Gas Prices vs. Red and Blue States

Factual Questions
1

In the last few says, there have been a few news stories that have suggests more than %40 of those polled believe that the white house or republicans or both have some ability to control gas prices.

The convential wisdom is that if gas prices are lower than they have been, voters will be less inclined to view gas prices as an issue, which is considered to be more positive for the rebublicans.

Meanwhile, a number of my friends in the midwest (im on the west coast) are reporting that gas prices are significantly lower in the midwest (as low as under $2/gallon in someplaces) whereas, around here it’s just dropping below $3/gallon.

My question is this: are gas prices falling faster in red states than blue states? I’m not looking for anedoteal evidence anymore - I’ve heard it many times. Are there hard numbers somewhere? (a graph of redstate/bluestate to gas prices, for example)

Further if this relationship does exist, isnt there something massively illegal about it?

2

Not necessarily.

It’s not clear from your question whether you are really interested in prices levels or price changes. But it’s easy enough to see how petrol in a rural state could be cheaper than on the West Coast and how in the wake of a fall in crude oil prices, prices in the rural state would fall faster. No consipracy needed. We had a thread on a rural gas station recently where it became clear that land prices were important component of pump prices.

So let’s make up an example where the wholesale price is $5 litre today and unexpectedly falls to $4 tomorrow. Let’s further imagine that land rents are really high on the West Coast - say $5 a litre - and $0 in the rural state. Competitive market, no other costs.

Price on West Coast today: $10. Price tomorrow: $9. Price falls 10%.
Price in rural state today: $5. Price tomorrow: $4. Price falls 20%.

The price is lower and falls faster in the rural state because the crude oil part of the price is bigger.

3

There’s also huge differences in state gasoline taxes to take into account. They range anywhere from 10 to 35 cents a gallon.

4

Here are recent price averages, right from the horses mouth:
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html
It’s not a question of rural/urban, nor a question of state taxes. Refinery llocations/pipeline access and transportation costs are factors, but even that shoudn’t have any dramatic effect on short term flucuation. It certainly seems that there may be some manipulation going on, since pump prices appear to benefit this administrations political fortunes. I am always very skeptical of conspiracy theories, but continued coincidences have to make me wonder.

5

Then I am looking for the answer that factors those things out. Gas prices, minus state taxes, percentage gain or loss vs. state

6

Try poking around the link provided by the (ironically) apposite link provided by A. R. Cane. This one and this one are just a click from the page provided. You could even ask them a question here. Maybe you could ask them for a breakdown of this page by region - although you migh like to check out the “everything” .xls link down the bottom of this page.

7

I live in a state that is unambiguously blue, and is not going to be red any time soon. Nevertheless, gas prices had been falling steadily until yesterday. They bottomed out at about $1.96 and shot back up to $2.25 within hours.

8

I don’t consider $2/gal gas cheap, just cheaper then it had been, but a lot higher then it had been. But in no way is it cheap.

Highly democratic states usuaually have higher concentrations of population, and hence air polution problems, and are in general more likely to pass environmental laws that require more expensive blends of gas, which keeps price higher.

Mountain states, which tend to be more republican don’t sell the same grade of gas, as the thinner air allows lower octane IIRC ‘Super’ unleaded in the mountains have lower octane then regular unleaded at sea level.

RE: the tax isses, if it’s that democrats are more likely to tax, or higher populations require more taxes, you will see that in general state taxes are lower in republican states then democratic states.

I do think maybe that we will see a seasonal trend in gas for now on, sort of a vacation tax - since people take vacation in the summer.

9

FWIW -

Out here in Redder than Red Indiana - currently the home of $2.10/gallon gas prices - there has been an editorial and several letters to the editor of my home town paper suggesting that the recent fall in prices is being manipulated by the oil companies to keep their pal in office. Nothing so far to dispute this claim.

10

(breaking out the tinfoil for some of you in here…)

Gasbuddy.com has prices just about everywhere…good place to get current prices.

11

Or support it, as far as I can see.

12

If it were the case that Republicans were manipulating gas prices to win votes, wouldn’t it make more sense to do it in blue states, or at least borderline states?

Long Time First Time is in a non-borderline red state, Indiana. I’m in a non-borderline blue state, Illinois. Gas prices have been falling significantly in both. If it was a concerted effort, you’d think it would be a bit more concerted.

