NationStates Jolt Archive

Sorry if this has been posted already and talked about to death but it's something I don't understand. Simply put, why have gas prices gone up? People say it's because of the Iraq war but I thought there were US backed sanctions on Iraq for the past 10+ years before the war started. There was the food-for-oil program but it seems Saddam took little part of that and when he did there was corruption involved. So, if oil is not coming out of Iraq, the US supply of oil must be coming from elsewhere. Therefore, why would the war on Iraq cause gas prices to go up?

Doesn't make sense and sounds like an excuse for oil companies to make money.

There was Hurricane Katrina, for starters, which pretty much disrupted fuel production along that region.

This is not fact, but what I know to be true(at least the last part):

Speculation, etc lead to gas prices going up during the iraq war, because of possible sanctions from opec, increased military use, etc.

With the inelastic properties of gasoline, the price went up, and yet sales stayed the same, or virtually the same. The gas companies realized they could raise prices, without demand going down, bringing them much greater profit margins.

Seeing this trend, they have been slowly increasing prices. And people keep buying at virtually the same levels, giving them profits that break records.

Prices are going up because the companies know we will keep paying for it, and they want money more than anything.

This is not fact, but what I know to be true(at least the last part):

Speculation, etc lead to gas prices going up during the iraq war, because of possible sanctions from opec, increased military use, etc.

With the inelastic properties of gasoline, the price went up, and yet sales stayed the same, or virtually the same. The gas companies realized they could raise prices, without demand going down, bringing them much greater profit margins.

Seeing this trend, they have been slowly increasing prices. And people keep buying at virtually the same levels, giving them profits that break records.

Prices are going up because the companies know we will keep paying for it, and they want money more than anything.


Agreed

Regards,

JMayo

http://mises.org/story/1936

written by Tom Lehman

Excerpts:

"(1) Gas prices are controlled entirely by wholesalers and big refinery oligopolists who illegally collude and profiteer at consumer expense. Fiction.

One of the leading and most widespread theories about gasoline markets is that prices are controlled entirely by oligopolists and monopolists in the oil and gasoline industry, and that suppliers may charge whatever high price they prefer with impunity due to collusion and cartel agreements. The evidence offered to support this theory is that prices between gas stations tend to move up (and down) in a synchronized pattern, with the inference being that price collusion must be occurring between suppliers. How else to explain the tight co-movements in gasoline prices?

While gasoline wholesalers and refiners certainly possess modest "market power," suppliers do not "control" prices. Instead, prices are controlled by the interplay between supply and demand; the collusion theory tends to ignore the demand side of the market. That gasoline refiners and wholesalers have any market power at all is due solely to the fact that consumer demand for petrol tends to be less sensitive to price changes. The demand for gasoline is said to be "price inelastic," meaning that when prices change, consumers' buying habits change proportionately less than the accompanying change in price.

The demand for gasoline tends to be price inelastic for several reasons. First, gasoline, broadly defined, has very few close substitutes. With fewer alternatives from which to choose, consumers tend to be less price conscious.

Second, gasoline is viewed (subjectively) as a "necessity" by most people. Most people are willing to sacrifice other goods and services in order to spend more of their income on gasoline, at least in the short run.

Third, in the short run, consumers do not have as much time to alter their buying behavior in response to price spikes. That is, in the short run, they do not typically adjust to higher gas prices by purchasing fuel-efficient hybrid vehicles or by riding their bicycles or walking to destinations. These adjustments in buying and lifestyle patterns take time. In the long run, however, consumers adjust by seeking alternatives, and the demand for gasoline becomes more price elastic.

Finally, at present, gasoline expenditures are still a relatively small portion of most household budgets. According to the latest Bureau of Labor Statistics' Consumer Expenditure Survey, consumers spent only 3.3% of their annual income on gasoline in 2003. As a result, households tend to be less sensitive to price changes. As the price of gasoline rises and becomes a larger percentage of the typical household budget, consumers may become more sensitive to prices changes, making demand for gasoline more elastic over time.

