Feathers and Rockets?

by Don Boudreaux on August 5, 2008

in Current Affairs, Energy, Prices

Here’s a letter that I sent a few days ago to the New York Post:

You favorably quote an analyst’s assertion that "motorists are getting
hosed" because prices at the pump have not fallen enough recently to
reflect the latest fall in oil prices ("Oil Drop Brings No Relief to
the Pump
," August 3).

Despite your seemingly supportive accompanying graph, this assertion is questionable.

First,
according to the figures in your own graph, oil prices today are 55
percent higher than in late September of 2007 (the starting date in
your graph), while gasoline prices today are 57.7 percent higher.  As
evidence of hosing goes, these figures are very weak indeed.

Second,
if we take a longer time horizon, evidence of hosing disappears
completely.  In 2004, for example, a gallon of gasoline retailed for
about $2.00 while a barrel of oil sold for about $33.  Today, oil’s
price is higher by 275 percent while gasoline’s price is higher by only
100 percent.

Sincerely,
Donald J. Boudreaux

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{ 19 comments }

Eric Jacobus August 5, 2008 at 1:41 pm

Many thanks for another great response to another misconception of our current "economic slump".

Bret August 5, 2008 at 2:01 pm

Do those figures (275% and 100%) take taxes into account?

Kevin August 5, 2008 at 2:24 pm

Unleaded gasoline is not crude oil and its value is not rigidly linked to the price of crude. Also, gasoline in tanks ready to be pumped into consumers' automobiles today is not made of oil to be delivered to Oklahoma next month. Byrne's premise is shallow to say the least. You didn't need to engage him on his terms.

Speedmaster August 5, 2008 at 2:26 pm

Good points. Too many fail to realize that the price of gas is due to supply and demand, not the cost of oil.

Mark August 5, 2008 at 2:54 pm

Don: thanks for raining on their doomsday parade.

All: back when you were in college, did you think of the journalism majors as the sharpest knives in the drawer? 'Nuff said.

SteveO August 5, 2008 at 3:47 pm

Due to background, I can speak very confidently about journalism students- the crop which produces the fruit. You would be frightened by the national associations and student and teacher groups.

Re: the topic. Don't forget that based on data linked to from a previous post that we also calculated gas mileage (therefore efficiency of using the gas we buy today) is on average 147% (in 2007) what it was in the mid 80's (1984 if I remember correctly).

Jay August 5, 2008 at 5:05 pm

Do you honestly expect journalists to understand something as complicated as a "crack spread" or that the people that are really getting "hosed" (assuming that prior profit margins accurately reflected risk) are the refiners?

A pre-req to being a journalist is having an IQ under 80.

BoscoH August 5, 2008 at 5:26 pm

We're kind of at a stage when journalists are beginning to learn that they should solicit the opinion of a trained economist when talking about financial things, rather than getting "both sides" from just the whiners who buy gas and the people operating gas stations who can only speak to retail conditions. A few thousand more public thumpings ought to solve the problem.

Adam August 5, 2008 at 6:58 pm

"if we take a longer time horizon, evidence of hosing disappears completely"

I think this may be the nerdiest thing I've read all year. :)

jpm August 5, 2008 at 8:50 pm

<>

BoscoH, maybe you should progress to the stage where you realize that the journalist writes the headline "X is terrible, women, minorities and the poor hardest hit" ; then quotes the "trained economist" from Berkley or the local Seven Eleven that can dovetail some populist trite with the headline.

It least you have finally ralize that global warming is a problem now.

Oh wait; I confused you with Don

BoscoH August 6, 2008 at 12:38 am

I think we can agree that there is a spelling shortage.

vidyohs August 6, 2008 at 9:19 am
vidyohs August 6, 2008 at 10:15 am

From my conversations with several independent gas stations owners here is what I am told.

They buy gas from the distributor at a set price per gallon which is not all that much lower than what you see on the pump. Their margin is razor thin and most will tell you that they make their money on the convenience store that virtually all gas stations have now.

If an independent sees he is running low in his storage tanks he calls and has them topped off at the foing price for that day of delivery. With full tanks of gas purchased at a set price, he must sell that gas at a price that assures that at a minimum he breaks even on the complete transaction costs. Which frequently means, in the era of rapidly changing pump prices, that he has a higher price than someone down the street that was fortunate enough to time his storage tank filling to allow him to sell at that lower price.

