Braineack

iTrader: (62)

our dollar is worth less too. and we buy from the same place at nearly the same price, so then we have to pay more...

inferno94

iTrader: (2)

Canada is required (due to NAFTA) to sell 2/3 of the oil produced here to the US, partially due to this there has been little investment in refining. We're closing refineries and our gas prices are $5 or more / Gal for 87 or $6/Gal for 94.

When our dollar goes up and people are losing jobs due to lower exports, gas gets cheaper since we buy most of what we use from the US, refined from Canadian oil.

Joe Perez

iTrader: (8)

Fundamentally, shortages are due to people wanting to purchase more of any given commodity than there is supply of that commodity.

The underlying reason that there was less refined gasoline available than consumer wished to purchase in late '73 / early '74 was that OPEC issued an embargo against the US.


Well, I don't entirely disagree with this.

On the one hand, I don't think you can argue that the fundamental underlying cause of the "gas crisis" of '73/'74 was anything other than the OPEC Embargo, admitting that any subsequent price-controls and rationing were secondary effects, not primary causal factors.

On the other hand, it's difficult to say "what might have been" had there been no price controls and rationing. If we assume that, like today, consumers responded to this by bitching and moaning while paying the higher price for alternately-sourced fuel, then this tends to strengthen my earlier dual assertions that shortages don't actually exist, and that consumer demand for gasoline is relatively inelastic.

If you posit that consumers would instead have reacted by not buying (or attempting to buy) gasoline, I'll need to ask you to justify this assertion, both by resolving the conflict of consumers in '73/'74 spending all day waiting in line to purchase what gasoline they did perceive to be available, and by describing what specific actions people might have taken in the short-term to lessen their demand for gasoline relative to pre-embargo times.

mgeoffriau

iTrader: (7)

My conclusion is that most people are much more willing to spend their time than their money -- or, to put it another way, something that costs you a lot of time rather than a lot of money is much more attractive to poor people (who, I would argue, have more time than money to spend). Or, to put it a third way, rich people are much more able to convert time into money or money into time, while what we call "the poor" are time-rich and money-poor and are unable to convert between those two currencies. So when our government used price controls and gas rations, they created a system which rewarded those willing to spend their time, even if they didn't have much money. Hope that paragraph made sense.

Furthermore, until one of us produces the numbers on gas consumption before, during, and after the gas crisis in 73/74 (to be honest, I haven't looked), we're really just telling stories about those hypothetical customers. I don't have to explain why some people would wait in line, I only have to demonstrate that some people chose not to wait in line -- that is, their demand did adjust to supply.

Now, if we'd seen no price controls and the price of gas went up by a factor of 5 or 10, I'm speculating that we would have seen even morse people take steps to curtail their gas usage -- eliminating unnecessary trips, canceling road-trip vacations, carpooling to work, driving only the most fuel-efficient car in their garage, etc.

Braineack

iTrader: (62)

We should legislate law that say people cannot drive cars, and we should build low-income free housing in the streets to prevent the use of gas gussling gas.

Joe Perez

iTrader: (8)

Yes, it makes perfect sense. I, for one, have better (and more productive) things to do than stand in line all day. If I have a choice between standing in line for six hours to buy $4/gal gasoline that doesn't exist or $20/gal gasoline that does exist and has no waiting line, I'll be buying the $20/gal gasoline.

I have seen no evidence to support the assertion that unrationed and uncontrolled gasoline was commonly available in US in the fall of '73.

But this is all getting off on a tangent. Let's just say that I accept your premise without question.


The real question in this thread had to do with the underlying causes of prince instability, and I maintain my assertion that the retail price of gasoline is based principally on speculation and emotion. Whenever any event which is in the least bit scary happens, everyone who is involved in the production and distribution of gasoline simultaneously puckers up and raises their sell price in anticipation of an increase in their cost.

If the various sell-prices of gasoline (and its precursors) were automatically regulated by a computer program based on actual supply-vs-demand data, the price would be much more stable, and when it does change, would track upwards and downwards at roughly the same pace, rather than tending to spike upwards sharply, but relax downwards gradually.



Scott, we've talked about this before. You need to lay off the lacquer thinner, dude.

Scrappy Jack

iTrader: (2)

I think you guys make some great points, including the "convertibility of the currencies of time and money."

The price elasticity of demand for gasoline in the USA is not zero.

A slightly dated meta-analysis that views several factors including short- and intermediate-run price elasticity of demand for gasoline, changes in volume of fuel and traffic, etc.

Large price movements in crude oil (and refined gasoline) do influence demand over time, .

flying_solo

iTrader: (5)

For the first time!? Where do you live?

Braineack

iTrader: (62)

I agree

http://www.huffingtonpost.com/2011/0...REATMENT_PLANT

Joe Perez

iTrader: (8)

Nobody, myself included, has claimed that it is.