So, gasoline is a price-inelastic good, at least in the short run. But, to assert that consumers will pay the same amount for a gallon of gasoline at any price, and that suppliers can sell equal quantities at all prices, is simply wrong. This notion defies the basic law of demand, which states that at lower prices, consumers will purchase more of a good. When prices fall, gasoline consumers eagerly buy more gas; demand is not perfectly inelastic.

As a final thought experiment, think about it this way: If the demand for gasoline is perfectly price inelastic, and if refineries and wholesale oligopolists have complete control over prices, why do prices ever stop rising? In other words, why don't we pay five or ten times more for gasoline than we presently do? Surely the self-interested suppliers of petrol are going to charge as high a price as they can obtain. Why would they ever stop short of infinity in their price hikes if consumers will pay any amount?

According to the US Department of Energy, gasoline prices averaged $2.61 per gallon the week before Hurricane Katrina made landfall. During and after the hurricane, prices jumped to an average of $3.07 per gallon. Then, in the subsequent two weeks, prices dropped to an average of $2.78 per gallon. If prices are controlled entirely by colluding gasoline oligopolists, how can this be? Why would prices ever stop rising, let alone decline, if they are controlled entirely by suppliers?

Moreover, why has it taken so long for prices to rise to the levels we currently observe? Again, according to the US Department of Energy, gasoline prices averaged just $1.53 per gallon the week after September 11, 2001, and dropped to $1.10 per gallon by the end of December that same year. This was over four years ago, following a terrorist attack on US soil. Why has it taken self-interested suppliers of petrol four years to "exploit" consumers with $3.00-per-gallon gasoline, and why do we fail to observe $20.00 — or even $30.00-per-gallon gasoline prices right now? Answer: something else must be going on, something for which the conspiracy theory of gasoline prices fails to account. Assigning blame to those "villainous" gasoline wholesalers just won't do."

...

"(4) There is no rational reason why retail gas prices at the local pump should skyrocket before a hurricane or immediately after a natural disaster, since the retail gasoline at the pump was purchased in a previous period and at a lower wholesale cost. That retail gas prices do rise during such events is merely more evidence of price gouging and exploitation. Fiction.

Here is another common misconception about gasoline prices that desperately needs dispelling. As before, our good friends supply and demand may be able to help, along with an understanding of how expectations influence markets.

First, the supply-side component. As mentioned above, cost does not justify prices, and the retail price of gasoline is not determined by the price of wholesale gasoline at the time it was purchased and pumped into the tanks at the local gas station. Instead, the retail price of gasoline at the pump is based upon expected replacement costs relative to current demand. In technical terms, the cost of the wholesale gasoline already in the reservoir at the local pump is a "sunk cost" (literally and figuratively), while parting with it by selling it to retail gasoline consumers is an "opportunity cost." In economics and in business, opportunity costs matter more than sunk costs.

Gasoline companies, knowing that Gulf Coast hurricanes can destroy oil rigs, damage underwater pipelines, and disrupt oil refining capacity, will expect that a hurricane-induced oil and gasoline shortage will push up the wholesale cost of gasoline. Expecting an increase in the future price of gasoline, local gas stations will logically pass some of that anticipated increase on to current retail petrol consumers. And, the opportunity cost of selling that gasoline will be reflected in the demand and willingness to pay for it among competing buyers, along with the anticipated cost of replacing it with higher-priced wholesale supplies.

Think about it this way: If you are a homeowner looking to relocate, would you sell your current home for the exact amount of money you paid for it, plus repair and improvement expenses incurred during the time of ownership? If the cost of something in one market determines the price at which it is sold in another market, then yes, you would. But, that is not the case, as the example should make clear.

The price you paid for your home does not typically even enter into the resale price decision because it is a sunk cost; it is historical, in the past, based upon market conditions that were different at the time of purchase. The price you ask for it when you want to sell it is based upon new market conditions, new developments, changes in supply and demand in the housing market that have occurred since you purchased the home, meaning that you might sell the home for much more or for much less than you paid at the time you bought it.

