Supply and Demand of Gas(oline)
 

It seems most news outlets have it all backwards. I keep seeing articles toting "Consumers switch to high efficiency vehicles as gas prices soar!!!" While this may be a true statement, I can't help but think the opposite: gas prices are soaring because the government is pushing extreme regulations for increased fuel economy and gas demand is flattening or decreasing.

Isn't this economics 101? Isn't it an oxymoron for politicians such as Obama to push increasing fuel efficiency standards while at the same time claimin that the can reduce fuel costs?

Why would the price of something go up when demand decreases?

Umm look outside of the US, demand for fuel is sky rocketing.

Remember the 70s when they tried to price fix gas?

No, I was not alive.

no excuse. remembering the faults of the past ensures the rights of the future.

So does sacrificing newborn babies.

So, where is this thread going to go? I'm curious to see what wild turn it takes.

i dunno. gas is $4.11 for 93 here now. Dont not like.

I'm thinking price increases to sustain profits and cover operating expenses. If I know I need to sell 1000 gallons at $4.00 to break even, then I'll need to sell 900 gallons at $4.44 to break even.

This may be unconventional thinking in selling consumer products, but it seems more relevant for essential commodities. If ten people want to buy a razorblade diaper at $5.00, it's less likely that five will want it at $10.00. But the same people will probably keep paying a garbage man to take the dirty diaper away if the cost of garbage services doubled.

I'm looking for a 1997-1998 Jetta or Golf TDI with a manual transmission.

gas prices dont follow logic there's never a decrease in demand for gas/oil.

https://www.miataturbo.net/attachmen...ine=1347892396

I'll be shocked if this doesn't turn into another political thread like 101% of the threads not involving boost/cats/food/beer

But my opinion is similar to Brains: there is no logic. They wanna charge more they charge more and we go to the station and pay them like bitches cause we're their bitches.......lol

One day I tried to figure out how gas pump prices work out, I ended up a few hours later looking how bees turn pollen into nectar/honey.

I'll try to come back to this thread with more detail, but I think Braineack's last comment is probably incorrect (depending on whether your "gas" = gasoline or natural gas). US oil imports peaked in 2005 or 2006 as I recall.

A combination of things affects US demand: huge supply of nat gas that is now economically feasible to extract, fuel switching between power plants and commercial vehicles, broad fleet efficiency increases, reduced miles driven, etc.


As for pricing, it's a combination of (A) oil, and thus, gasoline is a global commodity which is represented in the WTI to Brent crude spread and (B) the commodities markets have been massively financialized over the past decade or so.

Also, (C), (D), and other misc things I am forgetting or unaware of.

I posted an image for demand, not production.

production has dropped significantly.


anyways, i dont even try to understand gas prices. nor do i care.

Here it is: Gas prices have skyrocketed as a result of several factors.

The most obvious is a striking increase in global energy demand over the last two decades. Economics 101 says that as demand increases, then price will also increase - not the other way around, as the OP suggested. The OP has confused supply with demand.

The second reason, and less obvious, is that the rate of increase of production of oil has not matched the rate of increase of consumption of oil. In the US, a lot of our oil comes from Canada, and some domestically. As the price of oil rises, the willingness for oil companies to add capacity increases, which naturally raises production and allows prices to settle again. A problem here arises with the fact that an oil company can't just go out in a boat and set up a drill platform and call it a day. There are government regulations that the oil company must comply with in order to be allowed to set-up a drilling and pumping operation, and once the oil company has complied with all of those regulations, they're at the mercy of a government agency to give them the stamp of approval to "go ahead and drill". In the wake of the latest, greatest, gulf spill, how easily do you think this process happens?

The third, and one of the two most important reasons (and probably the least understood reason) is that oil is a GLOBAL market. It's not a U.S. market, or a North America market. Oil drilled here doesn't automatically stay here, and oil drilled overseas doesn't automatically stay overseas. What does this mean? If Germany has to pay $150/barrel for oil produced in Eurasiafrica, then that means they are willing to pay $150/barrel for oil produced in the Gulf of Mexico. If Shell can sell it's barrel of oil for only $100 to a refinery in Texas, and it costs Shell only $30 to ship that barrel of oil to Germany, then Shell is going to ship that barrel of Oil to Germany *EVERY SINGLE TIME* and make an additional $20/barrel profit. In order for texas to get that barrel of oil, they have to be willing to pay at least $130.

