Saturday, March 10, 2012

Gas Prices Explained



"Gas Prices Explained," from the same group that produced "Quantitative Easing Explained" (which now has more than 5 million views on YouTube).

33 Comments:

At 3/10/2012 7:03 PM, Blogger Larry G said...

let's see.. Enron was a myth,...right?

:-)

 
At 3/10/2012 7:45 PM, Blogger Ron H. said...

"let's see.. Enron was a myth,...right?"

??

What does Enron have to do with gasoline prices?

 
At 3/10/2012 8:05 PM, Blogger SBVOR said...

Sorry...
The debasement of the currency has an impact. But, just like 2008, the primary reason -- by far -- for rising gasoline prices is the simple fact that the global demand for oil has exceeded the global supply of oil for each of the last 8 quarters:

http://sbvor.blogspot.com/2012/03/blaming-speculators-for-oil-prices-is.html

 
At 3/10/2012 8:15 PM, Blogger Rufus II said...

That is embarrassing to see on a would-be economics blog.

The Australian Dollar has risen a little over 15% against the U.S. Dollar since 2009

Meanwhile the World Price of Oil, as referenced by Brent Crude has increased over 200%.

Who's next, Neil Cavuto?

 
At 3/10/2012 9:05 PM, OpenID liberalorder.com said...

Mark, though I don't disagree with you, I believe there is more to it that that. Actually, your answer and mine are closely related, but there are other factors as well.

http://bit.ly/xhYlmY

 
At 3/10/2012 9:14 PM, Blogger Rufus II said...

Crude + Condensate Production in 2005 was 73.8 Million Barrels/Day

In the first 3 qtrs of 2011 C+C Production was 73.9 Million Barrels/Day.

In the meantime China's oil imports are increasing close to a million barrels/day.

Now, add in ever-increasing imports to India, and the rest of Asia, Latin America, and the Middle East,

and more, and more consumption on the part of the oil producers, themselves (causing a drop in exports every year,)

and you have the Real cause of the problem.

 
At 3/10/2012 9:20 PM, Blogger Rufus II said...

That should have been China's Oil Imports are Increasing close to One Million Barrels/Day "Every Year."

 
At 3/10/2012 10:12 PM, Blogger PeakTrader said...

Liberalorder, your article states: "The past few jobs reports have been favorable, which bodes poorly for Fed Chairman Bernanke's pledge to maintiain the currently low interest rates low and keep inflation at or below 2%."

Although job creation improved over the past three months, it'll take years at that pace to remove the slack out of the economy.

And if inflation accelerates, the Fed will raise interest rates on excess reserves (the Fed began paying interest on reserves in 2008) instead of removing excess reserves.

 
At 3/11/2012 12:39 AM, Blogger pkenans said...

umm, gas prices are higher because of the weaker dollar? according to tips spread inflation expectations have been low, and ngdp is still below trend so even if you don't accept the cpi numbers, relatively the dollar is not weak compared to gas. and that would only explain the nominal increase in gas prices and it is obvious the real price of gas is higher. Im sorry to say this because this is one of my favorite blogs, but this video is shitty economics.

 
At 3/11/2012 12:56 AM, Blogger SBVOR said...

"Im sorry to say this because this is one of my favorite blogs, but this video is shitty economics."

With sincere apologies to Dr. Perry, I have to agree (on both counts quoted above).

See my first comment and the associated link.

 
At 3/11/2012 4:15 AM, Blogger Ron H. said...

Rufus: "That is embarrassing to see on a would-be economics blog.

The Australian Dollar has risen a little over 15% against the U.S. Dollar since 2009

Meanwhile the World Price of Oil, as referenced by Brent Crude has increased over 200%.
"

What's REALLY embarrassing is to see a commenter cherry pick dates for high and low oil prices so blatantly.

 
At 3/11/2012 4:46 AM, Blogger OBloodyHell said...

>>> What does Enron have to do with gasoline prices?

The more appropriate question would be "What does 'reason' and 'sense' have to do with Larry's brain?"

Glad I could clear that up for ya...