The same goes for the petrol in the tanks at gas stations, and the analogy to home sales is appropriate even when we recognize that the time duration between the purchase and resale of a home is usually much longer than between the purchase and resale of gasoline. Market price is based upon the (opportunity) cost of replacing that wholesale gasoline, plus the changes in the demand conditions that have occurred since the wholesale gasoline was pumped into the retailer's tanks. If that opportunity cost is expected to rise, the retail price will rise immediately to reflect that expectation.

Additionally, there is a demand-side component that is even more important. It, too, is related to expectations. Consumers, knowing that Gulf Coast hurricanes can retard oil and gas production and restrict supplies by knocking out refining capacity, will also expect prices to rise. On the basis of these expectations, and even before a hurricane makes landfall, consumers will increase their demand for gasoline immediately, hoping to buy some gasoline and top off their tanks before prices rise.

However, when all consumers act in tandem based upon similar expectations of rising prices, overall market demand will increase. And, because the supply of gasoline at the retail pump is fixed, at least momentarily, the increase in market demand based upon expectations of a future price hike leads to a self-fulfilling prophecy: prices rise immediately, even before the hurricane has had a chance to damage the supply chain, simply because demanders are more intensely bidding for the scarce supply of petrol at the local gas pump. This rise in price is an unmitigated good from the perspective of the market as a whole. It is precisely this rise in price that forestalls or prevents a shortage of gasoline and forces consumers to economize on its consumption, ensuring that there is enough gasoline to go around.

So, there certainly are rational reasons why the price at the pump jumps immediately when some change occurs in the global oil and gas markets, and the laws of supply and demand do a good job of explaining this connection. Now, admittedly, we may not like this fact, and we may complain loudly about the higher gasoline prices that result. But, we should at least take some comfort in understanding why."

Less oil is comming out of Iraq now then when Saddam was in power. Reasons include equipement break-downs, qualified personel fleeing the country, corruption, Iraqis buying Western cars, Iraqi price controls for domestic consumption, and insurgent violence.

Second, when oil prices where low a lot of stupid Americans decided it was an entitalment and bought lots of gas hogs (SUVs!). The government did nothing to stop that trend.

Third, the Asian economy (primarly China) is taking off and they are also buying gas hogs.

Fourth, there are concerns that Arabia is running out of oil while Nigeria and South American oil producers are undergoing political instability. The Nigerian state in particular is dieing.

Fifth, oil companies have been reducing the number of refinaries so as to artifically increase the price of gas (and have been doing so for years).

Up? Gas prices are going down near me... maybe I'm just lucky.

They were $2.90 at their peak, and are now $2.70. They were $2.75 last week.. I'm seeing a downward trend.

Fifth, oil companies have been reducing the number of refinaries so as to artifically increase the price of gas (and have been doing so for years).
In the US, no new refineries have been built since the Ford administration due to EPA pretty much regulating them to the point of "extinction". In the US, it has nothing to do with wanting to "artificially increase the price of gas" and everything to do with governmental regulations.

In the US, no new refineries have been built since the Ford administration due to EPA pretty much regulating them to the point of "extinction". In the US, it has nothing to do with wanting to "artificially increase the price of gas" and everything to do with governmental regulations.

That is an urben myth.

That is an urben (sic) myth.
No, it's a hard fact.

I would say it has to do with the old premise of supply and demand.

The evil capitalist monkey-pig-dogs (TM) have raised the prices to screw the proletariat once more.

Fifth, oil companies have been reducing the number of refinaries so as to artifically increase the price of gas (and have been doing so for years).

OK I'm slapping down the big BS on this one. Oil companies are wanting to bulid MORE refineries. They typically come across two problems in trying to do so.

One is the enviromentalist whackos (not to be confused with envromentalists) who are always protesting against new refineries being bulit and current ones being upgraded.

