Gas Prices
Gas prices are going up again. Two months ago it was at $2.40, this morning it was at $2.90.
Every time this happens there is a lot of media coverage about gouging, and how the price of gas is "too high". Poppycock. In Europe, prices were at $4+ when I was there 10 years ago (we were still way under $2). Last summer in Canada, I was paying well over $3 when the prices were in the low $2 range here.
The market economics of gasoline are simple. With a limited supply, the prices will go up until demand is equal to supply. The media would have you believe that the price of crude oil is somehow to blame for this. This is actually not true, since the price of crude is no longer the key driving factor. Rather, it is the refinery capacity (which is at around 100% utilization) that is the bottleneck.
So, we can't make any more gasoline. This means prices will go up.
Who benefits? There are three (3) parties that have the opportunity. Consider the cost of gas has three components. First, the crude oil must be purchased. Then it must be refined and delivered to the pumps. Finally, the pump price must be set, which includes a variety of government taxes.
First, the arabs. They can drive the price of crude sky-high until it once again become a key driving factor in the price of gasoline in the US. This will annoy the Europeans, but they tend to be annoyed with us anyway. The downside is that the arabs will then pocket the profits.
The second group consists of the oil companies. They tend to control the supply chain, so it's easy enough for them to simply raise prices at the pumps and pocket the extra profit. Personally, I'd rather pay $4 per gallon versus having gasoline rationing and waiting in long lines to get gas.
Finally, there is the government. They can raise the taxes substantially to drive down demand, thus avoiding rationing.
The interesting thing to note here is that the price of gasoline is going to go up substantially in the next few years. The only question is who will pocket the extra money, since the cost of production and refining will not change. Interesting question, since the government won't let the oil companies do it (remember the outcry over the Exxon profits), and the government doesn't have the stomach to do it themselves.
Thus, the arabs will eventually realize that driving the price of crude to $100+ per barrel has no effect on the actual price of gasoline, and will move in that direction.
Every time this happens there is a lot of media coverage about gouging, and how the price of gas is "too high". Poppycock. In Europe, prices were at $4+ when I was there 10 years ago (we were still way under $2). Last summer in Canada, I was paying well over $3 when the prices were in the low $2 range here.
The market economics of gasoline are simple. With a limited supply, the prices will go up until demand is equal to supply. The media would have you believe that the price of crude oil is somehow to blame for this. This is actually not true, since the price of crude is no longer the key driving factor. Rather, it is the refinery capacity (which is at around 100% utilization) that is the bottleneck.
So, we can't make any more gasoline. This means prices will go up.
Who benefits? There are three (3) parties that have the opportunity. Consider the cost of gas has three components. First, the crude oil must be purchased. Then it must be refined and delivered to the pumps. Finally, the pump price must be set, which includes a variety of government taxes.
First, the arabs. They can drive the price of crude sky-high until it once again become a key driving factor in the price of gasoline in the US. This will annoy the Europeans, but they tend to be annoyed with us anyway. The downside is that the arabs will then pocket the profits.
The second group consists of the oil companies. They tend to control the supply chain, so it's easy enough for them to simply raise prices at the pumps and pocket the extra profit. Personally, I'd rather pay $4 per gallon versus having gasoline rationing and waiting in long lines to get gas.
Finally, there is the government. They can raise the taxes substantially to drive down demand, thus avoiding rationing.
The interesting thing to note here is that the price of gasoline is going to go up substantially in the next few years. The only question is who will pocket the extra money, since the cost of production and refining will not change. Interesting question, since the government won't let the oil companies do it (remember the outcry over the Exxon profits), and the government doesn't have the stomach to do it themselves.
Thus, the arabs will eventually realize that driving the price of crude to $100+ per barrel has no effect on the actual price of gasoline, and will move in that direction.
posted by Aras at 8:25 PM
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