Alexis Madrigal: Why are gasoline prices falling?

Freshly returned from a few months spent with his new baby (congratulations!), Alexis Madrigal at the Atlantic wonders why gas prices are falling in the US. He notes that the national average is the lowest it’s been in almost three years.

He identifies a few factors that influence gas prices, most notably world oil prices. These prices have fallen, due both to demand and supply factors, and most importantly how higher gas prices induced consumers to change their behavior:

But they [gas prices post-Arab spring] couldn’t go too high because, at least here in the U.S., demand has softened. Americans are buying (slightly) more fuel-efficient cars, on average. And younger people are driving less.

Which is all a pretty rational response to the big run up in gas prices during the mid-2000s.

He then points out (courtesy of Brad Plumer) something that shows just how complex the dynamics are in gasoline markets — gasoline and diesel are joint products, so to produce more diesel you get more gasoline. Diesel is in high demand in Europe, thanks in part to the economical and energy-efficient, yet also sassy and full of fun, TDI diesel engines from Volkswagen and Audi (and it’s an interesting question to ask why US regulations still provide such barriers to TDI diesel, but I’ll leave that as an exercise for the reader ;-0 ). If you are refining diesel in the US to export to Europe, you will increase the supply of domestic gasoline, shifting the supply curve out. In the face of that softened demand, that’s going to mean lower prices.

A couple of neat points, but this post is mostly an excuse for me to say how glad I am that Alexis is back from paternity leave! I missed his writing.

Notes on the post-Sandy NJ/NYC black market in gasoline

Michael Giberson

Jeffrey Tucker at Laissez Faire Today points out Peter C. Earle’s blog on the emergence of a black market in gasoline in northern New Jersey and New York City during the post-Storm Sandy period. A few days after the storm swept through, when politicians began reasserting their willingness to enforce price gouging limits on gasoline sales, Earle went looking for signs that the price caps contributed to gasoline sales shifting to the black market.

Without too much trouble Earle found the black market: tweets naming offer prices or bid prices much higher than legal retailers could legally charge; on-line want ads with prices asked at $15 or $25 per gallon, and other ads with buyers suggesting $5. He tracked bids and offers for a few days, noticing a kind of rough fumbling for a mutually workable price–the way price discovery works when it has to work in the shadows. As news stories noted at the time, some persons were offering a variety of personal services in exchange for gasoline in place of a cash payment.

I wish news organizations with their teams of reporters and camera crews would have explored these market developments more carefully-not just going for the “sex for gas” titillation, but also reporting the more ordinary money trades. It would be great to have price, quantity, and location data for all of the black market exchanges, too, so as to get a clearer picture of the costs of price gouging policy’s price caps. But Earle’s reports provide some useful insight into how people creatively respond to politicized efforts to control prices. Earle has performed a real public service.

It is interesting to note that consumer bids tended to anchor around $5/gallon, perhaps near the highest that consumers could imagine being willing to pay under most circumstances, and yet sellers were often offering at a much higher level. (This $5 stickiness in buyer bids may be evidence of an anchoring effect, that is to say a behavioral bias that causes the market to function less efficiently in that consumers resist transactions that would contribute to consumer surplus. See related issues raised here.)

New York newspaper says “add shame to penalty for gouging”

Michael Giberson

Is price gouging like highway robbery? The Journal News, from the suburbs north of New York City, said: “Add shame to penalty for gouging“:

Given the extraordinary cost of just about everything in New York, it is often difficult to distinguish price-gouging, which is both illegal and despicable, from the usual highway robbery, which is just sort of expected. Then there are those merchants, as seen during Superstorm Sandy, who make the distinction so abundantly clear that all doubt is removed. Stiff fines and restitution should await these offenders, should the allegations hold up; a measure of public shaming ought to be part of the menu of sanctions as well.