Second comes from even those who want more refineries. They're the "not in my backyard" people. They want more refineries, and to see wind farms and solar farms as well....as long as it's not in their area.

I also believe that at least a couple of the companies (although I don't know for sure and they would be smart to do so) want to bulid some refineries back away from the seaports, using piplines to get the crude from the port to the refinery. Being back away from the sea makes them less vunerable from huricanes and such.

No, it's a hard fact.

Prove it.

Up? Gas prices are going down near me... maybe I'm just lucky.

They were $2.90 at their peak, and are now $2.70. They were $2.75 last week.. I'm seeing a downward trend.

I've got $2.47 here as of this evening. I also have seen it drop at least 4 times in the last 2 weeks. I did a little dance when it droped below the $2.50 mark

I've seen gas prices as high as $3.33 a gallon.

Prove it.
Just look at the EPA regulations for oil refineries.

Just look at the EPA regulations for oil refineries.

Take a look at the tax code, do you know how many subsidies and hand out these oil companies get even though their businesses are booming?

See BRitish petrol prices are artificialy high because the government has a 75% tax on the stuff the only reason its not above 99.9p a LITRE is because the signs arnt big enough and only have 4 digits, but weve seen prices skyrocket and not come down, and our government tries to blame Opec, America, CHina, Iraq etc but it doesnt want to lower taxes if a party said we will halve petrol tax they would get in to office at the next oppertunity.

Whats the American tax on fuel? and do you still get it in Gallons?

See BRitish petrol prices are artificialy high because the government has a 75% tax on the stuff the only reason its not above 99.9p a LITRE is because the signs arnt big enough and only have 4 digits, but weve seen prices skyrocket and not come down, and our government tries to blame Opec, America, CHina, Iraq etc but it doesnt want to lower taxes if a party said we will halve petrol tax they would get in to office at the next oppertunity.

Whats the American tax on fuel? and do you still get it in Gallons?

America has a tax on fuel, but it is pathetic compared to the British taxes on account of the American public being so tax phobic. And yes the Gallon is the basic unit of measurement for the purchase of gas.

See BRitish petrol prices are artificialy high because the government has a 75% tax on the stuff the only reason its not above 99.9p a LITRE is because the signs arnt big enough and only have 4 digits, but weve seen prices skyrocket and not come down, and our government tries to blame Opec, America, CHina, Iraq etc but it doesnt want to lower taxes if a party said we will halve petrol tax they would get in to office at the next oppertunity.

Whats the American tax on fuel? and do you still get it in Gallons?


dont worry, they will work out a way to get a 10 or higher on the left hand digit... they have here... its now at ~1.25 a liter

Because the gas companies can raise prices and use hurricane Katrina as a scapegoat.

1) Short term because some refineries got transport problems related to Katrina. Also before Katrina because gas sellers saw a chance to profit from this shortage.

2) Longer term because the demand for oil is increasing all the time, so the prices rise unless the suplies increase as quickly. Increase supply means to build refineries and drill for 'new' oil. Because of protests and regulations and regime uncertainity all around (and maybe because of a certain cartel that wants prices to go up) this has not been done.

Take a look at the tax code,
What about it?


do you know how many subsidies and hand out these oil companies get even though their businesses are booming?
Hi, my name is Red Herring. I'm a fallacy. You just used me.

Gas prices are high primarily because demand has grown in step with supply, resulting in the rise in prices. However, as of recent the demand has slowed and refinery capacity looks like it will expand considerably compared to projections early in the year. China's gasoline demand is slowing because diesel generators are no longer required to produce power in an increasingly large number of regions. This reduced demand as well, and lowers prices.

Furthermore, there are several major expansion projects ahead, including a 325,000 barrel expansion of the Motiva refinery in Louisiana and a 75,000 barrel project in Oklaholma.

The main reason why there are no new refineries isn't because they cost too much (at least for the integrated oils, smaller suppliers are a different case) but the hassle necessary to overcome the complex laws and regulations. Some 800 are required, on average, and 1.5 billion dollars in initial fees.

