The Volokh Conspiracy

Right, when I was a teenager, gas cost $0.35 per gallon, the minimum wage was $1.00 to $1.25 per hour and I earned the minimum wage and drove a V-8 that got 18mpg at best. Now gas costs ten times as much and I earn 50 times as much and drive a car that gets about 30mpg, so as far as I'm concerned, there is no gas problem, just a common-sense problem.

Marcus1,

I think that there are no impediments to your getting into the bonanza by buying up some mineral rights, doing the exploration, performing the drilling, mounting the pumping rigs, building a refinery, and establishing a marketing and distribution network. These guys were smart enough to do all that when gas was dirt cheap. If I were you, I'd invest in coal and nuclear, the only practical hopes for a future without petroleum.

If one of the big sellers started consistently undercutting the others, and the others failed to respond in turn, don't you think that seller would quickly start getting a lot more sales?

The reason they don't do this isn't because nobody would even notice. It's because the other companies would then have to do the same thing. The result would simply be lost profits for all of them.

If there were more sellers, though, then this would be inevitale. But there aren't. I'd call that a lack of competition.

I'll second what Mr. Zarkov said.

The IRS allows $0.445 per mile. In a rather guzzly 20 MPG car at $3/gal only about a third of this is gasoline.

-dk

I don't know how it works in the rest of the country, but here in Texas we usually have three grades of gas, 87, 89 and 93 octane, usually priced something like $2.79, $2.89 and $2.99. I'd like to get the names of those dumb enough to pump the 89 octane instead of mixing the other two grades, if indeed 89 octane is called for. I'd add their names to the my roster of the certified fools who are religious or carry insurance.

Without following Adler's link, I have to interject here that the profit margin in retailing gasoline is very low. As such, retailers have very little flexibility in pricing. At higher levels (refining and extraction)< the profit margins are higher. But, as we are dealing with a highly fungible commodity, there is little incentive to discount, in order to attract additional business.

Gasoline prices, like most other retail prices, follow a "rockets and feathers" pattern of response to oil prices. However, just because retail prices are slow to fall when oil prices do, that does not mean that retail gasoline markets are uncompetitive. It's more a reflection of the inelastic demand for gasoline.

Most retail prices follow a rockets and feathers pattern of response to oil prices? That's a rather dubious proposition.

I have never seen a very good explanation of gasoline price movement vis-a-vis oil price movement. It seems to me the explanations there are are some combination of uninformed, silly, or conspiracy theory with an occasional bit of reality mixed in.

Why do retail gasoline prices go up? Two main reasons: 1. the wholesale price of gasoline goes up or is expected to, and 2. the retail business likes to make a profit.

Every retail proprietor would like to raise prices all the time in order to make more profit, but no retail proprietor wants to lose too many sales by reason of his higher prices so that his profit goes down too much. The later restrains the former.

If the wholesale gasoline price increases, then the retailer must increase his prices pronto to avoid taking a loss. If the price of oil goes up sharply, the retailer expects the wholesale price will go up sharply and thus he must increase his prices pronto to avoid taking a loss.

Depending on the retailer and his wholesaler, and the wholesaler's suppier(s), the prices may respond more quickly or more slowly than another chain of supply. Not all prices are always the same. In my area, Shell is always higher than everyone else, Costco/Kroger/Safeway/Racetrack gases are sometimes the same, sometimes different from each other, and are sometimes higher, sometimes lower than the major oil companies. Chevron and Exxon are sometimes the same, seldom is either as high as Shell, and are sometimes lower or much higher than Costco/Kroger/Safeway/Racetrack.

Why do retail gasoline prices go down? Two main reasons: 1. the wholesale price of gasoline goes down, and 2. the retail business likes to make a profit.

Those two are actually related. If the wholesale price goes down, the retailer can make more profit at the same price - the retailer likes that. But if the retailer lowers his price a little, he can get more business - less profit per sale, but more sales equals more profits.