However it is extremely small compared to the sort of intra-day fluctuations in gasoline price which tend to generate headlines and forum debate.


A couple of observations.

First, the authors of that paper define "short term" in a different way than I do. When speaking of the retail price of gasoline, I consider "short term" to refer to days or weeks, which is an appropriate timescale for observing "large" fluctuations in the retail price of gasoline (on the order of 10% or more.)

By comparison, that paper notes that "Short term is defined as responses made within one
period of the data used for the study, most commonly, in this context, within 1 year." It then observes that "If the real price of fuel rises by 10% and stays at that level, the result is a dynamic process of adjustment such that the following occur:
(a) Volume of traffic will fall by roundly 1% within about a year, building up to a reduction of about 3% in the longer run (about 5 years or so)."

Surely you cannot consider a reduction in traffic volume of 1% after one year in response to a 10% increase the the retail price of gasoline to qualify as demand elasticity sufficient to generate equilibrium in the value of a commodity which commonly exhibits price swings of 10% (or more) in less than one week's time?


And second, of course, there is the small matter of nationality. This thread, if I'm not mistaken, is about gasoline in America. (I derive this from the fact that the word "America" appears once per sentence in the original post.) The British authors of this paper note clearly that "USA has lower fuel consumption elasticities than Europe with respect to both price and income. "

Lower than 1% per yer per 10% price increase, and lower than 3% over 5 years per the same 10% increase.


So, again. Nobody is saying that demand for gasoline is 100% inelastic. But your paper demonstrates that I was closer than I realized in post #19, in stating that "I still posit that consumer demand for gasoline within the US is essentially inelastic, or at most, displays an elasticity of only a few percent across the range of gasoline prices which have been observed over the past few decades. "


The fact is that the elasticity of demand is extremely small as compared to the observable fluctuations in the price of gasoline, and occurs on an entirely different timescale. As such, demand elasticity cannot be considered to be a primary driver in a classical "market equilibrium / supply vs. demand" model. The retail price of gasoline is speculatory in nature. There is no other rational explenation.

Scrappy Jack

iTrader: (2)

No; I am with you, Joe.

Two additional quick points: I would argue the price of crude (and gasoline) may also be manipulated more than expected between OPEC, the Saudis and some of the BFOE/Brent complex. And, the price of oil has been affected by the financialization of commodities via instruments like the GSCI.

Joe Perez

iTrader: (8)

This.

That is essentially when I'm referring to by describing the nature of gasoline pricing as "speculatory."

What's interesting is that, compared to most other exchange-traded commodities (soybeans, feeder cattle, copper, frozen concentrated orange juice), gasoline is an extremely complex product which is derived from yet another exchange-traded commodity, passes through several different phases in the transition from raw material to consumer product, gives off useful byproducts during its production, and changes hands many times during the production process, being sold from one company to another to another.

I posit that this last characteristic, the fact that gasoline (and its precursor agents) are by necessity sold from one firm to the next as it is gradually produced in multiple steps, that gives rise to the potential for such price instability. At each step in the process, various companies possess large inventories of their version of the product, which they attempt to assess the future valuation of while simultaneously trying to predict the future cost of their feedstock material from the previous company in the production chain, which is itself performing the same valuation assessments, and so on.

Company A sells crude oil to company B, which refines it into gasoline and sells it to company C, which blends the gasoline into various grades before selling it to company D, which mixes the gasoline with their proprietary additive package (thereby branding it as "Chevron" gasoline or "Tepco" gasoline, or whatever), before selling it to company E, which then finally sells it to the consumer.

I would argue that it is company E which is the first to raise the price of gasoline in response to any given event, predicting that their cost to acquire gasoline from company D will increase, and so on.

fooger03

iTrader: (2)

My knowledge of the oil industry is limited at best, but here's my own theroy.

It's impossible to fix the problem, because information at the consumer level is nearly perfect, and there's no invested interest in sticking to any one gas station. A gasoline retailer could, in theory, stabilize it's own prices relative to everyone else's, but here's the problem.

As the gas station stabilizes it's prices, the station down the street drops its price by 2 cents a gallon - 2 cents a gallon is all it takes, and consumers immediately stop buying fuel from the stable gas station.

A week later, the station down the street's prices go up 5 cents. The moment that happens, people immediately stop buying fuel at the station down the street, and drive down to your gas station to buy all your gas at an actual loss of operating profit to the retailer.

So the stable gas station either makes no profit when prices fall, or windfall losses when prices rise.


Chevron - the "retailer" buys it's gas from the cheapest producer too, under the exact same set of circumstances.

And so on all the way back to the producers themselves, who - instead of deciding what the price is going to be, they instead decide how much fuel they are going to produce.


Consider a similar market: Milk. If I'm in the grocery store to get milk, and I notice the price has gone up 10 cents/gallon. I'm still going to get the milk here. I probably won't go to the grocery store across the street, because the time it would take me to get the cheaper gallon of milk is worth more than 10 cents to me. I'll probably come back to the same grocery store next time too, because 10 cents/gallon isn't enough for me to put effort into switching grocery stores.

