Supply/Demand
03-04-2012, 12:42 PM
#42
Boost Pope
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All very good points, Andrew.
There's some other factor at work, however, which doesn't seem to be explained by either a classical supply-and-demand model or a commodities-speculation model. And that's what really interests me.
I managed to scrounge up a couple of charts tracking both the market price of oil and the retail price of gasoline over a six-year period. I re-scaled the data according to the big boom/bust cycle in 2008 which represented both the record high and record low of both products. This had the effect of making the rest of the chart track rather nicely between the two, with a couple of exceptions:
(crude oil is red, gasoline is blue)
See how there are three big excursions in which the price of gasoline experiences a bubble which is out of proportion to oil? I've taken two of those and blown them up:
In both of these cases, the price of gasoline rocketed upwards by a large amount just prior to a small increase in the cost of oil. Not only was this price increase predictive rather than reactive, but note especially the area which is highlighted in yellow. Both of these areas represent a steep decline in the price of gasoline (a correction towards pre-spike levels) which occurred while the market value of crude oil was still slowly increasing.
If the retail price of gasoline were tied only to the market price of crude, then we would not see this phenomenon. And we've already established that consumer demand for gasoline is not sufficiently elastic to cause this.
This is where I get back to my "emotional" theory of Post #19. These anomalies represent periods of time in which the retail price of gasoline was controlled by hysterical speculation on the part of those involved in the process of creating and delivering gasoline, irrespective of the behavior of the commodities markets.
There's some other factor at work, however, which doesn't seem to be explained by either a classical supply-and-demand model or a commodities-speculation model. And that's what really interests me.
I managed to scrounge up a couple of charts tracking both the market price of oil and the retail price of gasoline over a six-year period. I re-scaled the data according to the big boom/bust cycle in 2008 which represented both the record high and record low of both products. This had the effect of making the rest of the chart track rather nicely between the two, with a couple of exceptions:
(crude oil is red, gasoline is blue)
See how there are three big excursions in which the price of gasoline experiences a bubble which is out of proportion to oil? I've taken two of those and blown them up:
In both of these cases, the price of gasoline rocketed upwards by a large amount just prior to a small increase in the cost of oil. Not only was this price increase predictive rather than reactive, but note especially the area which is highlighted in yellow. Both of these areas represent a steep decline in the price of gasoline (a correction towards pre-spike levels) which occurred while the market value of crude oil was still slowly increasing.
If the retail price of gasoline were tied only to the market price of crude, then we would not see this phenomenon. And we've already established that consumer demand for gasoline is not sufficiently elastic to cause this.
This is where I get back to my "emotional" theory of Post #19. These anomalies represent periods of time in which the retail price of gasoline was controlled by hysterical speculation on the part of those involved in the process of creating and delivering gasoline, irrespective of the behavior of the commodities markets.
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03-04-2012, 02:13 PM
#43
Former Vendor
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Two possible explanations for two anomalies.
If you google "Gas Prices March 2007" you will get a couple of articles discussing refinery shut-downs and a drop in the national supply of gasoline. That's just basic supply and demand - if the supply drops while oil prices are rising, then you're going to see an even sharper rise in the price of gas. No doubt that it's speculative, but IMO that speculation is based on the price volatility introduced by excessive speculation. No surprise there.
The other one is likely based entirely on Brent vs. WTI pricing. AFAIK you're using WTI pricing in your model. The period you highlighted was October 1 to December 15 of 2011. Brent was ~$26/bbl higher than WTI on October 1st, and just ~$10/bbl higher on December 15th. I am lazy, but if you use this chart: http://ycharts.com/indicators/brent_wti_spread to alter your crude data, I bet the 2011 anomaly disappears.
I'm not saying that there's not any other factor going on to affect the price of gasoline - I'm sure that high demand in the summers and low supply due to refinery shut-downs can easily sway the price of fuel by 5-10% in either direction, but that's not what we're seeing here.
If you google "Gas Prices March 2007" you will get a couple of articles discussing refinery shut-downs and a drop in the national supply of gasoline. That's just basic supply and demand - if the supply drops while oil prices are rising, then you're going to see an even sharper rise in the price of gas. No doubt that it's speculative, but IMO that speculation is based on the price volatility introduced by excessive speculation. No surprise there.
The other one is likely based entirely on Brent vs. WTI pricing. AFAIK you're using WTI pricing in your model. The period you highlighted was October 1 to December 15 of 2011. Brent was ~$26/bbl higher than WTI on October 1st, and just ~$10/bbl higher on December 15th. I am lazy, but if you use this chart: http://ycharts.com/indicators/brent_wti_spread to alter your crude data, I bet the 2011 anomaly disappears.
I'm not saying that there's not any other factor going on to affect the price of gasoline - I'm sure that high demand in the summers and low supply due to refinery shut-downs can easily sway the price of fuel by 5-10% in either direction, but that's not what we're seeing here.
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