 
At 3/11/2012 8:57 AM, Blogger Larry G said...

Enron was an example of how prices CAN be affected by more than the stock "supply and demand" narrative that was condescendingly covered in the video.

Clearly in the US, where demand is down.. prices have not reflected that reduced demand.

Not all commodities are subject to supply/demand forces and not all commodities are subject to worldwide supply/demand.

For instance, in this country electricity and natural gas are not affected by worldwide supply/demand.

In a prior thread entitled: " Canadian and North Dakota Oil Help Explain Why Gas Prices in Midwest Are Lower Than the Coasts" Mr. Perry makes the case that not even gasoline is totally subject to worldwide supply/demand forces.

the video is a dry and condescending "explanation" that is more theory than realities.

It's true that supply/demand is a fundamental concept that affects many things but in the real world, not universally and not to the same degree.

 
At 3/11/2012 9:22 AM, Blogger Reliapundit said...

This comment has been removed by a blog administrator.

 
At 3/11/2012 9:34 AM, Blogger Zachriel said...

Others have pointed out many of the errors with the video, including the much higher rise in oil prices than weakness in the dollar can explain. Just to emphasize a few points specific to the argument in the video:

The gasoline and oil markets are international. So even if U.S. demand is slack, it doesn't mean demand is slack overall.

The rise in the stock market and in the price of oil may be correlated because they share a common cause. When business increases, people use more fuel.

And instability in the Middle East is not a binary characteristic. Speculators have to make judgments as to how likely the instability will affect the flow of oil. As the oil market has very little slack globally, it means that a small disruption in supply can have exaggerated effects in price.

 
At 3/11/2012 9:52 AM, Blogger Rufus II said...

Actually, I wanted to go back to 2001 (when the Aussie Dollar was selling for approx. $0.50,) but that chart would only go to 2009 (and, I was too tired to find another one.)

If I could have found it that chart would have shown a halving of the U.S. Dollar vs. the Aussie, but a Quintupling of Global Oil Prices.

The fact is: Global Oil Production has been basically Flat since 2005; and, That is the problem.

 
At 3/11/2012 10:55 AM, Blogger SBVOR said...

Larry G says:

"Clearly in the US, where demand is down.. prices have not reflected that reduced demand."

Larry,

Which part of GLOBAL MARKET FOR OIL do you not understand?

If, perchance, you think gasoline prices do not march in lockstep with oil prices, check this chart:

http://research.stlouisfed.org/fred2/graph/?g=5u5

 
At 3/11/2012 12:16 PM, Blogger Buddy R Pacifico said...

The video with the bubble couple had a gas price/stock market correlation chart referenced. Does anyone have a link to such a chart?

 
At 3/11/2012 12:32 PM, Blogger SBVOR said...

This comment has been removed by the author.

 
At 3/11/2012 12:34 PM, Blogger SBVOR said...

Buddy R Pacifico,

Here's a chart which the creators of the animation would prefer:

http://research.stlouisfed.org/fred2/graph/?g=5CF

Here's one they would be less enthused with:

http://research.stlouisfed.org/fred2/graph/?g=5CE

I think the first chart simply tells us that both stock prices and gasoline prices are sensitive to economic expansion and economic recession.

 
At 3/11/2012 1:02 PM, Blogger Buddy R Pacifico said...

SBVOR, thank very much for the two ST. Louis Fed charts.

Some might surmise if the stock market soars above a correlation with gas prices(1990-2002 chart) then: "irrational exuburance". I don't know, but it's very interesting.

 
At 3/11/2012 1:11 PM, Blogger SBVOR said...

Buddy,

You're most welcome. Certainly the period of "irrational exuberance" was anomalous.

 
At 3/11/2012 1:33 PM, Blogger juandos said...

"That is embarrassing to see on a would-be economics blog"...

I'm pretty sure that Professor Mark isn't the person that shouldn't be embarrassed here...

From Forbes dated 2/22/'12: Gasoline Prices Are Not Rising, the Dollar Is Falling

 
At 3/11/2012 1:52 PM, Blogger SBVOR said...