Attorney General Eric Schneiderman, following up on familiar pre-storm threats and warnings, announced enforcement actions Thursday against a dozen gas station operators who allegedly kicked motorists when they were down — after rampaging Sandy darkened many gasoline stations, disrupted gasoline supplies and caused consumers, many toting gasoline cans, to endure interminable waits outside stations. Long lines and even rationing weren’t all that they faced.

For example, there were Mobil stations in Katonah, at 80 Bedford Road, and in Spring Valley, at 189 Route 59, where gasoline sold for $4.79 and $4.65, respectively, according to the allegations from the AG’s Office. Those prices — like all the charges highlighted by Schneiderman — were for a gallon of regular, and decidedly higher than normal, even in this high-cost region.

There was the BP station in Elmont where the price was an attention-getting $6.99; prices at the Shell in East Elmhurst, according to complaints, ranged from $4.89 to $7.90.

But they had nothing on the purported gouging leader, the Mobil at 3424 East Tremont Avenue in the Bronx, “where a consumer waiting in line for over an hour was just three cars from the pump when she was told that she would be charged $50 for five gallons of gasoline — $10 per gallon.” Stations nearby charged $3.95.

If I may interject, I think it is useful to distinguish between cases of suddenly higher prices and cases in which stations charge higher than the publicly posted price.

The “Stations nearby charged $3.95″ will be an incomplete accounting of the cost, since they must have had lines too. It would be great if the New York Attorney General’s office collected data on time spent in lines, might be useful in helping to calculate the full cost of low station prices.

Continue reading

New Yorkers didn’t ‘share the pain’ of higher gasoline prices during emergency

Michael Giberson

One idea advanced by proponents of anti-price gouging laws is that after disaster strikes people should put aside their usual self-interests, join in with the community, and share in the burden of recovery. What these proponents often miss is that normal market adjustments will support a sharing in the burden of recovery, even among those lacking much in the way of charitable impulses, when prices are relatively free to adjust.

Prices go up in the disaster zone, supplies are diverted from elsewhere, prices go up elsewhere, people elsewhere cut back a little in response to higher prices, and there we have it: sharing the pain. Adam Smith’s “invisible hand” is a helping hand to those in need.

But the actions of the “invisible hand” were constrained by the very visible hand of the state. In both New York and New Jersey state officials were prominently threatening to slap businesses with thousands of dollars in fines if prices went up too much. Prices did go up a bit in the disaster struck area, but not enough to prompt extraordinary efforts from elsewhere. New York saw none of that normal, voluntary response to changing supply and demand conditions elsewhere, and post-disaster sacrifices remained concentrated mostly in the hardest hit areas.

Consider the price chart below, which shows regular gasoline prices in Albany, Buffalo, and New York City, all in New York State, from June of 2011 through the end of November 2012. Typically these prices move up and down together with just a little localized variation. Beginning at the end of October 2012, during Sandy and its aftermath, prices in the New York City moved sharply higher for nearly two weeks. In New York state outside the disaster-struck area, however, gasoline prices barely slowed their descent from late summer highs.

18_months_of_NY_pricesGasoline lines? Odd-even rationing? Gasoline stations pumped dry? Yes, but only around the power-out, flooded-out, storm-struck area.

Elsewhere in the state: business as usual but for the occasional invitation to chip in $10 to the Red Cross.

ROCKETS AND FEATHERS NOTE: Interestingly, Buffalo prices pretty consistently show a slower price descent when prices are falling than either New York City or Albany. I recall that at the end of 2008 a Buffalo-area Congressman was complaining about the same thing. See here and here. The second half of 2008 was a time of fairly consistently falling gasoline prices throughout the U.S., interrupted only by a short lived mid-September price spike due to Hurricane Ike. Gasoline price researchers, start your engines.

Another round of price gouging charges in New York

Michael Giberson

The New York Attorney General’s office continues its aggressive pursuit of price gouging violations, announcing another 12 cases last week. From the press release:

“Our office will continue to take enforcement actions against price gougers because ripping off New Yorkers is against the law,” Attorney General Schneiderman said. “We are actively investigating the hundreds of complaints we’ve received from consumers of businesses preying on victims of Hurricane Sandy. There must be no tolerance for unscrupulous individuals who take advantage of New Yorkers trying to rebuild their lives.”

