So says this Business Week opinion column that, as far as I can tell, lays high gas prices squarely and almost solely at the feet of oil company profiteering.
What do you think of his arguments? They strike me as too simplistic somehow, but damn if I can express why.
I’m pretty skeptical of the article. First, it appears the author’s day job is local AM radio car show host. He also writes a car column in the Sunday edition of the Fort Worth newspaper. Now, I know in a perfect world, there’s no such thing as “appeal to authority” in science, that is, if you can back your claim up with experiments, you don’t need a fancy degree. In economics, models are often the best we can do, but Wallace doesn’t appear to have any models. Unless he can produce a model explaining how gas prices work, I’m not impressed.
He also talks about gasoline and oil reserves, misusing the term in the case of oil. “Reserves” refers to oil in the ground; he means stocks, as in the stuff in tanks. It may be true that stocks are historically high; I haven’t checked the numbers. However, many, many other factors influence gasoline prices.
He seems to have a problem with market speculators, but speculators are necessary for an efficient market. I think this is a non-starter.
The biggest problem I have, however, is the title: There Is No Gas Shortage. This is essentially a meaningless statement, as everything is in short supply. We would all like to have more gasoline, shoes, airplanes, and iPods. Even statements like “demand outstrips supply” are meaningless without an explanation. I will also point out the “profiteering” used by the OP doesn’t really have any economic meaning, and the OP needs to clarify what s/he means. IF the OP means that oil companies are colluding to fix prices and withhold supply, that would be a reasonable statement that could be evaluated.
It’s so easy to make this sort of accusation, but it’s not correct. Oil companies are not “profiteering”. They are subject to the same market forces as everybody else. They pay more for their stocks, they pay more to refine it, and they make the same profit as a percentage of income as they always have. They are not stealing from anybody, unless you want to assert that they are the ones responsible for driving the market sky-high, in which case you’ll need a cite because extraordinary claims require extraordinary evidence.
The entire article is a hodgepodge of intellectual dishonesty starting with the title. There is no oil shortage in the sense that we are limited by the amount we can purchase. In fact, the price paid in the United States is dirt cheap compared with other industrialized countries. The fact that John Q SUV is paying a lot for energy is due to the SUV and not the price of gas.
We will see increases in the cost of oil because the United States uses more than is produced nationally and therefore subject to the spot price on the world market. The same goes for gasoline. We currently use more than can be refined so it is imported as well.
If the author believes there is profiteering in the oil industry than he should advise the readers of Business Week on the best investment strategy.
I have found something weird for the last few years. Gas, from as early as I can remember (mid-80s), until early 2002, was about a dollar, give or take 25 cents. Then it promtply doubled, and that’s been the baseline ever since, with it frequently shooting over $3 per gallon. I think the last time I filled up was $3.65. What else has tripled in cost in the last 6 years?
I’m not saying this is due to some nefarious big-oil collusion. I haven’t the foggiest idea why it’s happened. I just find it weird.
Partly psychological, but demand can jump erratically. These kind of curves (jump!, stabilize, jump!) happen in business, and often in reverse too. The jump usually demonstrates where demand went up and supply took longer to get there. But also cheaper* stocks of oil were exhausted, and more expensive ones came online, etc.
*Strictly speaking there’s no real limit on the amount of oil we can get ahold of, especially including the renewable versions. The limits are on oil at different stages of price-efficiency. There’s a lot of it which is just more expensive to get. The first oil companies were in upstate Pennsylvania; they often drilled holes and just grabbed hundreds of barrels of it as it shot up like a gewser. But near-surface reserves are rare now because they were easy to grab: low hanging fruit.
Ok, I understand how a LOT of oil now is purchased on the spot maket (instead of on long-term contracts), hence, we see lots of day-day price movements for the price of crude oil. But how does the retail price of gas change so quickly? You buy so many million barrels of crude-then you refin it into gasoline, and ship it to the retailers 9gas stations)-this takes a few weeks. The gas station I go to (an independent) changes his prices practically every day! How does this happen?