Now while we may not be shipping barrels of oil to Germany on a daily basis, consider that Russian oil might go to China and Europe, and Persian Gulf oil might go to Europe and Asia, and Canadian oil might go to Russia and U.S., and U.S. oil might go to Canada and South America....

In the grand scheme of things, any "barrel" of oil produced from any well by any company might end up in any country. Realistically, that "barrel" of oil will end up in the country that is willing to pay the most + the cost of shipping...sooo, if a well is shut down in South Africa, then they will be willing to pay a higher price for Persian Gulf oil, which in turn makes oil less available to Europe, who is then willing to pay more for Russian oil, and so Russia is willing to pay more for Canadian oil, and Canada is willing to pay more for U.S. oil. The end result is that YOU, the consumer, must either be willing to pay more for your own oil, or else you must consume less oil. The choice is yours...

Of course, we all know that demand for oil in the short term is nearly perfectly inelastic, while demand for oil in the long term is very inelastic - Now in layman's terms: As the price of gasoline goes up, your willingness to buy gasoline very likely does not go down - or if your willingness does go down, then as the needle of your fuel gauge starts pointing towards "E", your willingness again goes back up - and it's not like you saved anything by not buying gas for those extra two days, because now you have to put those extra two days back into your tank on top of what you would have bought anyways...effectively: you're going to buy gas, no matter the cost.

The fourth point, the second of the two important points, and another misunderstood point. The oligopoly known simply as "OPEC" (Oil Producing and Exporting Countries).
OPEC exists solely to maximize the profits of its members. It's like a homeowners association: we don't have legitimate rule, but we're going to punch you in the ovaries if you don't listen to us. (This is part of the reason that I threaten the very idea of a homeowners association whenever it is brought up/mentioned/etc.) So OPEC, like I said, exists solely for profits. A little over a decade ago, when demand for gasoline was in the middle of it's skyrocket, OPEC decided to try an experiment: What happens if we simply don't produce enough gasoline for everyone?

Well their experiment was a resounding success: they found that when they produced a little less oil, they made a LOT MORE PROFIT on that oil. They did it a few more times, reducing the quotas for the member countries until they found that they could maximize their profits while saving more of their reserves.

Think about it: if you made 1000 widgets a day and people paid $0.99 per widget, but then found out that people would pay $4.00/widget if you only produced 750/day because they wanted the widgets that bad - there's no way in hell you'd make 1000 widgets a day. You'd go for less work = more money every single time.

Now: the misunderstood part about OPEC: No NON-OPEC countries are big enough to replace demand for oil - not singly and not combined. If we all produced oil at 200% capacity and OPEC completely ceased oil production, the price for gasoline at our pumps would probably jump to well over $10.00 or $20/gallon. By this reasoning, OPEC gets to set the price of oil at whatever makes them the most profit (by limiting supply), and there's nothing you or I can do about it. If we can produce enough oil here to pay only $0.50/gallon at the pump, but Germany is willing to pay $500/barrel + shipping for that oil, then we're going to pay $500/barrel for that oil here at home.

Wouldn't it be nice if oil produced on Federal lands belonging to "We the People" stayed in the U.S.? Wouldn't it be nice if "We the People" had more access to all that oil locked on Federal land or offshore? It's just sitting there like a candy bar on the counter...

Is Cordy advocating socialism? I am confused now...

:giggle::giggle::giggle:

It ain't redistribution if you own it. :idea:

Fooger expanded on several points. I would probably refine a few of them: Saudi is price setter for now more than OPEC as a whole; Saudi is conscious that raising prices to the point of tipping countries in to global recession is not good for their profit; the size and consumption of the USA gives us more pricing power as purchasers vs other nations; no mention of the WTI vs Brent relationship; there is more demand elasticity than he gives credit for over intermediate-to-longer time periods.

