Strengthening Constitutional Self-Government

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Taking on Gas

Gas prices are falling fast. They might fall faster, or never have risen so high, in the absence of lots of stupid government regulations. Occasional NLT contributor Nathaniel Stewart reflects on this aspect of the issue in this splendid paper, co-authored with the always impressive Andrew Morriss.

Discussions - 14 Comments

Sorry, Steve, I don’t buy it. Oil hasn’t reflected true supply-and-demand curves in 3 years. Here’s what really happened: After the oil bust of the late 1990s, oil companies intentionally lowered production to create bottlenecks and shortage (thereby increasing price). Hoarding oil continued the run on futures markets, leading to ever-increasing profits. Now storage has maxed out in the face of strong production -- the dam has broken, at least temporarily. If you disagree, can you point to any real event in the last month that would account for a drop of 80 cents per gallon?

This isn’t a proper market dynamic. Yes, ultimately the market wins...there are just enough actors to make longterm collusion impossible. Yet, in the meantime, how many made fortunes in the last three years, and how many working families were forced to spend ever greater percentages of their take-home pay on gasoline. What we are experiecing now is recovery from market manipulation, although big oil will do what it can to prevent this recovery. $3 per gallon is might sweet...real easy for them to get used to that.

I think that paper probably has a point. (I haven’t read it as it is coming to me by email, except for the abstract.) I paid $2.09 in Maumee, Ohio, two days ago. It was ten to thirty cents a gallon more here, nearer to Cleveland, yesterday. In Bethesda, my son says that the price dropping below $3 a gallon is cause for rejoicing. There ARE different regulations and requirements for formulations of the fuel for different parts of the country. Different components of the "gasoline" additives have market forces at work, too. And, can the fact that vacation driving (and of people who DO take vacations in the summer, who did not because of gas prices? People drove around with big 5-wheelers, forsooth!) has wound up meaning more supply, right now, and dropping prices? Perhaps the refineries hit by last year’s hurricanes in the Gulf region are, at last, running at full capacity? That’s a big deal, refinery capacity, because the state and federal governments have been hostile to the building of refineries - nasty smelly, polluting things that they are. Lots of factors "manipulate" the market for such a product.

If "Big Oil" were as powerful in controlling market forces as you say, there would NOT be $2.09 a gallon oil in Maumee, Ohio.

Next thing you know, somebody is going to start complaining that Republican interests, Dick Cheney and George Bush’s ties to "Big Oil" are bringing prices down to influence the election. What, then, will happen when prices go up as refineries change over to creating heating oil for winter? Prices will go up again and said oil companies will be accused of gouging, again. That latter one happens every year and I boggle that no one ever remembers. Gasoline prices are influenced by far more than the price per barrel when the stuff first hits the market.

It’s not Big Oil that’s been driving up the prices, nor maintaining them. It’s the traders, who basically act as middlemen and think they can make a profit by betting on potential future risks. It may not be what you would consider a "proper market dynamic," but its pretty typical of when speculators get involved in a commodities market and bet on ever increasing prices. The market eventually does correct (just look at what happened to the Hunt brothers in early 80s).

The oil companies for the most part seem to be happy taking their profit as they add value by refining crude oil, then get it to market. Even when they are pumping oil out of the ground, they usually end up paying most of any windfall to the government that sold them the lease.

As for Oil Companies hoarding oil, that’s a canard that’s been shot down several times since the 70s. There just isn’t that much tankage available (I don’t know for sure, but if you added up all the crude oil storage tank capacity in the world, I doubt it would equal a month’s consumption worldwide). And speculating that you could buy a tanker of oil, then keep it on the high seas for a few weeks while the price goes up is just dumb... those ships have huge demurrage costs, and nobody is going to leave one sitting at anchor in hopes that oil will go up another dollar per bbl. Running one in circles in the ocean is even more costly. If you add in the value of risk that the price will actually go down instead of up, you can see a bet only attractive to really rich suckers. Oil companies are anything but dumb, and because they operate on a margin that would be suicidal for most any other industry, they know to steer clear of sucker bets.



I worked in Big Oil for a many years, and up to the mid-90s, about the only time the oil companies were reliably profitable was when we had government price controls guaranteeing a small level of profit. It is an extremely competitive industry, and is pervasively regulated to prevent collusion and price fixing (unless you happen to be an international cartel).

