Cross Posted @ The Disputed Truth & other Progressive Blogs
It seems like every year at this time we go through the same gas shortage/high prices phenomenon. This has been going on since I first started driving in 1976, I started late! Did I miss something? I know I am not very smart and don’t claim to be, but why has this problem not been adequately dealt with in 30 years? Why have we allowed the big oil companies to year after year present this same lame excuse for price gouging? Why have our elected officials not been able to or been unwilling to tackle this national problem?
I was in Chicago over the weekend and gas prices were 4.00@gallon. Is it just me or does that seem inordinately high? If every year the oil companies know there will be a larger demand in the summer, why do they not make allowances for this? Can it really be as simple as it is being reported by the media for why gas is so high? I have never been one to accept the status quo so after a little investigating this is what I found out.
There’s no doubt that the recent refining share has gone higher, although the share has been higher in the past. (Note: With a higher gasoline price, the spread in dollars is going to be higher even with a constant share.) A quick glance reveals obvious seasonality in the refiner’s share. To get a feel for how we stand relative to the same time in previous years, Figure 4 presents the refiner’s share over the current and past three years.
Figure 4: Share of gasoline prices associated with refining, in 2007 (blue), in 2006 (red), in 2005 (green), in 2004 (black), in percent. Source: Energy Information Administration.
The graph confirms the impression that the refiner’s share has been particularly high for this time of the year, although there have been higher peaks, specifically in 2004.
One bit of policy analysis. The Washington Post article quotes the assertion that the wide spreads are due to policy inaction over the past six years. There is indeed a temptation to ascribe the wide spreads to cartelization, or opportunistic shutdowns of refineries (and I won’t rule either of those out — remember Enron and California in ’00-’01…). However, high spreads are also consistent with the view that there is no coordinated reduction of supply and the view that if conservation had been encouraged over the past six years (instead of tax breaks for SUVs), the spread would be smaller. That’s because theory predicts that the greater and more inelastic the demand, the greater the resulting price-cost margin.
So one way of thinking about what policies could have mitigated the crack spread is to consider both demand management and supply enhancement. The Administration until recently focused almost solely on the latter.
Basically what is happening is that the oil companies which not only import oil, they also refine the oil, and then they sell the gasoline that is refined from the oil are always looking for ways to increase profit margin. The profit margin in the actual price of crude oil is pretty much stagnant; it is built into whatever the market will bear. All oil companies pay about the same price for crude so there isn’t a lot of room for individual price change, except on a conspiratorial cartel level which the author seems to brush off with little desire to explore. As usual we fell to grasp the obvious in our search for some farfetched analysis of why things are the way they are. The answer is usually something simple; in this case it is; big oil companies wanting to maximize profits at the expense of a captive consumer. It is a known fact that even with gas prices spiraling; demand has not diminished and it does not diminish due to what we drive and how we drive.
I have never understood why no one has ever investigated the link between the American auto industry and big oil. Is it just a coincidence that when the price of gas is at an all-time high the most popular vehicles are SUV’s and other large vehicles? We must not fall for the old scam of “it is a consumer driven market”, the consumer will buy what is presented to them. If there were no SUV’s would consumers demand them? I find it interesting that we have an energy policy that does not deal with two of the most important components of the issue. The fact that we have been sold vehicles that are energy inefficient and that our gas policy is being set by a few giant energy conglomerates. It doesn’t seem to matter who is in power or who is in office, the oil companies keep making money. And we the consumer, keep filling the coffers of those companies despite the hardships it is causing.
Truth is not only violated by falsehood; it may be equally outraged by silence. – Henri Frederic Amiel