Why does the retail price seem to go down slower after sharp decreases than it goes up after sharp increases? Two main reasons: 1. in the event of sharp changes, the retailer is unsure whether the price having sharply increased, then sharply decreases, will not sharply increase again, thereby hanging him out to dry with more costs and less profit than if he kept the price relatively steady. 2. did I mention retailers like to make profits - the slower the retail price goes down, the more profit the retailer can get as his costs go down more rapidly. It is a fact of the business, however, that some retailer will start making bigger increases to try to get more sales and more total profit, then other will have to adjust downward accordingly.

The price of gasoline is also a function of local area competition - whose stations are on the other four corners of your intersection? How far down the street is the high volume independent retailer?

The inelasticity of gasoline prices is, it seems to me, a function solely of 1. driver usage patterns, and 2. driver vehicle choices. If sufficient drivers alter their driving patterns so as to reduce usage, then demand decreases, supply increases, price goes down. If sufficient drivers choose more efficient vehicles for the same driving patterns, then demand decreases, supply increases, price goes down. Both of those, however, are not so easy to change.

The only "oil company cabal" is that of OPEC and OAPEC who meet to set production and price targets. National oil companies, which is to say state owned oil companies, own some 75% of world crude oil production. The stock market traded oil companies used to control the world, but have not, at least since the expropriations of the 1960's and 70's.

The only theory on which to base an antitrust claim is "conscious parallelism." Which is to say, even though nobody from one company talked or communicated to the other in any way, even though there was no evidence of signalling, just because prices moved similarly there was a illegal pricefixing conspiracy. It died a well deserved death.

As a general proposition, it would be good to remember:

"gas" is an ambiguous term, gasoline is what you put in your auto tank, natural gas is what you burn in your hot water heater. "Oil companies" produce and sell both.

Exxon and Mobil are one company now. Exxon the former Std Oil New Jersy, Mobil the form Std Oil New York

Chevron and Texaco are one company now. Chevron the former Std Oil California, who also ate Gulf and Unocal. Texaco the former The Texas Company.

British Petroleum ate Amoco (former Std Oil Illinois), Arco, and Standard Oil Ohio.

Do your HHI's, as the FTC and DoJ did for each of the mergers, and note the assets required to be sold as a condition of approval.

So basically, all problems result from environmental regulations?

Pretty much, yes.
At the risk of repeating some of the points in the linked article, here's my own take on the reasons for gas prices.

1: 'Seasonal Blends' It's 'Enviro friendly' to create gasoline that burns at it's best under certain driving conditions. Supposedly. Yet, it does cause supply restrictions, given point 2, which is a limited refining capacity. Re-tooling this limited capacity to create these blends every few months, costs the refineries millions every year. And they actually have to stop making gas while the production line is shifted to the new blending, thus making supply/demand even worse. Where do you think that cost difference goes? Thank you, un-American left for forcing this enviro-wacko nonsense on us. If the Democrats were really serious about lowering the costs of fuel, don't you think we'd see them eliminate this enviro-wacko madness?

2: Limited refining capacity: We have not built one new refinery since 1976.Our current systems are running at around 95%, despite the gyrations of the different blends we're forcing though every few months... see point 1. Worse, we're losing some of the refineries we now have online because they can't deal with the regulatory load placed on them in the name of the 'environment', and the outrageous taxation on the investors in those companies and the companies themselves, al of whom make such systems possible. Thank you, un-American left for forcing this enviro-wacko nonsense on us. If the Democrats were really serious about the cost of gas and heating oil, don't you think they'd get serious about eliminating the mountain of red tape and impediments we're up against in the task of increasing our refining capacity?

3: World demand: The third world, along with places like China, for example, are seeing their energy demands increase. It's interesting to note that as such they're not working under the same environmental regulations nightmare we are here in the states and thus their gas prices are far cheaper. Wonder why manufacturing jobs are moving to China, and what is responsible for such shifts? The cost of energy being lower there is a large chunk of the deal. Thank you, un-American left for forcing this enviro-wacko nonsense on us. If the Democrats were serious about the cost of fuel, don't you think they'd call for our *adding* to the world supply? Which is a nice tie-in to;

4: Lack of domestic drilling: We have oil here in the US; lots of it, but the usual suspects won't let us drill for it; ANWR, for example would be turning out about a million barrels a day. Think that'd help? Remember, Bill Clinton vetoed drilling there, and the Democrats in Congress blocked the idea when Mr. Bush re-proposed it more recently as a part of his energy bill. Thank you, un-American left for forcing this enviro-wacko nonsense on us. If the Democrats were serious on this topic, don't you think they'd be willing to allow us to drill for our own oil?

