Thursday, April 19, 2007

Detroit Free Press

From my commentary in today's Detroit Free Press "Don't Buy Into Myth on Price Gouging:"

People assume that oil companies control gasoline prices, but the economic reality is that they don't. Even the biggest oil companies don't set prices for gasoline, diesel or jet fuel, any more than farmers set the price of corn, soybeans or milk. Oil prices, like prices for all world commodities, are set by competitive international market forces.

And yet oil companies are constantly accused by politicians of "price gouging," and a House Energy and Commerce subcommittee is pushing for federal regulation of oil prices that would end up harming U.S. consumers and increasing our dependence on foreign oil.

There is a great deal to be gained by allowing market forces to drive down gasoline prices when there are supply disruptions, and a lot to be lost if we foolishly enact price gouging legislation.


At 4/20/2007 11:35 AM, Anonymous Anonymous said...

I wouldn't think that the price of oil is tied completely to competitive international market forces. Doesn't OPEC have an influence on the prices as well?

At 4/20/2007 1:43 PM, Anonymous Walt G. said...

I spent some time researching this when I bought a diesel-powered truck and the historical price of diesel fuel went ahead of gasoline almost to the day I bought the truck (did they see me coming or what?).

In a nutshell, gasoline/diesel prices are about: 65% crude oil and refining; 15% taxes; 15% trucking, distributing, and wholesaling; and 5% retail. Or thereabouts.

I couldn't find any conspiracy (even though I tried very hard). But, I don’t claim to be an expert.

I guess the closest you can get to finding gouging instead of simple market forces at work is the way that the speculators and hedgers such as ICE operate.

There is a wealth of information for those who care to dig deeper with tons of data for analyzing. Crude oil supply and demand quantities, refined products, and consumption rates are readily available. Part of the problem is US refining capacity, but nobody wants to have a new one in their backyard or pay for them with increased prices. Even though prices are high in the US, they are higher everywhere else, so multinational companies don’t have a problem moving capital abroad. In short, we’ve been spoiled by historically low fuel prices, so we better get used to the higher prices in the new global market.

At 4/20/2007 2:09 PM, Anonymous Bob Wright said...

Walt g, you said:

"Even though prices are high in the US, they are higher everywhere else"

My understanding is that the only difference in the cost of a gallon (liter) of gasoline in the U.S. vs. Europe is the taxes added by government(s).

After all, a barrel of oil from Saudi Arabia costs the same whether it is shipped to the U.S. or Europe.

Oil is fungible, is it not?

Is my understanding not accurate?

At 4/20/2007 4:56 PM, Anonymous Walt G. said...

bob wright,

You are correct. Good catch. But, the price of a barrel of crude oil is only part of the problem. The price of the refined product is also higher overseas (gallon of fuel), so the oil companies’ profit margin is higher than in the US. Then, they put the higher tax on, too.

You also have US refinery capacity problems and the huge, huge demand for crude oil to turn into diesel fuel to run power plants in China and India.

China and India are booming, and both have terrible infrastructure (power grids). First, the power plants are diesel fueled (unlike coal and natural gas in the US). And second, electricity is out for sometimes ½ of the day, so every establishment (hospital, hotels, manufacturing . . .) has there own huge diesel-powered generator for back-up electrical power.

So, I guess the problem is two-fold. 1) Financial incentives and environmental concessions are needed for new US refineries, and 2) Increased competition for the pretty-much fixed supply of crude oil.

People might get mad at Exxon, but their profits are consumers’ gains if they will build new US refineries with the profits. The last time I checked, the US refineries were at 95% capacity.

Any type of price controls (anti-gouging legislation) would only exacerbate the problems and create possible shortages. I would rather have $3 diesel fuel and be able to get all that I want than have $2 diesel fuel and sit in line for a few gallons’ ration.

At 4/21/2007 9:56 AM, Blogger Mark J. Perry said...

Certainly OPEC's output decisions influence the world price of oil, but the proposed price-gouging legislation only applies to U.S. oil companies. My point is that U.S. oil companies like Exxon don't set the price of oil, they are pretty much helpless, and at the mercy of market forces. Therefore, if Exxon can't control or set the price of oil or gasoline in the U.S, how could it be charged with "price-gouging."


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