13

Also, the whole red state/blue state thing is only derived from presidential elections. The upcoming election is for Congress, and there isn’t always a corellation between presidential politics and Congressional politics. Look at bluer-than-blue RI, which has a Republican Senator (allbeit a rather liberal one).

14

Also, the idea that the White House can change (or significantly affect) gas prices is dubious at best. This was the topic of an interesting discussion on NPR’s morning edition this morning. The story, with a map concerning regional gas price differences, can be heard here: Curb Your Conspiracy Theories on Gas Prices : NPR

15

What can’t the Republicans do? Rig elections, kill Kennedys, make Bill spooge on Monica, and now gas prices? I think an earlier poster had it. If you look at state gas taxes in the “blue” states they are significantly higher than the national average of 28 cents. California, 41 cents, New York 45, Connecticut 36, Rhode Island 31. And the red states, Alaska 8 cents, Arizona 18, New Mexico 18. The real conspiracy may be that your local democratic state senator likes to tax you more that the red state guys does.

16

I don’t know who’s controlling the prices but it seems like one big mind-fu*k they’re pulling.

CEO-A:“Let’s see, prices are at $1.80. We could really make a lot of cash at $2.00 a gallon.”

CEO-B:“But everyone’s going to be outraged at $2. They’re going to take action.”

CEO-C:“Ah yes. But what if we steadily increase it to $3 a gallon. Sure it will really piss them off. Then when we drop it back to $2 they’ll call us heroes and thank us.”

CEO-A:“Excellent! And in the meantime look at all the extra profits we’ll rake in.”

CEO-B:“Yess! And no one will question the extra profits once we drop it back to $2 because that’s yesterday’s news.”

CEO-A-B-C: “Muuuwahh-haa-haa!!!”

17

When the price of a barrel of oil was below $15 back in 1997, did you note the “coincidence” of how that benefited the Clinton administrations political fortunes? :rolleyes:

18

That makes a good image but do you know who sets gas prices. Neither do I despite many attempts to figure it out. It seems like a reasonable question but I have never heard a semi-coherent answer to it. It is basically like the stock market in that everyone and everything sets the price and yet no one and nothing can do it directly and the system itself has properties that defy direct control.

Anyone want to give us a DETAILED account of how the whole supply chain works all the way to the point of a minimum wage person getting notification to climb up on that damned sign again? That is a key piece to this speculation.

19

The following is a simplistic supply chain from reservoir to gasoline or diesel dispenser.
First up though, throw out of your mind any thoughts that crude oil is a fungible commodity. This hopefully will become apparent throughout the following long tedious waffle.
Second up, brevity is something I have yet to learn. You have been warned, he did ask for detailed, but this is just a basic run through.

So broadly speaking you have 5 main phases…

Exploration and Production
Crude markets
Refining
Refined products markets
Retail sales

A major additional input to the crude market is pipe line and shipping availability.

Supply and demand between these stages is critical to the price and controlled by the markets between each stage. The supply and demand between these stages is also linked. Before we look at supply and demand we need to take stock of a few subtleties at each stage and who is involved

The cast of heros and villans of the piece are; (you are free to pick as you see fit)

