Gas prices: don't blame the victims

Man, I love everything this guy is saying. The latest from my man DVO:

Dems missing the boat again by not having a massive stink. What else is new?

If the U.S. announced that it would no longer pay more than, say, $20/barrel for crude oil, but China was still willing to pay $60/barrel, every oil-exporting country would simply stop selling crude oil to us.

The alternative would be for the U.S. to still pay market prices for the crude, but offer subsidies so the price to U.S. refiners stayed the same. But the subsidies would come out of tax revenue, which would make our (already gargantuan) deficits even larger. Indonesia is now having riots because they finally had to reduce their fuel subsidies after the costs rose to one-third of the government's entire budget.

We could put price controls on non-imported petroleum, but then U.S. refiners would have tremendous incentive to use U.S. petroleum exclusively, which would cause us to rapidly deplete all of our remaining reserves. After that we would be forced to pay the (now higher) market price to import petroleum or else have no more petroleum at all.

Gasoline prices are a little trickier, because effectively all of our gasoline is refined in the U.S., regardless of whether the crude came from here or from overseas. The main risks with price controls on gasoline are two-fold:

1. Part of the price of gasoline is based on the cost of crude oil. If the price of crude goes up, but the retail price of gasoline is held constant, someone in the supply chain (refiners, distributors, or wholesalers) takes a loss. Enough losses and they will stop operating or go bankrupt. Subsidies would cause the same problem as above.

2. Price controls on gasoline will keep demand artificially high, which in the case of subsidies produces a snowballing of costs for taxpayers. Price controls without subsidies will lead to chronic shortages, as the incentive for private industry to invest in new production capacity will fall to zero. Of course, the government could get involved and start building and running refineries, gas stations, and whatnot, but now we're talking socialism and that's a whole different discussion.

There is too much corruption in the industry, which is what caused the shortage we have today. The gasoline shortage is not due to a shortage of oil. In reality, many oil suppliers such as PEMEX have actually stopped giving oil to the U.S. because the U.S. can't use it.

Want to know why? We don't have enough refineries. Not only do we not have enough refineries (and did not have enough before the hurricanes), but the executives of oil companies have been having the refineries shut down for "maintenance" or other bullshit reasons so they could create a gas shortage.

It's pretty obvious why they are doing it. They can pay less people to do less work and raise gas prices higher as a result. It's cheaper and it makes more money, it's amazingly greedy but effective.

So basically, we can't trust corporations to even exist in my opinion, we need to go back to the day when corporations were temporary entities used to accomplish a goal. Industries vital to the nation's health such as the oil industry should not be trusted to be in the hands of wealthy individuals. We should put it in the hands of every American.

A la Jimmy Carter. Use the proceeds to research alternative energy sources and help low income families heat their homes.

regarding what would happen when there was a price ceiling on American produced oil. First of all there would be a decrease in the incentive for American producers to supply oil thus American production of oil would decrease. There would be lost revenue in the various forms of taxation the companies, management, and the workers would be subject to. There would also be some cheap oil coming on the market. Unless there were pricing controls that continued through to the gasoline the oil produced by American oil producers would turn up as profits in one of the other pre-consumption stages. If there was cheaper gas there would be a shortage of the cheap gas because people strictly prefer cheap gas to expensive gas. Thus there would have to be some sort of reallocation resulting in some sort of rationing program. This would further cost the tax payers as these types of programs are not cheap.

In short you end up doing little to help consumers at a huge cost to the oil companies. Naturally any program where you take money from somebody and it disappears is not a good program.

If you do not have an economics background your reasoning skill are very impressive. Besides the small oversight your analysis was very good.

It doesn't really affect the conclusion, but your point is a good one.

No, I don't have much of an economics background, yet. I've taken two lower division courses (Micro and Macro).

I have a strong interest in economics, though. I'm returning to school next year to finally earn my B.S. degree (ahem) after an extended (don't ask how long) absence. My major/minor will be Economics/Statistics.

My goal is to get to the point where I can help re-legitimize left-wing, non-Marxist, economic thought. These little analytical exercises are good practice for me.

Thank you for pointing out my error.:-)

One final thought: Isn't it interesting how we have identified two situations in which producers would intentionally lower production below the level desired by society? In an unregulated market, refiners and distributors have incentive to artificially lower production in order to raise prices. In a temporarily regulated market, producers have incentive to produce as little as possible to avoid selling their product for a lower price than they desire.

applied mathematics will go further then statistics if you want to be a theorist which is what it sounds like you want to be. There are a few courses you should definitely take if you get the chance. Industrial organization is likely the most important course when it comes to planning government intervention and regulation. The course is about market power and price setting firms. Behavioral economics characterizes how people's behavior deviates from what would be expected; because of this it also shows were intervention can be beneficial. An environmental or resource economics course is also very important. A political economy course is also very relevant especially if it focuses on public choice. One problem you may find is that it is difficult to do anything in the area of theoretical economics without taking a graduate degree. If you are considering that you might want to sign up for an honors degree as it is necessary to do that to get into most grad schools.