And finally, yes, the government imposed patchwork of fuel specifications across the country is a dreadful and costly abomination. The whole theory of regionally and seasonally specified fuel compositions is based on research done on cars without computerized fuel management systems. By the time the rules were being put into place, the cars whould would yield any significant emissions benefit from the specifications were only 10% or less of the vehicle fleet. I’m guessing that today these old cars are in the range of 1 to 5%. These needless fuel specifications have taken fungibility out of the fuel distribution system, resulting in inefficiencies, local gluts and shortages, and higher costs to the consumers. It would have been easier and cheaper to just impose an emissions tax on old cars.

My $.02


DaveK

I almost ran out of gas, waiting just one more day to fill up. I probably saved about a buck and a half for my efforts. What an idjit.

Next thing you know, somebody is going to start complaining that Republican interests, Dick Cheney and George Bush’s ties to "Big Oil" are bringing prices down to influence the election.

You’re too late, Kate, it’s already happened. I ride to court every day with several people, one of whom is a very sweet woman who happens to be a very liberal Democrat (a Public Defender). She’s very good natured and we tease her allot, but when prices first began to drop, she let us know that she thought the drop in gas prices was "very suspicious" and a Republican plot to influence the elections.

I agree with Peter S. that there won’t be a Democratic tidal wave come election day, unless, as I agree with David F., Republicans become complacent. I also anticipate Democrats will, wrongly, blame their election failures on a Rovian plot and ballot boxes stuffed with ballots, dripping crude (I know, I know, it isn’t done that way any more, but it is a fun mental image, isn’t it?).

DaveK, you speak as if Big Oil and OPEC have nothing to do with setting the preconditions for trading activity. There was a reason that this became a bubble...it’s my contention that is was intentional, in part a response to the oil bust of the last 1990s.

As for inventories, the U.S. has been running well ahead of average with 300+ million barrels in storage. The fact is, inventories have been near maximum, giving us the anomaly of being awash in oil and yet paying $3 a gallon for gas.

Nope, the traders took their money and ran. Big oil took their money and ran. The producers took their money and ran. All the while, the GOP and industry spokesman provided political cover by throwing one excuse after another at us. Lots of people made money, and lots of people lost money.

Hey, you market worshippers out there in NLT land, I thought capitalism was a win-win game?

The rumor that Bush is manipulating the oil prices to win the election is everywhere. But if they stay down for a couple of months the rumor will fade and the Rs will benefit. I agree with Steve H on the stupid regulations and am worried with dain about the huge profits badly hidden with political cover.

Lets see... manipulation of petroleum inventories to raise prices...

Nope, US Petroleum inventories (exclusive of the SPR) are essentially unchanged since 1990 (see here), at around 1 billion barrels. With US Consumption running in the range of 20 Million Bbls/day, thats what, a little less than two months supply. The SPR adds another 25 days in a pinch.


If someone was rigging prices by keeping petroleum off the market, it doesn’t show in the domestic petroleum inventories.

DaveK

Even your own statistics (which refer to all crude oil products, not just gasoline I guess) show increasing "stocks" in the last year...and they are near record highs...yes? Indeed, those records in the 1990/91 period were the run-up to the Gulf War. Moreover, and more importantly, if I were the CEO of a large petroleum company I wouldn’t hoard crude oil in the United States, where political scrutiny has been pretty high. It’s a big world, DaveK, and Big Oil is multinational (as I’m sure you know). Seems to me they have a lot of ways to create tight supply/demand graphs, thereby tricking traders into this nasty gambling scenario.

Regardless, I think perhaps we both agree that these price spikes have NOT been due to demand from China or India nor hurricanes nor Federal regulations. The old demand-supply calculus of neo-liberal economics simply broke down here...we can make up new "economic laws" if we want to, but the simple fact is that this "natural system" victimized millions and millions of people. Such behavior invites government intervention...and that concerns me.

dain, You forget that our federal and state governments took their taxes and ran.

If, IF, oil companies profits are up then they will be in a good position to invest in increased oil exploration and production that will keep prices down. Perhaps they will even find some place willing to allow another few oil refineries. Abdallah S. Jum’ah of Aramco says there is lots of oil in the world, (of course, the issue is always the expense of getting it out of the ground) which is good news. If he is right, then this is a stable commodity and dain might have a point.