International Oil Companies (IOC) These are the Exxon Shell, Anadarko, Murphys of the World. They may be vertically integrated from reservoir to dispensers types, or solely involved in the exploration and production side (the independents)
National Oil Companies (NOC) these are the Petrobras, Petronas, PVDSA, PEMEX, ADCO, Aramcos of the world. State controlled companies who also have access to state reservoirs.
Governments – These guys hand out the permission to develop resources. They may get their revenues through royalties, PSA (Production sharing agreements), corporate taxation or through their respective NOC.
Shipping Companies. These guys own the boats that ship the crude or refined products around.
Pipeline consortiums. They may own the pipelines as a single company entitiy or more typically as a joint consortium. Note countries that have pipe liens crossing them will typically charge a % per barrel (bbl) that goes through
their country, or take a percentage of the capacity.
Refineries. These are the guys who own the refineries. The refineries have widely varying capability to accept some crude types and produce some refined products. They may be owned by an NOC, an IOC or a refineray company (eg Valero)
Merchant and investment banks. These guys are trading on the futures and spot market and making money on volatility and crystal ball predictions, they are also very sensitive to stock levels.
Distributors, retailers and franchsies. These guys are buying refined product and selling it to you and I. The anecdotal stories I have heard is that they make more money off the Tuna salad sarnie I buy than the fuel I pay for are incidental to this page turning story.
Governments and voters setting tax and environmental constraints on fuel composition and emissions as they see fit. (I do not say this is a bad thing)
Captains of Industry needing fuel for logistics, electricity for industry and petrochemicals
Agriculture needing fuel and fertilizers, the fertilizer have alternate sources, fuel however, not so much.
Joe Blogs needing to drive around, heat his home and have electricity. These are seasonal (mild winters and driving season) but also tax and subsidy dependent. In Europe OECD countries the tax makes up such a large part of the price, the consumer is shielded from fluctuations in the base price. In many other global non OECD countries the governments have imposed price controls on the prices of gasoline and diesel thus the consumer does not adjust consumption based on raw product price. Thus price does not drive demand as much as one may think.
If I have left anyone out, my apologies.

So subtleties of supply and demand. Lest look at refineries and what they need to produce and what they have to work with.
Refineries broadly speaking have markets for
Fuel Oil – low grade low price used in shipping an power generation for large scale power plants. This is almost an unwanted by product these days.
Middle Distillates – This is your diesel and aviation fuel, alos know as gasoil or heating oil no2. – There is a growing market for diesel particularly in Europe due to its improved efficiency and seasonal demand for heating oil, particularly in the US northeast. The demand in China for diesel has dropped of significantly as additional power generation has come on line and people have been able to move away from back up diesel power generators to installed capacity.
Gasoline, what you put in your petrol engine. However there are significant regional variations on fuel quality, California is a notable exception with few plants being capable of producing the quality of fuel needed. For the rest of the world, state control of prices and taxes are key factors controlling demand.
Napatha, hydrogen and petrochemicals. I am sure you have all heard of oil being used to make everything in the world, also note some refined products are put back into the stream to upgrade other lower quality products. Thus products are high margin items. Gasoline has volume, petrochemicals have margin.

Your refineries fall into many different categories, hydroskiming (large fuel oil % produced) hydrocracking, distillation, coking plus reforming condensate splitting and upgrading trains. A refinery does not take all type of oil and produce all types of refined products. Certain refinery types take certain oil types, or produce a more in demand mix based on the input crude. Some refineries cannot process certain oil types. Some refineries cannot produce certain products or products of the required grade. Coking plants are good for dealing with heavy oil, condensate splitting are good for producing very low sulphur diesel. Some refineries cannot manage high sulphur heavy crude, some can, some can’t manage light or condensates or do anything useful with them.

So the refineries selling onto the spot and futures and contract markets are driven by what is in demand and what they can actually make. What they can make is dependent on their design (not changeable quickly if at all) and the cost and availability of the crude oil type available. Another factor driving the crude availability is deliverability. Refineries run in batches. This requires a stock pile of the correct crude available or an incoming shipment or an on stream pipeline. The shipping is a slightly ignored beast that can drive the spot markets. For example in july there was a large number of shipments from Russian ports, these boats will be at sea for a few weeks, and you may have a glut of oil arriving at refineries in august, but the boats have to get back, load up and sail again, so September deliveries are scarce and if the batching of the refineries is not smooth, this will drive up spot prices for the couple of shipments that will arrive in September thus drive market sentiments for the gasoline futures. This is also controlled by storage capacity at either end and also what the boat is carrying form one shipment to the next. A boat that caries a sour crude may then not be suitable to pick up a light sweet crude thus take some supply capacity out of the shipping market. (the flushing of VLCC tanks at sea is a major environmental nasty that needs to be jumped on, although bear in mind the downtime for proper flushing is going to push up your fuel price).
Pipeline capacity and availability also drives markets and have a real impact on the downstream supply issues. No pipe line to get it out fo there, no point producing. Clearly out of commission pipelines will reduce supply to refineries. Also note that many consortium pipelines will have a lot of different supplier crudes pushed down it in batches. A low quality sour Tengiz crude through the urals pipeline system will drive down the price for a follow on light sweet Azeri crude due to contamination, it may also reduce the workable volume.