There is a very gifted professor at MIT that teaches things from a "Marxist" point of view. Event if that is not your goal it may be beneficial to read some of his works. I don't remember his name off hand but I will see if I can get it for you.

Me; I'm in my 5th year of university at a Canadian university studying economics. I have one more year to get all of the courses that I need to get into the graduate program. As of the end of this year I am also very close to getting a mathematics degree. Because I am interested in studying the political economy I might end up going to graduate school in America.

Even under neoclassical assumptions (price taking and profit maximizing) a floor price would still result in lower production from American producers. In this case it would not be a firm making the wrong choice but rather society choosing to do so.

Also, I question the amount that refinery’s actually play in the pricing of gasoline. Given the barrier to entry that the current regulations place on refineries, most refineries that do not have the same regulations in place make a very high profit. Thus it is not in the best interest of these refineries to reduce production as they have high marginal losses due to reduced production. The competition that is in place, even if it is not a perfectly competitive industry further decreases the incentive to reduce production.

The reasons why high gas prices are affecting America so much are largely due to issues that the oil industry has no control over. First off, Americans consume a lot of oil. A quarter of the oil produced world wide is consumed by America making it so that when the price goes up it will greatly affect the American consumer. There is also increased demand world wide. The Demand from China and India have cause the price to increase and because of the short period and relative large price increase the substitution possibilities and increased incentive to produce oil haven’t been able compensate for the increased demand. This is partially due to the relative cost of extracting oil increasing and the availability of oil has decreasing. Also the American dollar has fallen at the same time that gas prices rise. Given that most oil is produced outside of American and around three quarters is consumed by other countries the price of oil is going to be related more to other currencies and the price that Americans have to pay will go up.

Economics is offered as both a B.A. and a B.S. here. The only difference is the amount of math required. Personally, I don't see how anyone could properly work in any theoretical capacity in any field without a strong grounding in mathematics, so it's pretty much a given that I'm going to pursue the B.S. option. Within that, my plan is to take a concentration in public finance. And I intend to get into the honors program as well.

I also looked into minoring in applied math instead of stats. For various reasons, stats is slightly more attractive at the school I will be attending.

It's good to know there are other lefty, mathematically inclined economists coming down the pipeline. I think the "free-market" dogmatists have had their day in the sun. The future belongs to those of us able to craft real-world solutions that properly integrate the roles of the private and public sectors for the benefit of the citizens. Tomorrow's economic environment will be very different from today's.

*************

On the question of refineries, I think you are overlooking the fact that multiple refineries tend to be owned by the same companies. If all refiners were independent of one another, the cost of deliberate shutdowns would be prohibitive. But when real shutdowns occur and the supply cushion disappears, such as what happened from Katrina/Rita, owners of multiple refineries can take advantage of the relative inelasticity of fuel demand to cause precipitous rises in prices. If a company owns ten refineries and cause prices to double by deliberately shutting down three of the refineries, the owning company rakes in more than enough money from the seven operating refineries to cover the costs of idling three of the refineries.

In the long-term, fuel price increases in this country will be due to the increasing cost of crude, but the specific price spike we are currently experiencing is, I think, largely due to lack of spare refining capacity and market manipulations that stem from that.

when I looking at other school's economics programs. My biggest problem with the economics department has been the lack of math utilized up until the fourth year courses. Even then it is possible for someone to do economics without applying any calculus to it by careful selection of courses.

I don't consider myself a lefty when it comes to economic policy. Many of the ideas that come from left wing institutions fail to accomplish the goals intended. There are also obvious issues with a non-intervenes such as the existence of economic determinism. I have a strange cross section of beliefs that are routed more based on the results of the policy rather then the intention. Unlike most people I prefer absolute wealth generation to wealth equality. That is that the amount of real wealth that a poorer person has is more important then the ratios of earnings between the poor and the rich. I strongly support Pigouvian taxes, when efficient on most forms of pollution. I am also under the impression that discrimination in the name of equality and other kinds of reallocations to minorities has done as much harm as it has good. This view is largely due to what I have experienced with racial equality in Canada. The natives get many opportunities that most Canadians don’t get yet have the lowest social performance of any ethnic group. It seems that the same problem occurs in America with Affirmative Action. I have yet to examine academic evidence on this phenomenon though if I haven’t thought of a better idea it would make a very good behavioral economics term paper. (AA would provide the desired result under a neoclassical system but for some reason it appears that it doesn’t provide the desired result in practice.)


