gas lines and closed gas stations.
The reason events are about to move fast regarding all petroleum supply is that the market will turn a potential geological-based peak oil scenario to a virtual cut off of supply. Extraction cannot keep going at some slowly reduced rate, mostly because the refining and marketing sectors cannot operate under negative-growth conditions very long. Enter petrocollapse and the unraveling of the global growth economy. Chaos and futile attempts at social control will only delay the time we all get together and resume growing food locally and meeting our other needs from our bioregions.
No more fruit from Chile or techno-toys from China.
http://www.culturechange.org/cms/index.php?option=com_content&task=view&id=45&Itemid=2
The above from Jan Lundberg-yes the one from Lundberg Survey
The US Empire will go to war before
admitting that Supply can no longer meet demand.
The usual scapegoats are being trotted out.
James
Why not? Oil will become more valuble as the supply shrinks, there will be plenty of recources to empty oil wells while unneded parts of the infrastructure defaults.
"Extraction cannot keep going at some slowly reduced rate, mostly because the refining and marketing sectors cannot operate under negative-growth conditions very long."
Why Not? I'm genuinely curious as to why you think this. Unfortunately its just one unsubstantiated assertion supported by another unsubstantiated assertion, and doesnt explain anything.
Why cannot refining and marketing operate under 'negative growth conditions' for very long? A recession (aka negative growth conditions) has never meant the end of things as far as I can remmember. How do you characterise ' not very long'?
COuld you flesh that that out as far an explanation, please.
First-What does "Negative Growth"(NG) mean?
It's a late 20th C term for "Contracting Economy"
Of course no one in the Main Stream Media
wants to say this, in fact will be carried off the
stage in a strait jacket before the term "Contracting
Economy " is uttered.
Second-Watch a financial channel or read the WSJ
and make a point of noting how many times you
see/hear the word "growth".
Third-My Point-for 100 years the US and World Economy
has been operating in the Age of Oil.
We only get growth from our growing use of oil.
No growth, then no investment, no investment, no returns.
In fact the only returns on investment will come from hoarding the commodity in question, hence Lundberg's
petroCollapse.
James
I have a colleague at work who confidently predicted yesterday that Oil prices would spike to $80 per barrel, then come down soon. His reasoning? The inflated price is ALL due to an Iran-fear induced bubble. Of course, he doesn't know what the hell he is talking about, but one doesn't want to be impolite....
Item (c) is important. There can be a decoupling between gas prices and oil if refineries cannot meet gasoline demand even if oil is available.
That is exactly correct. It would not surprise me to see oil and gasoline prices diverge, or at least change in the same direction, but by starkly different percentages. I know some people who are playing a spread between the two in the futures markets with this expectation (and have been making good money so far).
RR
- 47%: Cost of crude
- 23%: Federal, state, and local taxes
- 18%: Refining costs and profits
- 12%: Distribution and marketing, retail dealer profits
Indeed, the increase in crude prices may be obscuring more subtle things that are going on in the background.If true, then it is well within the reach of grandstanding politicians. After all, this says that the price of gas selling now has little to do with how much it actually cost to produce it. You've just used fancy words for what is price gouging to the public.
A Primer on Gasoline Pricing
That article probably has gotten more hits than anything else I have written. Nobody who responded in the comments disputed my arguments. It is very similar to the MSNBC piece (which everyone should read), but not as comprehensive.
In short, gasoline prices right now are being affected by falling inventories. Oil prices, which of course affect gas prices as well, are being affected by tightness in supply and demand, fear, and speculation. But brimming crude oil inventories suggest that the forces affecting oil prices are not exactly the same as the forces affecting gasoline prices. If we see oil inventories fall dramatically for 7 weeks in a row, and much more steeply than forecast, then we will have $100 oil in 7 weeks.
RR
December gasoline futures are trading at $1.95. 35 * $1.95 = $68.25 with zilch processing, refining, or transport costs.
What gives?
Really enjoy your expertise and excellent write-up, by the way.
RR
I think you might be confusing yourself by pricing out the yields in this way.
If you look at figures 1 (page 7) and 6 (page 9) in this document you can see how the gross refining margins for WTS (West Texas Sour) and Mexican Maya were calculated in August 2004.
Multiply this fraction by the cost of a barrel of oil and that will give you the portion of the cost that corresponds to gasoline. Then divide that by the number of gallons of gasoline you get from the barrel to get the price per gallon of gasoline due just to the cost of crude.
According to Barbara Meyer-Bukow of the Mineralölwirtschaftsverband (MWV - call it the oil sellers in short), consumption fell more than expected last year. Gasoline sales (Benzinabsatz - a bit tricky, but in this case, I would bet on them measuring sales in liters, not euros) fell 6.3% in the first quarter. And according to the article (without quoting sourcing), German refineries were more than 99% utilized (ausgelastet), and posted good/excellent earnings.
