It’s too easy to argue that, if rising gasoline prices are caused by corporate greed, then falling gasoline prices must be caused by corporate altruism — or at least by a decline in corporate greed. (I did once succumb to the temptation to pursue this easy route.)
But perhaps a better explanation for the recent decline in gasoline prices is consumer greed. Consumers obviously have become more greedy, thus explaining this decline in prices at the pump.
Compelling, no?
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What is even harder to swallow is that supply and demand pushed prices up 50% in a year… the supply was there to meet the demand.
I suspect the "corporate greed" in play was not in the board rooms of the petroleum companies, but resulted from unrestrained manipulators in the petroleum markets.
* dot.com manipulators
* housing manipulators (okay… maybe this is just general greed)
* petroleum manipulators
Knowledge is power; those who know how to manipulate, win… the rest of the world loses.
The falling prices are still motivated by corporate greed – under cutting the prices of competitors trying to steal customers.
Bt of course you already knew that.
Bruce Hall: Speculation is not manipulation. It is betting. Speculators lose far more often than the rest of the world.
Swimmy…
that's probably true, but they also have an impact on commodity prices while they are "speculating". Kind of like lemmings rushing toward the cliff. An insane upward momentum followed by a "correction". Such was the case of overpriced tulip bulbs centuries ago. The commodities change, but the process and mentality… and market disruption… continue.
Bruce, are you saying there's an "oil bubble?" Oil prices are going to crater?
Nicely said.
I learned ("learned") from the wife of a friend the other day that when gas prices go up, it's because the oil companies are greedy, but when they go down, it's because oil companies want a Republican elected to office.
Sigh.
There's so much ignorance in the world.
Conspiracy theories are easier and more fun the having a clue.
Those evil oil co's are artificially dropping prices to bail out the SUV makers, so that gasoline demand will once again rise, yada yada…
(TJIC, can I borrow your tag line??)
Eric,
Regarding the "crater"… one only needs to look at the trend line of prices to see that the run-up of 50+% was not sustainable given the supply and market conditions… just as the dot.com run-up was not sustainable.
So, if that is what you mean by "crater", then I guess I am saying that.
By the way, I wonder how many other "discoveries" of oil such as the recent one in the Gulf of Mexico will be announced. That knowledge was available prior to the run-up of prices, but there's no sense letting the word out when there is an opportunity to make a few extra bucks on an artificial situation, is there?
Greed was cured through the persuasion of government investigations into gas company profits and bonuses to executives. The government will expand their War on Greed by sub poena-ing the rest of us to testify before Congress. After that they'll tackle lust and envy. They will not pursue an investigation of adultery for some reason.
I think more economists and business reporters should point out that gas prices are based on the expect cost of replacing the gallon that you are pumping right now.
So when gas is $3 per gallon, you are actually covering the cost of a gallon of gas the next time the station buys gas, not the cost of gas on the wholesale market.
Another interesting point, there's a chain of gas stations in Minnesota that allow you, the customer, to buy gas on the futures market. When gas prices spiked to the $2.50 mark last year, those people had long range gas futures that came due for about $1.50 per gallon. Once gas prices come down again, it will be interesting to see if this idea takes off.
Neal,
Good post. You make such excellent points that it is hard to produce any type of comments about them.
Either you feel that the price increases and decreases of petroleum was the result of speculative greed/optimism/whatever and the decrease was simply a market correction that occurs when an imbalance exists… or you think that it was a reasonable reaction to the supply/demand equation.
I'm willing to be convinced that it was one, the other, or some of both, but not by poorly constructed "witticisms."
Bruce Hall: "I wonder how many other "discoveries" of oil such as the recent one in the Gulf of Mexico will be announced. That knowledge was available prior to the run-up of prices"
Mr. Hall, Chevron announced the Jack prospect in September, 2004. They weren't keeping it a secret.
What they could not announce then, of course, was the magnitude of the discovery. Determining the volume of recoverable oil in a field is not simple when the oil lies 29,000 feet below the drilling platform.
As Chevron announced on September 7, 2004:
"Further appraisal drilling is planned to determine the extent of the discovery."
The test of the appraisal well, the second well at the Jack field, was not conducted until the 2nd qtr of 2006.
Perhaps, Mr. Hall, you believe that Chevron dragged its feet, awaiting higher prices. If so, do you base that on some insider information about the petroleum industry? Does your knowledge come from employment in the energy industry?
The appraisal of an offshore oil field, including well drilling, generally takes 2 to 5 years. Very deep finds such as the Jack field just take longer. Chevron plans to drill an additional appraisal well starting in 2007, so the overall appraisal for Jack will likely require 4 years.
Chevron and its partners were not guilty of deception, Mr. Hall. They were simply doing their job as required by law, making announcements of known facts rather than presenting speculation – speculation that would have made them guilty of stock price manipulation.
If Andre the Giant could become a Bad Guy, then certainly the Oil Company Billionaires can turn good over night.
I wonder how the Greedy Ethanol Billionaires are doing these days. Since their subsidies are not going away anytime soon (if ever), they may still be doing OK.
Here's an excellent explanation of 2006 petroleum and gasoline prices from my alma mater:
http://tinyurl.com/epqy5
This May 2006 Wharton article points to the impact of switching from the additive MTBE to corn-based enthanol, as mandated by the 2005 Energy Act:
"Unlike MTBE-blended gasoline, ethanol cannot be transported by pipelines. Instead, it has to be mixed in at terminals and then transported by trains or trucks. Many refineries were not prepared for this switch, and disruptions to the supply chain occurred."
The article also notes that prices rose in the second quarter as refineries made the switch from winter blends to summer blends, which cost more to produce.
John,
Fair enough! That was basically a throwaway comment anyway. The timing looked odd, but I accept your arguments.
B
[If Andre the Giant could become a Bad Guy, then certainly the Oil Company Billionaires can turn good over night.]
I don't think Andre's turn to a heel was that surprising, especially given his French accent. Wasn't Hulk Hogan's move to the NWO a few years ago much more dramatic and shocking???
I work with someone who believes peak oil will end life as we know it by 2012.
When I pointed out to him this morning that gas was cheaper today than it was this time last year, he proposed that the oil companies are trying to give us a false sense of security so we don't know it's coming.
Apparently, the primary job of an oil company is to fool people. After all, the oil companies are spending billions to retrieve oil that doesn't really exist, covering up a crisis that would drastically raise the price of their product, deliberately lowering the price of that product below actual market value, and pointedly avoiding any search for massively profitable alternative fuels to replace petroleum products (it might tip us off).
And here all this time *I* thought the oil industry's purpose was to make money.
Silly me.
Reminds me once again of this wager:
http://en.wikipedia.org/wiki/Wager_between_Julian_Simon_and_Paul_Ehrlich