I do something that I call idea testing. It is basically where I test conservative ideas at liberal forums and liberal ideas at conservative forum. Thus I get many people criticizing my ideas and if there is a mistake in my logic someone usually catches it.



I still disagree with you assessment of how refineries have acted in the sort term. If the price increases were largely driven by market manipulation then the firms made a mistake. The prices went up All over North America. That would mean that Canadian refineries were picking up the slack. Many of the oil companies who work in Alberta have their own refineries. Because of the nature of oil production here the make up of companies is different then America. If American refineries were the main issue for the price increase then the refining in Alberta would also help to diffuse the gains that refineries in America were making as the prices increased here as well. Thus I believe that you are underestimating the effect of substitution.

Even assuming some of the refineries are shut down to affect the price, there are other refineries that were shut down due to the weather and damage associated with it. Given that refining profits typically are higher as the price of oil is higher and the prices are already higher due to the problems with supply the margins they are making are already high. With higher margins on production more profit is lost when taking a unit of a good off the market thus the high margins present a disincentive to increase the price by market manipulation. Factoring in the anger Americans already have about high gas prices, many consumers desire to punish the gas companies for the situation so in the long run it adds another cost to attempting to increase the price. Finally I believe that this behavior is illegal under American law. If that is the case then that would also provide an incentive not to try to fix prices.

Yeah, the economics department at the school I will be attending only requires one quarter of calculus for a B.A. degree. It's no wonder economics is a backwater major, largely a dumping ground for washouts from the business department(!). I don't have any illusions that I will be educated in the process of getting my degree. If anything, I'll be doing most of the educating. But I need the official credentials to follow my desired career path.

I consider myself a lefty, but I agree that we need to consider the results of policies, not just the intentions. As an example, right now I'm gathering data to either confirm or refute my hypothesis that universal education does more harm than good. There is a whole ideology built off the premise that anyone can be educated, and the failure of students is due to a failure of the education system. This ideology is part of the foundation of affirmative action, but has many other consequences, some good and most bad.

From what I have seen in the course of my education, many students (from whatever background) are simply in over their heads, lacking either the intelligence, drive, or focus to succeed. Too many resources are devoted to helping these hopeless cases. Ethically, the left-wing position is that we owe everyone an equal opportunity to succeed, but do we really owe everyone twelve years or more of opportunities? At what point of repeated failure do we cut our losses and focus on the individuals that will actually derive some benefit from the continued application of resources? What would a cost/benefit analysis tell us? I also don't think forcing substandard students to stay in school does the students themselves any favors.

***************

As far as the refinery question, I think we would need to know more information about the availability of substitution to know if refinery owners could gain from deliberate shutdowns or not. Because of differing emissions standards in different jurisdictions and limited pipeline routes and capacities, there may be considerable limits to substitution effects, at least in the short term.

Price collusion is illegal in the US, but often difficult to prove, especially if there are no "smoking gun" records of meeting minutes, emails, or phone calls. The electricity crisis in California in 2001(?) was similar in many respects to the scenario we have been discussing, and it has now been revealed that the "crisis" was largely fabricated by just this sort of deliberate supply shortage. Criminal? Yes. Implausible? Not really.

We're just eavesdropping on your comversation.

:hi:

We're off-topic, but I figured our discussion might still be of interest to others.

:hi:

Some things you might want to think about when doing your analysis is whether the problem is with the American system or if it actually deals with universal education as a whole. I’m beginning to understand that Americans are typically do a very poor job at intervention so you may want to look a little farther then what you are used to. Universal education does not necessarily mean equal. I have also found that at least in Canada they divide people off based on skills. There were 5 levels of math in grade eleven by the time I was out including two levels of advanced mathematics (including honors and IB). This allows people to reach their full potential, by understanding that not everyone is equally skilled and motivated.

I imagine that if America wants to stay competitive there will need to be a fundamental shift in attitudes toward education and the design of the system.

After all they don't care about every day prices and pocket books. It doesn't affect them. They make it up elsewhere. A lot of that creative Enron type of accounting is the norm for these power hungry repukes.

David Van Os would be a great Attorney General.

Amen!

Sonia

just auction off annual rental of drilling rights. Share that among the people of texas.

AM in favor of vogorous investigations by the AG's office into price gouging and collusion, and revocation of corporate charters if wrongdoing found.

(Two more votes gets this onto the 'greatest'. Would y'all show David some love?)

kick!

(link in the other thread in this forum)

"I think we see insidious relationships between money power and political power in the web of interlocking relationships between corporations and government that results in working people having to pay $3 a gallon for gasoline and probably $4 a gallon in the not too distant future and then even $5 a gallon...

We have relationships between corporate money power and political power in the fact that the present attorney general of the state is not investigating the possibility that Texas anti-trust law may be occurring in the way the price of gasoline goes up across the board, all the oil companies at the same time, and there’s no competition."