… Among the current batch of 12 enforcement targets is a Mobil station at 3424 East Tremont Avenue in the Bronx where a consumer waiting in line for over an hour was just three cars from the pump when she was told that she would be charged $50 for five gallons of gasoline – $10 per gallon. In contrast, stations nearby were charging $3.95 a gallon.

At a second station, the Coastal station at 1575 Route 112 in Port Jefferson Station, a consumer reported being charged $4.69 per gallon of gasoline while neighboring stations were charging between $3.69 and $4.05. One consumer waited in line for over an hour and did not see a sign detailing prices until after the attendant began pumping gas for the customer.

The 12 stations charged with price gouging are branded: Coastal, BP, Liberty, Ultra, Rio, Getty, Gulf, Shell, Sunoco, Mobil (3). Charged in the earlier 13 price gouging cases were: The 13 gasoline stations are branded: Shell (3), Mobile (4), USA Petroleum (2), Babylon Gas/Express Market, Sonomax, Delta, and Getty.

In New Jersey seven gas stations have been charged with price gouging, with the following brand names: Lukoil (2), Gulf, Delta, Exxon, BP, and Sunoco.

New York state also moves quickly on price gougers

Michael Giberson

The New York Attorney General’s office takes action against 13 gas station owners in the state for price gouging. Like last week’s prompt response by New Jersey, this is unusually quick work for price gouging cases.

A few quotes from the AG’s press release:

NEW YORK – Attorney General Eric T. Schneiderman today announcedthat his office has notified 13 gas station operators of his intent to commence enforcement proceedings against them for violations of the New York State Price Gouging statute. These are the first of what is expected to be a series of actions taken in a wide-ranging investigation launched in the wake of Hurricane Sandy for price gouging after receiving hundreds of complaints from consumers across the state of New York.

“Our office has zero tolerance for price gouging and we are taking action to send a message that ripping off New Yorkers is against the law,” said Attorney General Schneiderman. “Today’s action is the first in a series of steps my office will take as we continue to actively investigate the hundreds of complaints we’ve received from consumers of businesses preying on victims of Hurricane Sandy. We will do everything we can to stop unscrupulous individuals from taking advantage of New Yorkers trying to rebuild their lives.”

Included is some explanation of price gouging law details:

New York’s price gouging law does not specifically define what constitutes an “unconscionably excessive price.” However, the statute provides that a price may be “unconscionably excessive” if: the amount charged represents a gross disparity between the price of the goods or services which were the subject of the transaction and their value measured by the price at which such consumer goods or services were sold or offered for sale by the defendant in the usual course of business immediately prior to the onset of the abnormal disruption of the market.

In other words, a “before-and-after” price analysis can be used as evidence of price gouging. Evidence that a price is unconscionably excessive may also include proof that “the amount charged grossly exceeded the price at which the same or similar goods or services were readily obtainable by other consumers in the trade area.” However, a merchant may counter with evidence that additional costs not within its control were imposed for the goods or services. Notably, the price gouging law does not prohibit any disparity between the price charged before and after there is an abnormal disruption of the market. Rather, the statute prohibits a “gross disparity,” when it is clear that a business is taking unfair advantage of consumers by charging unconscionably excessive prices, and increasing its profits, under severe circumstances that call for shared sacrifices.

Attorney General Schneiderman added, “These thirteen retailers stand out from others in the high prices they have charged and in the size of their price increases.”

Note the phrase “additional costs not within its control.” If a store manager takes actions to increase cost that are within the managers control: paying overtime to an employee, or undertaking extraordinary efforts to stock up on goods that post-emergency consumers might use, it may find that the state does not consider such costs as legitimate grounds for charging higher prices. (Case in point: People v. Chazy Hardware. Expense and risks involved in effort to procure generators after an ice storm not grounds for charging higher price.)

