Gas Prices
Can someone explain to me how gas can be $2.15 per gallon on Tuesday and by Wednesday morning rise to $2.25? I just don't get it. Is demand really that high on Wednesday, Thursday and Friday? Or, is that just some myth that we use more gas, so they have to raise prices. I get supply and demand, I took economics, but gas isn't the same. Case in point, if demand is high for an HDTV, the store can charge premium price for it because he only has so many to sell. I just wouldn't buy the TV while prices are high. But, gas, I don't have a choice. I need gas to get to work, the store, church, etc.
Well, I'm just complaining, as I filled up on Tuesday and didn't have to pay the $2.25. I do have a new strategy for gas purchasing. When I see a low price, I fill up. That way I can usually ride out the weekend's premium price.
But that's just me.
God Bless
Well, I'm just complaining, as I filled up on Tuesday and didn't have to pay the $2.25. I do have a new strategy for gas purchasing. When I see a low price, I fill up. That way I can usually ride out the weekend's premium price.
But that's just me.
God Bless
posted by Julie at
5:35 AM
5 Comments:
Oil is bought and sold (traded) on the worldwide mercantile exchanges in New York, Tokyo, Beijing, Berlin, London, etc, (similar to pork bellies, orange juice concentrate, gold) by the barrel based on future price speculation (fundamentally predicting future out-of-the-ground supply and refining capacity). That worldwide network of exchanges helps explain overnight consumer price changes.
Your assumption is that gas prices reflect real-time daily consumption, which isn't the case.
Consider this - the reason gas prices peaked so high early this past summer was in anticipation of the hurricane season (which is from August to mid-October) and over angst in the Middle East. In that case, traders were speculating on the future supply of oil, not the daily demand. The reason we've seen a 70 percent drop in prices is because there were no hurricanes that disrupted refining capacity and traders at the time did not anticipate significant out-of-the-ground disruptions (based largely on the quelling of violence between Israel and Lebanon-based terrorists).
You also have to keep in mind that the United States isn't the only consumer of oil - large, rapidly growing economies in China, India, and parts of Eastern Europe also consume copious amounts of energy.
You also need to remember that 90 percent of the world's oil reserves are controlled by state-owned corporations that can manipulate the point-of-origin price any way they want, largely dictated by the whims of - in many cases - despotic or socialized regimes (Chavez, Putin, former Soviet Republics).
So no, Republicans are not in cahoots with Big Oil to manipulate prices, profits, and elections.
The $8 bn tax breaks that Big Oil received were to spur reinvestment in new technologies and exploration - and their profits reflect the positive effect of those tax breaks. Becaaauuuse, they've been able to expand refining capacity (squeezing more gas out of a barrel of oil) and expanding known reserves, thus stabilizing prices while mitigating the effects of state-owned operators and their erratic behavior.
While we may balk at the sheer size of their profits, as opposed to their operating costs, their profit margins (about 9%) are really below average for the private sector.
Addendum to the last paragraph:
The size of the profits - again, keeping in mind the profit margin which is revenue minus cost - should show in stark contrast the very SIZE of the energy sector.
Think of it this way... If $10.49 billion for ONE QUARTER of the year seems like a lot, consider just how big the energy sector must be (transacting tens of trillions of dollars a year).
Publius,
Thanks for the well written input. I very much appreciated it, even if I still don't get how gas prices can change so quick over night. But, then, I don't understand how milk because cottage cheese either. :-)
How does the price OPEC puts on a barrel fit in? I think I read that they were going to cut production by quite a few barrels. Won't that make the price jump? And, how does it happen so quick?
God Bless,
Julie
To answer your question re: OPEC...
OPEC doesn't set price, however they have a great deal of influence with the manipulation thereof.
Because they represent the majority of oil-producing nations, they have a quasi-monopolistic control on oil trading prices (remember, OPEC is a cartel).
When oil is trading at, say, $60/barrel, they will curtail production (shipping oil to market). Because they control so much of the crude oil production, this has the effect of pushing prices back up (depending on how much they scale back production) of raising prices. If oil prices continue to climb they will subsequently produce MORE oil at the higher price to reap more profit.
But as you know from your economics classes and the laws of supply and demand, the act of producing MORE at the higher price will consequently push prices back DOWN to equilibrium. However, even OPEC realizes that they cannot manipulate prices with impugnity - they, too, are subject to the laws of supply and demand (albeit to a lesser degree, because the true benefits of a free market are mitigated by cartels like OPEC).
The US usually responds to threats of cuts in oil production with our own threats of releasing oil out of our own strategic reserves to mitigate the increases in gas prices (in effect, we increase the worldwide supply of oil and thereby driving down cost). Or the US consumer will use less, or non-OPEC nations will increase supply to take advantage of the higher prices(like former Soviet republics).
To answer your question re: immediate price changes...
The price you pay at the pump reflects the price that the gas station owner will have to pay to REPLENISH his supply of gas in the underground tanks, not the price he paid for the gas that's already in there. So, if he paid, say, $2.00/gal (he's charging you $2.xx to reflect the nearly 50% markup he has to impose on you the consumer to pay taxes, fees, regulations, etc..) for the gas in the tanks in the ground, but has to buy gas tomorrow from market at $2.50, that's what causes the near immediate increase in the price at the pump.
Because, if he sold you the gas in the ground for the same price (markup not included) he bought it for, he would not be able to afford to REPLENISH the supply tomorrow, because he cannot afford the new price.
So finally, to answer your last question...
The near-immediate price jumps the reflect the prices of futures at market and the cost to replenish inventories.
The best explanation I ever heard about why things are the way they are happened on Meet The Press when Tim Russert interviewed several Big Oil CEO's.
BIG OIL INTERVIEW
MR. RUSSERT: But you could make less profit and lower prices at the pump if you chose to.
BIG OIL: Not, not in, not in an open market. Because if, if you reduce your price in an open market, demand goes up and you, you, you run the risk of running out of, of oil and gas. So I think the issue here is not, is not price issues. The solution here is to look at how we can increase supplies.
In other words, Big Oil has taken it upon themselves to establish the price of gasoline high enough to force some level of conservation on Americans. People react to high gasoline prices by using less, thus artificially increasing the supply without finding a new source. That they are reaping huge profits at our expense is incidental.
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