The only issue I take with DaveK involves a question to him; when is the last time a new oil company entered the market? It is an extremely competitive industry, and is pervasively regulated to prevent collusion and price fixing (unless you happen to be an international cartel). is something I would have presumed to be true, and as such would constitute yet another barrier to entry into the market. But that would also lead to a relatively uncompetitive markeplace, if no new companies can enter the market. Isn’t Citgo owned by the Venezuelan government? Are their prices remarkably different than other oil companies? How do they fit?

Kate:

IIRC, a recent article I read quoted some statistics showing that the major oil companies (the Western ones, that is) were taking a large part of their so-called windfall and putting that back into exploration and production. I wish I could cite the source.

As far as competition is concerned, you are right that pervasive regulation is a reason that new players do not enter the industry. The other is simply that it would take vast amounts of capital to do so. Its not unlike automobile manufacturers, where only a few big players can stay in the game, but profits are still slim.

The main place that oil companies make profits is at the wellhead, where the markets set the price for crude oil, and you make money by keeping your lifting costs low. Refining has historically been a cost-pass-through operation, and has made little money for the industry. The low profit on refining operations is another reason that nobody is eager to build new refineries in the US. A lot of companies stay in the refining business because that’s how you finally get your product into a market where the public will pay for it.

Dane:

Your argument implies that US oil companies are shifting gasoline storage to crude oil storage. If only you knew just how difficult such a change is, and how costly to change it back to storage of any kind of refined product.


DaveK

I’m not suggesting that they are turning gasoline into crude oil, if that’s what you mean (is that even possible?). I’m simply saying that there are numerous ways of keeping crude supplies tighter than need be in order to 1) simulate scarcity, and 2) scare the futures markets. You yourself have noted that this is an oligopolic market...I’m only saying what millions of people suspect (not the conspiracy nuts, but the rest of us who are fed up with the excuse du jour. Even the experts say the there has been a strong disconnect between real demand and supply; denying that futures markets can be manipulated isn’t particularly reasonable, DaveK.

This is the kind of thing I’m suggesting. The petroleum industry has been able to dodge such allegations in the past, but reasonable people are making them.

Dave K:

While some companies might reinvest their tax "breaks" (I do not think they are breaks because people get angry over depletition allowances which is just depreciation, although the amount of per year allowance might be artifically high) that is certaintly not true across the board. Have you already forgotten about BP and the Alaska pipeline? They let the thing fall apart instead of doing the proper maintenance. A company that is so slothful it allows a major piece of equipment to fall to pieces probably is not a wise spender of its money.

Has the petroleum market been gamed? With that, I’d have to agree. I would place only a small part of the blame on the oil companies... When the price of crude oil goes up, their profits do indeed rise as well. Simply, they have no incentive to act against the market.

There are a lot of commodity brokers doing the trading in oil futures, and when supplies are tight, they tend to go into frenzy mode and keep jacking up the price to ensure that their customers have assured access to oil a few weeks/months down the road. This, in my mind, accounts for the bulk of the sky-high prices.

And if a large oil company wanted to play the "I won’t buy at this price" game, he has in effect cut himself off from the raw material he needs to make a product he can sell. Meanwhile, his competitors reap the benefits... tighter inventories of refined products mean that prices to the public go up. If they bought at the price their competitor refused, they’ll make a tidy profit. If, instead, everyone buys at the market price, they pass through the increased cost, then collect their small bit of added value.

The commodities markets have somehow enabled a risk-premium to become a semi-permanent part of the cost of crude oil. The problem with that entire approach is that in spite of huge prices for future oil contracts, if anything serious ever happened (for example, the Straits of Hormuz closed for 3 Months) the contracts would probably be voided due to force majeur. In essence, you are paying a premium for something that probably cannot be delivered were the actual crisis to happen. You might be able to sue the shirts off a few traders, but shirts don’t do a good job of filling gas tanks.

Bottom line, I really don’t believe that there is real collusion or conspiracy going on to raise oil prices, certainly not among the major international oil companies. Other folks may see it differently, but I’d want to see some real evidence of price manipulaton before I could begin to agree.


My last $.02 on this


DaveK

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