Two gasoline price gouging examples listed in the press release:

Attorney General Schneiderman noted as an example that, in the case of the Mobil station located at 40-40 Crescent Street in Long Island City, the price per gallon was posted at the roadside as $3.89. The line for the station was three city blocks long. When the consumer got to the pump, the price sign noted a cash price of $4.89 for regular gas and a credit card price of $4.99. The consumer paid the $4.99 using his credit card because he was low on cash and needed the gas.

In another example, at the Express mart station located at 1000 Rte 9 in Lindenhurst, a consumer has reported that there were no road signs indicating the gas prices, only a plywood sign next to the road stating they were only accepting cash for gasoline purchases. There was a long line at the gas station. When the consumer pulled up to the pump he was told the gas price was $4.99 a gallon. He paid the $4.99 because he needed the gas.

The 13 gasoline stations are branded: Shell (3), Mobile (4), USA Petroleum (2), Babylon Gas/Express Market, Sonomax, Delta, and Getty. Without looking for any evidence, I’ll hazard the guess that the seven “big name” stations are all franchisees and not vertically integrated companies with refineries and distribution operations and the other six are small local chains or franchisees of regional brands. Compare to the NJ seven listed here.

Refiners are getting squeezed by high crude oil prices and faltering U.S. demand, so let’s increase their costs!

Michael Giberson

The Houston Chronicle reports on the difficult financial position of many U.S. refineries. Crude oil prices are up for refineries relying on international markets, but U.S. consumers are moderating their gasoline consumption at higher prices and so refiners find their margins to be getting squeezed.

A good article, but right at the end we get this oddball proposal:

Still, refineries could do more to curb skyrocketing gasoline prices, said Amy Myers Jaffe, fellow at Rice University’s Baker Institute. A government mandate for refineries to maintain a certain level of gasoline in storage would help to curb market fears of a shortage, fears that fuel rapid price spikes, she said.

“We should be requiring inventories of gasoline,” Jaffe said, to reassure the market that supplies won’t run short.

Seems to me a non sequitur wrapped in a riddle: refineries should be doing more to curb skyrocketing gasoline costs? Why refineries? Every indication is that gasoline prices are being driven by world oil crude oil prices (expect for the bottlenecked supplies of the northern Rocky Mountain states). There is no indication that “the market” is fearing a shortage of gasoline, is there? By the way, gasoline inventories are pretty high for this time of year AND consumption has been trending down, so who thinks consumer fears of a gasoline shortage are a problem?

And, I guess this is my real question, what makes Jaffe think that the solution to the refineries’ current woes is to impose regulations that would significantly add to their costs? Exactly how is this going to “do more to curb skyrocketing gasoline prices”?

Jaffe is usually smarter than this, so I’m a bit confused by the idea.

Are refiners and wholesalers price gouging on petroleum products in Alaska?

Michael Giberson

As the chart below shows, during the summer of 2008 gasoline prices in Anchorage, Alaska switched from following typical prices in the lower 48 to a modest but notable amount above such typical prices. Not shown, but you can check it out at Gasbuddy.com where I generated the chart, after the summer of 2008 Anchorage prices have tracked more closely with Honolulu, Hawaii prices instead of prices in the continental United States.

Anchorage, Seattle and Houston gasoline prices from March 2006-March 2012

Anchorage, Seattle and Houston gasoline prices from March 2006-March 2012

We’ve discussed this before. As noted here in a post in 2009, “For years, average prices in Alaska were about the same as the U.S. average price.  Higher costs of delivery in Alaska were mostly offset by the nation’s lowest gasoline tax, just 8 cents a gallon, and the result was a price that more or less tracked the U.S. average price.” More from that post:

That pattern changed beginning in June 2008.  Prices had been marching up everywhere, but the price march stalled in the lower 48, while in Alaska (and Hawaii) prices continued to rise for another month.  Prices fell sharply throughout the country from July through December – excepting a short pause during the late hurricane season in the lower 48 – but Alaska’s prices now seemed to track the higher prices of Hawaii rather than returning to the U.S. average.