I'll try to cite sources later but it is Monday.

I'm running a Caddy II Pickup (rebadged Skoda Felcia Pickup) 1.9 SDI at 47mpg mixed (it was cheap and is rusty). :)
Not a sporty one, but it hauls engines and other vital stuff.

$2.36 per liter currently...
Taxes "shield" us from the market changes (only about 50% increase the last 12 years, compared to close to 400% in the US)

A first-year econ student would say that you have it backwards.

It is a fundamental tenet of supply-and-demand economics that as the demand for a certain product rises relative to supply, the cost of the product goes up. And as demand decreases relative to supply, the cost goes down.

Think about what happens to the price of orange juice when there is an unseasonably harsh winter in Florida. The amount of OJ available goes down, and so the price of price of OJ starts to rise until a point of equilibrium is reached at which the higher price of the OJ depresses consumer demand for OJ to the point where demand no longer exceeds supply.

When this is not permitted to occur (such as when a government imposes price-controls), the result is that shortages occur. (eg: people who are willing to purchase the commodity at whatever price it is selling for are unable to do so, as there is no more supply, or because the remaining supply has been rationed, etc.)


Of course, the actual pricing of gasoline is rather more complex, and is tainted by emotion, speculation, and the existence of the futures market. But invariably, whenever some event occurs which either causes or threatens to cause a reduction in the supply of gasoline (hurricane in the gulf, pipeline rupture, war, embargo, OPEC nations agreeing to decrease production volume, etc), the result is an increase in the price of gasoline.

Private producers have ramped up production and are selling it to neighbor countries for a heafty profit.

Literally nothing about gas prices is "economics 101".

I've considered this possibility, and there are points for it, and points against it.

The idea is that Oil is a natural resource with a finite limit, but who owns the oil?

In property law, the owner of land legally owns everything beneath the land, all the way to the core of the earth, and everything above the land, all the way to the edge of the universe. There are limits with what can be done with that property, but in theory, that's property ownership - if there's an oil deposit beneath a piece of land, and you own the land, then you own the oil.

The social theory of the resource works like this: The government owns the oil - no ifs, ands, buts about it. In order to get the oil out of the ground, the government holds an auction on that oil. The bidders are the oil companies bidding on how much "profit" they will keep for themselves per barrel of oil pulled out of the ground. The lowest bidder wins rights to the oil deposit. Since there is no incentive to make an additional profit on the oil, the government owns the oil completely as soon as it is pumped out of the ground, and therefore the government would have full say over where the oil was sent (via. tanker/pipeline/etc.) Since it's in the govt's interest to make as much money out of the oil as possible, they too will begin "maximizing profits" by sending the oil to the highest bidder, except instead of generating "profits", the government generates "revenue", which in theory reduces the tax burden on U.S. citizens by that amount of money. Now, since "we the people" would LOVE this, we would have 300 new major drilling projects completed within the next 18 months, and our effective tax burden would be paid by the global population (not realistic, but in theory, work with me here) in ten years, we would run out of oil because we weren't limiting our production - which made oil cheap for the entire world and increased global dependence on oil. Cheap oil means that all of the developing countries significantly increased their oil consumption, and they now rely on oil far more than before. After that glorious 10 years of cheap gas and no taxes, we would be forced back to paying taxes, and the extremely high global demand for oil means that we'd be paying $10/20/30 per gallon of gas for a few years before demand came back down. Our government, having saved no money during those ten years, goes nearly bankrupt trying to figure out how to continue paying for the newest worthless programs and expanded agencies that it was able to afford during the oil bubble.

Could we limit production and make 50 years on our oil reserves? Absolutely, it would be easy - but will the "intelligent" voter choose the candidate that says we need to "increase taxes", or will he choose the candidate that says we need to "increase oil exports"?