The other day I saw a chart of a report, from a local planning office, that said that **in constant-dollar terms ** oil is where it was c. 1980, and it actually went down to a lower plateau in the later 80s-early 90s, rose slowly in the late 90s, then really picked up fast in the mid-00’s. They blamed partly the Iraqi unpleasantness, and partly the same alleged source of the recent spike in prices of EVERY major industrial-input commodity: the expansion of the Chinese and Indian economies. Because, y’know, the primary reason-for-being of Exxon, BP, Citgo and Shell is NOT fueling American cars, believe it or not.
The fascinating thing is, oil companies have been making money hand over fist for decades, but it only becomes a huge *OMG it’s a conspiracy * thing when it involves some painful threshold re: gasoline or heating oil in the USA. And it’s a symptom of short memories, because the same howls of pain happened when gas went to $2/gal, and before that to $1/gal: anyone remember the talk about “obscene profits” * and proposals for a “windfall profit tax” * around the late 70s? We just got used to it.
Anyway price-of-gas-at-the-pump was for the longest time an unreliable indicator of the real oil market, since US price-at-the-pump has been long held back, often significantly lower than almost any other major industrial nation, as a reflection of political considerations (e.g. keep taxes low; OMG we can’t give up big V8s, think of the jobs in Detroit; this is the USA goddammit who cares if those socialist foreigners ride bikes and trains; etc.).
Now, the companies decide that in the current scenario, they will revamp their pricing structure and find out what the market will REALLY bear for motor fuel in the USA. Well, that hurts, and it sucks to be me or you (or a low-fare airline, or a small trucking company), but what are we supposed to do? Go Hugo Chavez on them and forbid them to profit beyond we think is reasonable?
ralph124: the price of the gas at your station rises immediately (or seemingly so), because from what the guy charges you today is from where he has to get the money to pay for that more expensive gas two weeks from now.
The current jump in prices started after the Iraq War, not in 2002. Other commodities haven’t tripled in price (actually, it’s doubled, not tripled; it’s been quite awhile since gas in the USA was a buck a gallon) because they aren’t the only major export of a place with a lot of war.
There’s also the fact that big markets like China are using more oil, of course. But let’s be honest; if the United States trumped up a reason to invade Colombia, coffee prices would go up a lot.
Bush went to Saudi Arabia to talk to the Opeckers about increasing production. That implies quite clearly that they had the option. Meaning they could control the supply and they had more available.
I vividly remember gas being under a dollar a gallon in late 2001.
That sounds like a deceptive chart, since gas prices spiked in 1980 as a result of the Iranian revolution and ensuing hostage crisis. Having the same gas prices (in constant dollars) as in 1980 is in no way a good thing.
Here’s a longer view, which unfortunately only takes us through 2006. Note the 1980 spike.
Yahoo Finance - Stock Market Live, Quotes, Business & Finance News Note ,this article says Opec will not raise production. That means they can ,at will. They are holding back to keep profits high.
Couldn’t find US averages but California prices were well above $1 in 2001.
And here’s a long-term view of crude oil prices in constant dollars. Unfortunately, this chart only goes through 2004. (Again, note the spike in 1980.)
If you extended that chart to 2008, you’d see that we are now above any historic spikes, even adjusted for inflation.
Well,
Here’s a chart with historical gas prices. Select 6 years as your time frame (as far back as it goes) and Charlotte, NC as your area (where I lived at the time) and you’ll see that gas was $1.16 in summer 2002.
Kinda. Opec controls a lot less oil than it once did as a portion of world supply, and its discipline has fallen off as a result of hatred between members. However, Venezuala (another oil producer) has had big issues and isn’t producing as much. I think they’re not necessarily investing in infrastructure enough; it may have a negative return at this point.
In December 2001, regular gas averaged $1.09 across the United States for the month, so it’s possible that it was lower than a buck where you live. It even got down to $1.06 in the third week. That was the lowest price between March of 1999 and now.
Pretty much. You can take oil profits and use them to get more oil in the future or more government today. Hugo has chosen the latter.
And I see he is sponsopring an Indy Car today, under the PDVSA name, not the Citgo name which I find odd.
The price of oil has not only gone up as a result of the fighting in Iraq and other political and demand factors, the value of the dollar has gone down in the world market.
The falling dollar is a big reason why gas is so expensive, and any commentary that fails to account for this is necessarily flawed.