Case in point: For 15 years, Arizona Clean Fuels has spent 500 million dollars and years of court wrangling and just got its emissions permit. They're not much closer to building the refinery than when they started.

Companies can get away with adding capacity through expansion projects

Sorry if this has been posted already and talked about to death but it's something I don't understand. Simply put, why have gas prices gone up? People say it's because of the Iraq war but I thought there were US backed sanctions on Iraq for the past 10+ years before the war started. There was the food-for-oil program but it seems Saddam took little part of that and when he did there was corruption involved. So, if oil is not coming out of Iraq, the US supply of oil must be coming from elsewhere. Therefore, why would the war on Iraq cause gas prices to go up?

Doesn't make sense and sounds like an excuse for oil companies to make money.

Well for one, I don't know where your at but in most places around the USA, the gas prices are actually dropping.

That is an urben myth.

Wrong. We haven't had any new refineries in 20+ years. Now, thanks to President Bush, we'll be getting new refineries and updating the ones that are currently in service.

This will also reduce gas prices as we are now able to produce more gasoline.

Just for price tracking purposes:

Gas started out at $2.47 Sat morning here. We went and saw our brother and upon returning that evening the same store we noted the above price was at $2.41. When we got up in the morning and went there to get gas Sunday morning before going out on a long day trip, it was down to $2.39. Still there at the moment, but you got to love a drop of 8 cents within 24 hours!

***does the happy dance***

$2.23 a gallon! And they keep on dropping!

Interesting how prices are dropping. You'd think that if it's all just screw-the-consumers-profit-driven, that the price would never drop.

I don't know if this has been stated yet, but Exxon-Mobil recorded over $100 Billion in revenue for the 3rd quarter. (http://moneycentral.msn.com/content/CNBCTV/Articles/Dispatches/P134024.asp)

I don't know if this has been stated yet, but Exxon-Mobil recorded over $100 Billion in revenue for the 3rd quarter. (http://moneycentral.msn.com/content/CNBCTV/Articles/Dispatches/P134024.asp)
And only 10% of that is profit.

But what is your point?

And only 10% of that is profit.

But what is your point?



The oil company's third-quarter revenue and profit were both records for any publicly traded company, according to Standard & Poor's. And it proved that soaring energy prices more than made up for any hurricane-related disruptions.


That is my point.

gas prices are going down here. after katrina it went up to $2.75ish now its dropped to $2.39

That is my point.
The problem is that the "conclusion" has no backing.

So what is your point?

The problem is that the "conclusion" has no backing.

So what is your point?

They have recorded a massive revenue and massive profit. So much for the bad effects of the hurricane!

They have recorded a massive revenue and massive profit. So much for the bad effects of the hurricane!
Those effects won't be felt for a while. It's not instantaneous. Plus, Q3 = July, August, Sept. The hurricanes only account for 1 month of that.

You might just want to know what you're talking about before you post. Just a hint.

$2.09 a gallon! How low can it go? ;)

Americans don't know how good they have it with fuel prices.

Up? Gas prices are going down near me... maybe I'm just lucky.

They were $2.90 at their peak, and are now $2.70. They were $2.75 last week.. I'm seeing a downward trend.

Moi aussi. Here in Victoria, BC, Canada, prices were $1.14 per litre in September, now they're down to $0.97 per litre.

... the only reason its not above 99.9p a LITRE is because the signs arnt big enough and only have 4 digits...

That's hardly something that would stop prices from rising. Canadian gas stations had to re-do all of their signs to add another digit this fall, when gas rose to over $1.00 per litre.

Moi aussi. Here in Victoria, BC, Canada, prices were $1.14 per litre in September, now they're down to $0.97 per litre.
BTW that's about $3.09 USD per gallon for those of you in the US

$2.09 a gallon! How low can it go? ;)

$2.05 here. mwahahahaha...