-------------------------------------
From another poster, alistairC (http://www.theoildrum.com/user/alistairC) -
OK so I've looked up some numbers for France:
Overall cost of energy increased 35% in 2005
Consumption of "essence" (=gasoline = benzin) down 6%
Consumption of diesel up 0.9%
Biofuels up 18% (off a very low base)
3% decline in private vehicle kilometers
1% decline in overall vehicle fuel sales
-----------------------------------------
What is interesting is to see how flexible German and French gasoline sales seem to be in comparison to what one reads coming form the U.S. Even more interesting, if German sales actually declined 6.3%, and German refineries are essentially running non-stop, I would guess that Germany / Europe is currently able to deal with rising crude costs a touch better, as they then turn around and sell the U.S. higher valued products, thus earning a small 'discount' in their total energy bills.
In my opinion, peak is here, and America seems to be about at the level of preparation which one would expect from a society which seems to be ruled by the idea that the market (or prayer) is the most powerful force in human affairs. How much have gasoline sales in terms of volume declined due to higher prices there? Of course, you can also see Jevon's paradox at work in the real world - conceptually, all of the 'excess' German gasoline / French was consumed by others who could pay for it.
But then, can the U.S. really afford to pay? At least in Germany and France, the price is too high, and people shift their behavior. Gas prices are not an obsession in conversation here, though the basic opinion at where I work is that the prices rises are essentially due to gouging, and American ineptness and stupidity in the Middle East.
The particular problem we face today is a shortage of ethanol. The reason this additive is needed is because of government regulations. The problem is that the switchover to ethanol was mandated before the production capacity was in place to meet the required demand.
This could have and should have been anticipated. It is no secret how much gasoline would be produced this month. It is no secret how much ethanol would be available. A shortage of ethanol was perfectly predictable (and was, in fact, predicted by many observers). The consequences are equally predictable and we are facing them today: spot shortages and extremely high prices. Gas hit over $4/gallon in my town today for full-service premium.
Government regulation is responsible for this problem and government could have prevented it. They should have phased in the rollover to ethanol over a longer period to make sure that production capacity would be in place. By mandating a sudden transition, government set us up for the situation we are in today.
Of course the last thing they want is to be held responsible, which is why we see all this posturing about profiteering and Chinese demand. Yes, high worldwide demand is an issue and would flow into high gasoline prices eventually. But the sudden and immediate problem we are facing today is due to government regulation. This is one cace where the finger of blame is very easy to point. Government should be held accountable for this fiasco.
The consumers are responsible in part for their lifestyle choices. Sure, the system makes is hard to live any other way but we are still responsible for our choice.
All hail Enron.
The sad truth is the government is often far, far more efficient that the market. If the goal is a stable society and not the enrichment of a few greedheads, then the government wins hands down. If your plan is to impoverish everyone and enrich a handful, then go with the market. This is not some sort of secret that either side is witholding from the rest of us.
All hail the no-bid contract.
Like the immigration issue. To stop illegal immigration, put the CEOs, human resources people, and stock holders in jail for three years with no parole and guess what? Problem solved. Why hasn't this simple solution been done? Business interests like cheap labor. It busts unions. It makes the rich richer. It drags down salaries across the board. It makes the rich richer. Do they care if the poor get poorer? No. The poor are less than human to them. So they kill the government, formerly the only real alternative the people had to prevent the creation of an unassailable upper-class.
All hail millionaire Senators.
RR
That said, it just seems laughable that as oil reaches $75/bbl, people are out there thinking of another reason for gasoline to be expensive.
What concerns me is that there is much media focus on the complexities of regional fuel formulation. This attention often carries a strong but unspoken suggestion that these complexities contribute to increasing the cost of motor fuel, which I'm sure it does. Nonetheless, these formulations are intended to minimise health and environmental damage (the details are not familiar to me).
I smell something bad cooking here.
How long until we hear a loudmouth pundit linking high gas costs to the "bureaucRATic" regulations on gasoline formulation? (note that this is a very US-centric post) How long until this becomes the reason of the day that gas prices are so high? How long then until a bill is buried in an invincible antiterrorism initiative repealing a large portion of gasoline formulation rules?
All in the name of cheaper gas. What politician wouldn't want to get behind that?
Do I sound paranoid?
High gas prices? BRING IT ON.
http://www.cnn.com/2006/US/04/21/feedback.gasprices/index.html?section=cnn_topstories
This was the comment on the CNN site that chilled me the most. Could there be any clearer statement of what the war in Iraq was all about? And it's unfathomable to me that anyone would see all the death in Iraq as "worth it" for cheap gasoline.
The reason why demand is so damn inelastic is becuse oil is so necessary for our economic system, from aviation to commuting to pharmiceuticals to seemingly cubic zirconium production. Oil is needed EVERYWHERE in our economy. Without oil, we would still be in the trees swinging around like fur-free apes. (once we lose resources needed for clothing, we will re-evolve to have fur again!)
I would say that you get the ultimate doomer award. I have heard people speculate that we may regress back to an 19th century lifestyle, but I haven't heard anyone speculate that we would regress back to Australopithecus's