On the reverse side the guy down the street has the advantage of selling at the lower price but that advantage is generally very temporary as the prices at delivery to the storage tanks rise and fall in response to the distribution market. The distributors of course are responding to the market prices at the refineries.

There is nothing to keep a gas station operator from receiving a distribution at the lower price and to continue selling it at the old high price at the pump, thereby increasing his profit margin on that tank full of gas; however; competition teaches the lesson of "give your customer all the breaks you can and you'll keep their loyalty and business." Competition also teaches another lesson and that is customers aren't stupid and will figure you out pretty quickly, therefore, "Screw your customer and soon you'll screw alone."

It is a statement of extreme ignorance to claim in a normal non-emergency situation that any independent gas station operater is hosing his customers.

For what it is worth, that is my street level explanation of why gas prices at the pump do not rise and fall to the mysterious controller of gas prices at the pump, and especially they don't do so in unison.

Now if the independent gas station operator tops his tanks off the day before a hurricane like Katrina or Rita is a definite to hit his area, IMHO he is justified in raising his prices on the gas he has stored until sells out, perhaps even raising the price several times as his tank are depleted.

Why? And is it gouging? It isn't gouging as has been stated and explained here on this care numerous time. Once his tanks are totally depleted the gas station operator knows with certainty that it will likely be many many days before he is able to receive a delivery and even that may be rationed. Therefore, to the gas station operator and to his potential customers, the gas in the storage tanks have increased in value due to their expected scarcity.

In the meantime, as the hurricane blasts his area, he is not selling gas and may not be able to for a week or more, depending on the amount of damage to his station; however, his payments continue, rent, taxes, insurance, city services, loans, etc. etc. A good businessman makes his money while he can and prices his goods and services based on supply and demand.

Maurice August 6, 2008 at 11:10 am

There is always a lag between the time gas goes down on the futures/cash market and the time it goes down at the pump. Yes, sometimes it seems to go up a bit too quickly relative to the drops, but that has often been because of a price shock; the prices will shoot up overnight, and then start going back down quickly (albeit, not as quickly as they shot up). But that's what also happens in a bear stock or futures market. Slow declines punctuated by sharp rallies.

I think the same thing happens on the retail level. Fact is, prices ARE heading down, and are already ~40 cents off the recent price highs in the area I live. Futures prices are about 65 to 70 cents off the high, and I fully expect gas pump prices to keep ratcheting down, barring some new price shocks.

Jon August 6, 2008 at 7:07 pm

Ssssshhhh

Don't confuse them with the facts.

T L Holaday August 7, 2008 at 4:44 pm

In your next letter, point out that any motorist is perfectly free to hedge against his or her expsure to changes in gasoline price by executing the appropriate contracts on NYMEX, or purchase insurance against a price rise through the use of options on the future.

Those complaining at the pump should blame their own inexcusable failure to take simple precautions.

Crusader August 7, 2008 at 8:01 pm

In the meantime, as the hurricane blasts his area, he is not selling gas and may not be able to for a week or more, depending on the amount of damage to his station; however, his payments continue, rent, taxes, insurance, city services, loans, etc. etc. A good businessman makes his money while he can and prices his goods and services based on supply and demand.

Posted by: vidyohs | Aug 6, 2008 10:15:59 AM

I'm reporting you to the Commissariat of Truth. You obviously need to be "re-educated".

vidyohs August 7, 2008 at 9:16 pm

:-)
Best just try to shoot me.

Bury me as an unapologetic capitalist, individual, and freeman.

SteveO August 8, 2008 at 4:12 pm

Amazingly, exactly as economic thinkers might predict, the possibility of new sources of oil appearing, and the reduction of monetary inflation equal drops in the price of oil. More supply = lower price. More value in the dollar = lower nominal prices in dollar denominated assets.

http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/08/08/do0801.xml

http://www.breitbart.com/article.php?id=080808153356.tmuj1avt&show_article=1

http://www.breitbart.com/article.php?id=080808154416.uocmqv78&show_article=1

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