5: Taxes: Not only are we dealing with tax levels amounting to as much as 70 cents per gallon in many states, particularly in the left-leaning north eastern states, but we're also paying a very heavy tax burden when is placed on the oil companies, and everyone in the delivery process... all of which adds to the cost you and I pay at the pump.... Because they pass it along as a cost of doing business. If the Democrats were really serious about lowering the costs, don't you think they'd lower the taxes both on the oil companies and direct taxation on the buyers at the pump.. Both of which come out of your wallet?

6: The growing world economy; More or less a good tie-in to point 3... As the World economy recovers from Clinton, we're seeing increasing demands and somewhat shorter supply. This is normal in an economic growth pattern. But this wouldn't be a problem, but rather a blessing, had the rest of the factors not been in place. And all the rest of the factors are directly attributable to the left.

Remember that when you go to the pump, gang. You're paying for the snail darter. Doesn't it feel good?

Bithead,

I think you missed my point, which was: if you mix equal parts of 93 octane and 87 octane, you get 90 octane at the price of 89 octane; or you can mix two parts 87 and one part 93 and get your 89 octane for less. I used to sell lots of belly-button brushes to housewives who couldn't add, much less subtract, multiply and divide. Any preacher or insurance salesman knows that you only have to buy a list of Baptists, Catholics and other such reality-crippled folks to ensure your future. Once you have that list, you will never again need to beat the bushes for suckers; you will be able to return to the same suckers again and again to sell the newest fad, whether it be a new Windows OS, a new translation of the bible, a multi-fuel car, a Medicare drug plan or a war in the Mideast.

Bithead's post is an example of what I said earlier:

It seems to me the explanations there are are some combination of uninformed, silly, or conspiracy theory with an occasional bit of reality mixed in.

1: 'Seasonal Blends' It's 'Enviro friendly' to create gasoline that burns at it's best under certain driving conditions. Supposedly. Yet, it does cause supply restrictions, given point 2, which is a limited refining capacity. Re-tooling this limited capacity to create these blends every few months, costs the refineries millions every year.

The problem is not the seasonal blends per se, it is the geographic areas they apply in. There are over 10 different EPA districts, each of which has had required a

different

blend of gasoline. That means that the gasoline blend mandated for Chicago cannot be sold in, just picking randomly, St. Louis, or vice versa. That means if there is one refinery in the St. Louis district that makes the St. Louis blend, and it must go down for maintenance or an upset, guess what, there is no alternate refinery, and the blend cannot be imported into St. Louis because it was unique to that area.

Refineries do not have to be "retooled" to produce seasonal blends. But the product delivery systems, tanks, pipelines, truck terminals must build up "new season blend" while still distributing "old season blend". And that costs money in making sure standards for both are met and in dual inventory costs.

2: Limited refining capacity: We have not built one new refinery since 1976.Our current systems are running at around 95%, despite the gyrations of the different blends we're forcing though every few months... see point 1. Worse, we're losing some of the refineries we now have online because they can't deal with the regulatory load placed on them in the name of the 'environment',

The number of US refineries has decreased by maybe 50% since the the 1970's, but total refinery capacity is higher. There are fewer refineries but they are larger, more efficient, and cleaner.

There are two reasons there have been no new refineries: 1. permitting issues - refineries can't be plopped down just anywhere, they have to have acces to supply, distribution, populations etc. Nimby. 2. Refining profit margins have been really really bad for most of the last 30 years. The price of oil crashed in 1984, and did not get "high" again until 1998 except for a brief spurt in 1990-1. There was no rate of return that justified a new refinery economically.