In reality, only offshore oil could be produced by government, and even then, since it's offshore, government has to compete with other countries for that oil - and private companies who are going to drill for themselves instead of for government because they can make real profits for themselves vs. the $2.13/barrel they bid when the government offered the oil reserve on contract. On-shore oil can only be drilled by the government if the government already owns the land that the oil is beneath. The 5th amendment, combined with property law, makes it illegal for the government to take the oil beneath your property without fairly compensating you for that oil - which means that the government would have to pay you market price for the oil that they take, which means that the gov't would be allowed to make $0 profit on that oil, completely nullifying the purpose of making that oil a national resource in the first place...

land rights and mineral rights
 

Not every land owner owns the land to the center of the earth. There are mineral rights separate from land rights. Oh, there are water rights too.

At the 50,000 foot level, the current boom we see at Bakken is through private lands, as energy production on federal lands are being slow-walked. If you want coal from federal lands or oil off the coast of Louisiana, fuggedaboudit.

The evil and stupid Sarah Palin restructured oil revenues in Alaska during her short tenure as governor, as in that state the land belongs to the people. While private companies take the risk and are entitled to the reward, they had to do so in a responsible manner, and they had to pay the land owners (the people of Alaska) a percentage of the profits. I like that business model.

Good thing I didn't go on to econ102!

Good thing you flunked 101 then.

Giggitty, thanks for leaving the door open.

Did ya guys know the male cheetas are only sperm donors and then they are no longer in the family? I'm watching that now on wttw.

Yes.

I've watched every episode of Big Cats Diary.

I got an A at the time. I'm off with the supply/demand reasoning, but my theory seems to hold true. In terms of North American gas and oil exploration, there are obviously break even points. 5-10 years ago there was so much pressure on the market that many projects got shelved for years. Now that the economy (or investors at least) has turned around, at least on paper, I believe the flattening/reduction in domestic demand has justified the increasing prices. If the prices are left to fall, domestic production will lose the extra capital to finance the projects which are setting up the higher paying future exports.

That'd be great if we could produce enough oil inside our borders to sustain US demand...

You have two choices. Pay it or use another form of transportation. They don't force you to buy fuel. I just choose to pay for it. I bought a less fuel thirsty car and watch random trips. In the Miata, I just swipe the card and look away since it never seems to get over 14mpg (though its all in town and I can't keep my foot out of it). I also jog to the drug store when we need something unexpected. Don't like the price? Quit buying tanks designed to move 18k pound trailers just to go to the store.

There's more to oil consumption than just SUVs.

Amurikah is a big place. It's got lots of land, and wasn't settled (in the European fashion) until very nearly the advent of the industrial revolution and the steam locomotive, so our cities were not designed around the meideval concept of clustered fortification and travel distances being judged by the pace of a man on foot.

So we have suburbs and long commutes. Travelling 40-50 miles per day in a Prius is less fuel efficient than travelling 5-10 miles per day in a Ford Excursion.


We also have a culture of convenience. I'd wager that Americans probably consume more petrolium-based plastics and related items per capita than most Europeans. Why bother washing a metal spoon when you can just throw a plastic one away and replace it?


A lot of the US is located at latitudes which would be uninhabitable (or, at least, very unpleasant to inhabit) without the significant use of air-conditioning nearly year-round. Couple this with housing trends driven by the aforementioned suburbification (large numbers of large, cheaplyl-built and poorly-insulated homes) and that's a lot of power consumption. Granted, most of our energy is not (and never has been) petroleium-derived, but it certainly consumes fossil-fuels which could otherwise be used as substitutes for petroleium in other applications.


We're also pretty damned lazy. Spend some time hanging around any town in Germany or The Netherlands. One thing you'll notice is lots and lots of people commuting by bicycle. It's not because they're poor, it's just because that's the way things are done there. By comparison, even here in SoCal where the weather is perfect 367 days a year I see relatively few bicycle commuters.


I travel a lot. And I stay in lots of hotels. I honestly can't recall the last time I entered a hotel room in the US and the aircon wasn't already cranked down to "Fargo." Is it really necessary to be able to liquiefy helium at "room temperature" in an empty hotel room? Multiply that by however many million hotel rooms we have and it's a big number. By contrast, go into a newer hotel room in Germany, and you'll find that you need to stick your keycard into a slot in the wall in order to energize the HVAC system and most of the lights. When you leave the room, you take your card with you, and everything shuts off.