JasonC SBB

I agree with Joe's last post.

In a functioning futures market, any speculation (e.g. "bad weather will cause a bad wheat harvest") that raises prices of a given commodity, if incorrect, will result in a later drop in prices to below that if there were no speculation. (and the speculators lose money) If correct, the final rise in prices will be less than in the absence of speculation.

Remember 2008 gasoline prices? Has anyone seen an article analyzing the rise then subsequent fall in prices?

Scrappy Jack

iTrader: (2)

For the more "wonkishly" inclined:

Chris Cook: Naked Oil

L. Randall Wray: The Biggest Bubble of All Time: Commodities Market Speculation

Savington

iTrader: (31)

Futures speculation is the most infuriating, despicable financial instrument in history.

e: To clarify: Regulated futures speculation is a critical part of the supply chain. Unregulated speculation is unconscionable.

Joe Perez

iTrader: (8)

I keep getting confused.

Regulated futures trading implies that Government is interfering with the Free Market, and according to MT groupthink, that is inherently bad and intolerable.

Unregulated trading implies that the Free Market is allowed to operate unfettered and seek its own natural equilibrium, and that is supposed to be inherently good.

Could it be that sound-byte-based, absolutist points of view, regardless of whether they are left-leaning or right-leaning, tend to be, ipso facto, incorrect?

mgeoffriau

iTrader: (7)

Well, I have a response, but it invokes the No True Scotsman fallacy.

Savington

iTrader: (31)

Yes, I would tend to agree with your last statement. Let me expound.

I support the basic tenants of a free market - specifically, the ideas that businesses are privately owned, and prices are set by supply and demand. I believe that in order for a free market to thrive, it must be populated by a variety of competing buyers, as well as a variety of competing sellers. The entire basis of a free market is built on the idea of equilibrium - if one seller's prices are too high, they won't sell anything, and they will be forced to drop their prices or go bankrupt.

I also support antitrust laws, because IMO antitrust laws promote the free market by ensuring that no single supplier has the ability to become large enough to dictate the price of a product. If a single supplier dictates the price of a market, then the market is obviously no longer free. Single-supplier markets are just as bad or worse than government-controlled markets - in both cases you have a single supplier setting pricing in a marketplace, and the invisible hand of the free markets gets its fingers broken by the very visible hand of the monopoly.

In general, it's safe to say that I support laws that promote the operation of a free market. The government's purpose in a free market is to ensure that no single entity in that market is allowed to shift the balance of equilibrium significantly. It's important to note that I think the futures markets serve a vital purpose, in that they allow consumers of things like wheat to plan ahead with the knowledge that they will be able to purchase wheat at X price, and suppliers of wheat to plan ahead knowing they will be able to sell wheat at X price.

The important thing here is the consumption - the futures market is meant to provide future planning and safety to buyers and sellers of actual ------- wheat.. When a real commodities speculator takes a long position on an item, he understands that unless he takes a similar short position in the future, he's going to end up with X bushels of raw wheat in his living room. Inconvienent, no? This also promotes price equilibrium and the free market in general - when the contracts are up, the speculators have to find a buyer for their wheat, and regardless of what they purchased the wheat at, the buyers in that market will only pay so much. (Isn't the free market great?)

The issue comes when investment banks and institutions that are not genuine commodities traders flood the market with long positions without taking a short position to offload the commodity when it arrives. A false demand for "product" is created as the percentage of speculation in a market grows, and since it's a free market, the price will accordingly rise.

You can kind of see where this is going - eventually speculation overpowers a market and creates a price bubble. At some point, someone looks around and goes "You know, a barrel of Brent probably isn't worth $147" and suddenly everyone ***** their pants and 5 months later the price is down 70%.

In my opinion, the deregulation of the futures markets over the last 20 years has done immense, continuous damage to the world economy. In 1991, the government strictly limited the number of allowable outstanding futures contracts to 5,000, but during the '90s investment banks lobbied Congress to lift those limits, and a decade later, that number was 130,000. This deregulation of the commodities markets has allowed institutions whose main purpose is not commodity trading to take these harmful "buy and hold" positions on commodities ranging from gasoline to wheat and everything in between, driving the price of goods up for absolutely no reason at all.

If the MT groupthink is serious about the free market and unfettered capitalism, then it should be just as serious about demanding that the free market be protected from fettering entities like monopolies and speculation. The greatest irony of people who are rigidly anti-government is their failure to notice the businesses that are doing EXACTLY what they are so fearful government will do - alter the price of a commodity and ruin a free market.

Savington

iTrader: (31)

Here's a much longer version of what I just wrote that is probably more coherent and certainly more in-depth: http://tinyurl.com/7dwagh3