One of the problems with limiting the capacity we do have to what we have are refinery emission standards and the requirements for gasoline and diesel products. Instead of producing more gasoline, capital expenditures have been huge to, for example, remove benzene from gasoline, remove lead from gasoline, remove sulfur from gasoline and diesel, remove MTBE from gasoline and use ethanol instead. Money spent that does not increase production, but only makes what there is cleaner.

3: World demand: The third world, along with places like China, for example, are seeing their energy demands increase. It's interesting to note that as such they're not working under the same environmental regulations nightmare we are here in the states and thus their gas prices are far cheaper.

Some of the lower price, if there is a lower price, is from lack of US environmental restrictions. How much is state subsidy. The Chicoms are net importers of crude now.

4: Lack of domestic drilling: We have oil here in the US; lots of it, but the usual suspects won't let us drill for it; ANWR, for example would be turning out about a million barrels a day. Think that'd help?

No, it won't, unless the ANWR oil is prohibited from export out of the US, and import duties are placed on other import oil. Increased ANWR production in the absence of those two requirements merely increases world supply, which lowers price, which stimulates demand. Net - no effect.

5: Taxes: Not only are we dealing with tax levels amounting to as much as 70 cents per gallon in many states, p

State and federal gasoline taxes are not an enviromental issue.

6: The growing world economy; More or less a good tie-in to point 3... As the World economy recovers from Clinton, we're seeing increasing demands and somewhat shorter supply. This is normal in an economic growth pattern. But this wouldn't be a problem, but rather a blessing,

This is merely incoherent.

Bitmap

We're both arriving at the same thing, here; limiting the number of required blends. While I want to eliminate the nonsense outright, you apparently speak to limiting their number. At least a step in the right direction, if not totally effective.

You appear not to understand the cause of problem. If the cause of the problem is the number of boutique districts, then the remedy is to reduce or eliminate the number of boutique districts so that gasoline becomes fungible nationwide. Once gasoline become fungible nationwide, seasonal changes, spring and fall, become irrelevant to price.

The cause of the problem is the boutique blends, not the seasonal change. Otherwise, there would not be problems with gasoline within districts, within a season, if refinery and pipeline systems have problems.

Eliminating the seasonal change, does nothing to remedy the problem with the boutique blend areas.

I submit the fastest and likley the cheapest way to deal with the issue is to use former military bases as sites for refineries... sites which the locals have no control over... viola' no more NIBMY issues.

What was it I said? Did you pay attention? I'll repeat it for you:

refineries can't be plopped down just anywhere, they have to have acces to supply, distribution, populations etc.

You are saying, let's plop them down where we happen to have military bases.

Nonsense. When Prhudoe bay oil started making it's way to the rest of the world, US prices dropped. That's because oil is fungable. The deal here is that this is a global supply issue. And by the way, the usual arguments about how ANWR won't be in production for long and be defeated with another look at Prhudoe bay, which we were told wouldn't run for 10 years. So far it's run 20 years, and most of that, at around twice the production rates intially predicted.

When did Prudhoe Bay oil production start, and when did it start making its way to the rest of the world? Answer me those.

If you want to reduce US oil prices, you must do either or both of two things, as I said: reduce world oil prices - but reducing world oil prices increases demand which then increases price - that's how the market works. The other thing is to isolate the US market from the world market and increase supply in the US - but increasing supply decreases prices which increases demand which raises prices again.

You cannot escape the market.

6

: The growing world economy; More or less a good tie-in to point 3... As the World economy recovers from Clinton, we're seeing increasing demands and somewhat shorter supply. This is normal in an economic growth pattern. But this wouldn't be a problem, but rather a blessing, had the rest of the factors not been in place. And all the rest of the factors are directly attributable to the left.

This is, as I said, incoherent. The world economy was not "destroyed" or adversely affected by Clinton. Demand has increased dramatically because, at least, of China and India demand and economic growth, and the safety margin between available production capacity and demand is dramatically less. Additionally, there are major production areas of the world that are now much less reliable than they were in the 1990's, Venezuela, Persian Gulf, Nigeria, at least.

Economic growth is generally a good thing. That is about the only thing you got right. The rest is incoherent.

Remember your homework assignment:

When did Prudhoe Bay oil production start, and when did it start making its way to the rest of the world?