Lots of simple little shit like that.


And on and on...



Simply outlawing SUVs isn't going to fix anything. We'll find other ways to squander energy resources- it's in our nature.

we have plently to go around, people just want to say we dont, then suddenly: skyrocketing.

I'm against outlawing anything. Personal responsibility should dictate what we do and don't buy/use. Just don't cry when what you bought is putting you in the poor house because you bought beyond your means when things were artificially low.

Based on current production and demand trends, it is feasible that the US could attain energy independence in the next decade. Understand, that is all energy and includes sources like coal, natural gas, wind, solar, thermal, etc in addition to oil.

Also understand that projecting current trends 10 years in to the future is like making a 1000 yard shot with a rifle: a small change in trajectory on the near end can make a huge difference on the far end.

And that works well in situations in which the decisions made by any given individual have consequences which affect only that individual.

If I elect to eat nothing but McFoodstuffs and bacon-wrapped lard, I'm going to get fat and develop heart disease. And if I choose to over-extend my purchasing ability by maxing out my credit cards to buy a bunch of stuff I don't need, then I'll probably wind up facing collections agencies and maybe file bankruptcy.

But what happens when the decicions of a large group of individuals have consequences which affect an entire society?

If a hundred million people eat their way into poor health, then the whole insurnce and healthcare industries become overtaxed. And if a hundred million people over-extend themselves financially, then you wind up having a "mortgage crisis" or a "financial meltdown."


It's much the same when discussing the allocation of finite commodities.

I choose to live close to work and commute by bicycle. If everyone did this, then we would all enjoy clean air, zero congestion, and no wars / political hand-wringing over gasoline. But since I am in the minority, and most of the people around me do not elect to do what I am doing, I have to suffer the consequences of their actions (traffic congestion, smog, oil wars, etc.)

Out here in the southwest, the same story plays out with water. It's all well and good if I am extremely conservative about my use of water, but if the 30 million other residents of southern California, Nevada, Utah and Colorado all burn through as much water as they can, we're all going to wind up with shortages, in addition to the poor bastards down in Arizona and New Mexico.


So it's sort of a prisioner's dilemna. Why should I conserve if the people around me aren't going to?

this^2

I frame the question a little differently: im insignificant.

All the hotels in China/Taiwan were like this as well.

One of the most fascinating things of traveling for me is to see how other nations adapt to energy costs (generally higher than our own, especially compared to income). I saw more solar water heaters and even solar panels in China than I've seen my whole life in the US. Just simple shit but when a lot of people do it the impact is amazing.
I would love to see that projection, especially with how we're going to reduce oil consumption to levels we can produce.
The only argument is the savings in expenditures but chances are those are miniscule at this time. The only way we'll see real changes in consumption in these areas will be through increased cost but I'm sure that idea won't go over well in here. :giggle:

Understand also that the costs in China may or may not be more heavily subsidized, especially in solar.

PM me your email address and I'll send you a couple hundred pages worth of research reports and white papers. :party:

Also, note I am talking about energy independence in terms of domestically produced energy. Again, oil imports peaked in the USA prior to the recent global financial crisis/Great Recession/etc (circa 2005 or 2006).

I don't advocate coal-fired smoke stacks on every corner but ANWR, Keystone, offshore and opening Federal lands to oil and natural gas and we'd be paying $1.25 per gallon for gas. Making sure that domestic production stayed domestic (it's our oil, after all) would be nice too.

And just think of the high-paying jobs and the reduction in trade deficit this would cause.

By simply signaling to the world that we were serious about energy independence would drop the price of gas by .50 in one week.

This only works if we can produce >= 100% of our domestic demand. If we have to import *any* amount to meet our own demand, then we're back in a global market. Also consider that at the oil price point which produces $1.25/gal gasoline, domestic oil demand is going to skyrocket relative to what it is right now - we wouldn't have to produce 100% of our current domestic use to see $1.25 at the pump; we'd probably have to produce closer to 180-200% of our current domestic use.