Juandos,

The St. Louis Fed does not track the price of gold (imagine that).

But, here's a chart West Texas Intermediate Crude against the value of the dollar (make of it what you will):

http://research.stlouisfed.org/fred2/graph/?g=5CN

 
At 3/11/2012 3:30 PM, Blogger juandos said...

Thanks for the link sbvor...

Not a real pretty picture is it?

I wonder when the fed will start graphs of WTI vs pond scum?

 
At 3/11/2012 3:45 PM, Blogger Ron H. said...

"Enron was an example of how prices CAN be affected by more than the stock "supply and demand" narrative that was condescendingly covered in the video."

Actually, Enron is a perfectly good example of supply and demand. The fact that "what you saw" was NOT "what you got" doesn't mean it was outside the law of supply and demand. Enron stock was in demand because investors were led to believe the company would have valuable future earnings.

Anyway, Enron had nothing to do with gasoline, or gasoline prices.

"Not all commodities are subject to supply/demand forces and not all commodities are subject to worldwide supply/demand."

That is absolutely, completely wrong. Anything that is scarce, is subject the laws of supply and demand.

Scarce means there is a limited supply of something. That means almost everything. Unless everyone has as much as they can possibly use of something, then it's scarce. People must bid for the available supply.

Air to breathe is an example of something that exists in a quantity greater than anyone can use, and is available to everyone.

This means there is no demand for air to breathe, as everyone already has as much as they can ever need.

Clean air may be scarce, compressed air is certainly scarce, warm or cold air may come at a price, but not just "air".

"For instance, in this country electricity and natural gas are not affected by worldwide supply/demand."

Those are terrible examples, as electricity and natural gas produced in the US are not global commodities. You will find that neither crosses oceans easily or cheaply, so supply and demand mostly applies to contiguous land masses. Electricity produced in the US won't be sold in Hong Kong, so US prices will not be affected by demand in Hong Kong.

Natural gas produced in the US must be compressed and transported to make it available on other continents, effectively making it a different product, that commands a higher price.

 
At 3/11/2012 4:08 PM, Blogger Ron H. said...

Z: "The rise in the stock market and in the price of oil may be correlated because they share a common cause. When business increases, people use more fuel. "

In the US they also share the dollar in common. A weaker dollar causes a nominal increase in the price of both stocks and fuel.

I guess you will want to see whether stocks or fuel prices lead, as with CO2 and temperature.

 
At 3/11/2012 7:51 PM, Blogger Zachriel said...

Ron H: A weaker dollar causes a nominal increase in the price of both stocks and fuel.

Sure, but not sufficient to explain the current rise in prices. As SBVOR posted above:
http://research.stlouisfed.org/fred2/graph/?g=5CN

If you prefer a different measure:

Gold to oil
http://tinyurl.com/gold2oil

Inflation adjusted oil
http://inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart_sm.jpg

 
At 3/11/2012 9:37 PM, Blogger SBVOR said...

This comment has been removed by the author.

 
At 3/11/2012 10:07 PM, Blogger SBVOR said...

Dr. Perry, et al:

Click here for a new chart documenting the primary cause of the price spikes of 2008 & 2011.

Click herefor the new post associated with the new chart.

 
At 3/12/2012 12:06 AM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 3/12/2012 9:29 AM, Blogger morganovich said...

there does seem to be a bit of a hole here in the "it's not up everywhere" argument due to currency.

from a year ago the usd is UP vs the euro (1.31 vs 1.40), flat against singapore and the swiss franc, up measured by the UUP index or DXY, is barely down (maybe 2%) against the ozzie and up against the loonie.

none of this explains differences from last year.

from 2009 to the middle of last year, sure the dollar tanked.

it lost 20% of it's value from 3/09 to 5/11, but oil was up a lot more than that.

this seems like a partial explanation, but not a complete one.

 
At 3/12/2012 2:12 PM, Blogger cactusKP said...

From the video: "...so simple even an economist can understand what's going on."

Apparently economists did not make this video

 

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