Other significant impact on the supply side of crude is the availability of a shipping or pipe line route. A multibillion bbl field is of no use if an export route is not available. That export route also has to have the capacity to be able to pay off the upfront investment in the development of the field. A 50k bbl/day pipeline will not be able to pay down a 12 billion dollar investment in production development and building the pipeline.

So crude types. Oil may be fungible, but some crude types are more fungible than others. The raw crudes range from heavy to light plus condensates, Gas to liquids (GTL) and Natural gas liquids (NGL). Lets just put natural gas out of this. The API gravity (low is heavy high is light) really tells you how long the hydrocarbon chains are. Heavy is like tar, light and through to condensate is pretty much like your average desile. Add in to the crude the light/sweet variations which are related to sulphur content. Sulphur is not good, it is corrosive and makes a mess of the refined products.

So as mentioned above the refineries require certain crude types, and dependent on the refinery capacity (already determined by the consumer demand) there will be a demand on crude types.
An example of this is heavy sour Saudi crude. They have about 1 million barrels a day production shut in, because the refineries that could refine it are at capacity and have better quality supplies from elsewhere. So the actual production capacity available is important in determining the supply side to the crude markets, but the export availability and refining capability on the supply side is also just as important, and bbl for Saudi is not the same as a bbl from Angola.

So now we get to the crude production side. Here we have OPEC and non OPEC. Non OPEC supply is approx 52b milliob bbl.day, OPEC capacity is approx 28MMbbl/day with a spare capcity of 3Mbl/day. The key to supply side is OPEC controlling the spare capacity, which is driving the spot market. So whilst the majority of the supplies are from non OPEC countries. The flex and hence the spot market price is driven by the capability of OPEC to ramp up or down. Obviously the political stability and possible interruptions to supplier from Persian gulf OPEC members is a big factor, as is the current Nigerian supply issues and doubts over Venezulas ability to maintain current levels let alone raise then to the mandated 3.2MMBbl/day levels. Incidentally OPEC countries are making moves to improve their local gas markets (gas flaring restrictions actually control production rates in some areas) and OPEC GTL and NGL are not controlled by OPEC quotas. The upshot of this is GTL and NGL may supplant some oil products on the demand side.

So that is existing crude, remember the crude from a particular region may or may not have a market dependent on the refineries pipelines and boats available and the consumer market for that product.
The ability to develop a reserve is also a driving supply factor. There are many reserves available however;
IOC have financing and technical capability but currently have restricted access to develop those reserves.
NOC have other national drains on their budgets which lower their ability to exploit reserves and lack the access to capital markets to provide the funding.
NOC generally lack the technical expertise to develop some of the more technically challenging reserves (do note Petrobras and Petronas have suffered for a while through their nationalization campaigns, but are generally regarded to by getting well up to speed now so this is may not be a long term condition and may be a driving factor in how IOCs evolve)
There is an exceptionally tight supply f services to construct primary production and refining capacity (steel up 50% plus, engineering companies maxed out) and for well construction services. Typically on a well a substantial part of the spend is on 3rd part services. An example is a recent operator was paying 230K per day for a 5th generation rig, and the next day after the contract rolled over, was paying 520K per day for the same rig. This tightness in the market is going to stay for some time.
All that is without touching geological risk, exploration risks, errors in recoverable reserves etc

So in summary the chain driving the price at the pump is
Supply of crude reserves and the escalation development costs.
Future availability of crude supplies
Future availability of the right kind of crude
Future supply stability of the right kinds of crude
Stable supply routes (pipelines and shipping)
Refining capacity and production of the right type of products.
Cost of newbuild refining or upgrading of existing facilites
Demand for the various mixes of product based on the price plus local laws, subsidies and taxes.
The random wims and sentiments of the intermediate markets in all of that.
Driving demand, power demand and space heatinbg demand.
Retail sales – no idea but I do know many of the retailers are franchises rather than directly controlled subsidiaries of the IOC or NOCs.

If someone can figure out a way to control the prices and make a ton of cash, they probably deserve it. If anyone involved in the above is going to listen to a politician and try and manipulate the market, they will probably loose their shirt, and they deserve that as well.
cheers

20

Fine post, NaturalBlondChap.