In the end, making sure "our oil" stays "our oil" is somewhat of a pipe dream. If you owned 100 acres of land and you struck oil on your land and you had the option of either paying $1.25/gallon to have your oil refined into gasoline that only you were allowed to use, or selling that oil for $2.75/gal profit to every single person in your hometown while also being forced to pay $4.00/gallon yourself which would you do?

We can, easily. Especially if you consider Canada as just a bunch of extra states. Cold ones. I would HOPE that demand would skyrocket, as that would mean that our economy was heating up. Extra demand would bring extra jobs. I like to see fellow Americans working. Heck, maybe those extra tax dollars could reduce the debt and deficit.

Edit--Our Oil. How about this--private land, private oil. Federal land, Ahmurrican oil. Otherwise, check page 147, addendum 2a for my further notes on my energy policy. :)

And while we're at it, incentivize solar, new nuclear, natural gas and clean coal in order to balance our power consumption. I don't know about where you live, but my electric rates go up 6-8-10% every year. That ain't right.

+1 vote for putting up a Huge nuclear power plant in So-Cal.

While our economy would indeed heat up pretty significantly with $1.25 energy, it would also heat up significantly with $4.00 exports, though I think you may be some confusion in your analysis of fuel demand / supply / economy / price points. The economy heats up because the less expensive oil means that EVERYTHING becomes less expensive to produce, meaning marginal costs fall dramatically. Anything that is ever put on a truck, airplane, train before it gets to you, or anything which is made out of oil or packaged in things made out of oil becomes less expensive. Less expensive consumables means the cost of living goes down. If the cost of living goes down, then we can buy more luxuries....

Its a spiraling process, it's just a matter of if the spiral is going up or down at any point in time.

Realistically, you don't want demand for oil to skyrocket, because if that demand for oil skyrockets, then your price point shoots right back up through the roof. You want low demand, high supply, and low prices.

Unfortunately, canada isn't just a bunch of extra states, and anything short of a political takeover means that canada is going to capitalize by selling to the highest bidder - which at $1.25/gallon of gas, ain't us.

Extra demand for oil would bring extra jobs where? To the oil refineries? It's the extra jobs which increases demand for the oil.

Nope, I get it. I just assume that as demand skyrockets, those who want to make a profit will bring more energy online.

As for nukes, I've got a nuclear power plant less than 10 miles away. San Onofre (Trestles, Old Man's, etc.) is considered some of the best surfing on the West Coast. Extra added bonus--the reactor domes look like two huge boobs. :) Unfortunately the reactor's offline for repairs. Most reactors nowadays use older technology that frankly isn't as safe as a new design, but a retrofit would brings 10's if not 100's of millions of dollars in regulatory compliance. Let's keep it safe, but let's not go all "Ralph Nader" on the situation.

We've already got two plants, and we're in serious danger of losing one of them.

San Onofre (which does, in fact, resemble two gigantic tits rising up out of the beach) is located just up the road from me. It houses two reactors which have been off-line all year. Long story short: it's an older facility which received a retrofit a couple of years ago. As it turns out, the Japanese are bad at math, because the steam generators (large boilers which couple heat from the reactor loop to the turbine loop) which Mitsubishi sold us were incorrectly designed, and they started leaking in January due to corrosion and mechanical wear from vibration.

The anti-nuke crowd, of course, have seized on this as an argument for mothballing the plant rather than repairing it. Meanwhile, our fossil-fuel plants are running full-tilt-boogie and they've even resurrected two old generators at the Huntington Beach plant which had been de-commissioned years ago to try to maintain grid stability throughout the summer.

I've replaced all of the batteries in my UPSes. Frankly, I'm amazed that we haven't had any blackouts yet, given the record heat last week.

I'd also love nothing more than to see San Onofre repaired and put back on-line, and several new plants built. I would fully support may tax dollars being used to underwrite this construction. Between the enormous heat-sink provided by the Pacific ocean (crucial for nuke plant operation) and our tremendous surplus of sunshine, we have it entirely within our power to be the first state in the entire world whose electrical generation is completely fossil-fuel-free.

Stay classy, San Diego.