The 2009 post reported the conclusions of an Alaskan investigation: no illegal collusion found, but oligopoly probably is minimizing competitive pressure.

Some Alaskan politicians want to do something about current, continuing, relatively high (compared to nearby Seattle) prices. A committee of the Alaskan state senate just held hearings on SB 28, an act that would declare it illegal to sell or offer to sell certain petroleum products at unconscionable prices. (More information on SB 28 here.)

From the Associated Press:

JUNEAU, Alaska — A bill aimed at gasoline refiners that would ban price gouging received a hearing Tuesday before a skeptical Senate committee.

Sen. Bill Wielechowski said his proposal is a response to the “unconscionable” disparity between the prices Alaskans pay for gas and heating fuel compared to rates elsewhere on the West Coast that have traditionally been similar. …

Under the proposal, prices could not exceed 10 percent of those charged by Seattle-based refiners. Alaska’s attorney general would be allowed to investigate claims against companies refining more than 1 million gallons of fuel per year, and companies guilty of price gouging would face a penalty equal to at least 10 times the profit gained from the practice.

Sen. Cathy Giessel, R-Anchorage, said the proposal misses its target.

She said it amounts to a “jobs bill for attorneys” by setting up an environment for constant lawsuits, and that it would drain companies providing Alaskans a much-needed product. She also said Seattle isn’t a fair comparison. Tesoro has exorbitant transportation costs to get crude oil from the North Slope and elsewhere, she said, and they also run their production facilities on cheaper fuel.

“This appears to vilify refineries by saying that they’re ‘unconscionable’ and ‘disreputable,’” Giessel said.

Loss of ethanol subsidy boosts gasoline prices a little, E85 prices a lot

Michael Giberson

The basic math is pretty simple: most gasoline in the U.S. has about 10 percent ethanol, so the the 45 cents/gallon VEETC subsidy reduced the price of gasoline about 4.5 cents. The subsidy expired at the end of 2011, so one reason gasoline prices have gone up a few cents since New Year’s Day comes from the loss of the subsidy. (World crude oil prices are up a bit, too.)

Normally, a subsidy would be shared by producers and consumers, so the loss of a subsidy would be shared. But the Renewable Fuels Standard quantity mandate protects producers from taking a hit. The main effect here is that the consumers’ mandated purchases of ethanol will no longer be subsidized by taxpayers, and therefore the price rises.

But lest you gasoline consumers feel too bad, consider the plight of the drivers relying on E85, a blend of 85 percent ethanol and only 15 percent gasoline. The math here is simple, too: 85 percent of 45 cents meant that E85 was receiving about a 38 cents/gallon subsidy, and now that subsidy is gone.

The Minneapolis, MN Star Tribune reports, “The Road for E85 Just got Rougher“:

The high-ethanol fuel known as E85 has gained a small foothold in Minnesota in recent years, thanks in part to a subsidized price advantage and the presence of major producers and blenders in the state.

Now, the federal tax credit that boosted the industry is gone, raising questions about the fuel’s future.

Without the 38-cent-per-gallon subsidy that went away Jan. 1, E85 prices are moving up. It’s still cheaper than gasoline, but the shrinking difference may not be enough to compensate drivers who get fewer miles per gallon because of the fuel’s lower energy content.

[Recall that ethanol has a lower energy density than gasoline, so drivers get fewer miles per gallon with E85.]

The post-subsidy era also brings tough choices for owners of flexible-fuel vehicles, including the state of Minnesota, which has more than 3,000 vehicles capable of burning E85, and in 2010 used 963,000 gallons of it.

They must decide whether to support a fuel that is 85 percent home-grown ethanol even it it’s no longer competitively priced. Minnesota is the nation’s fourth-largest ethanol producer, and leads the nation with 364 retailers selling E85.

[...]

Last week in the Twin Cities, E85 was 16 cents to 40 cents lower than regular gasoline, which also rose in price. That’s as little as a 5 percent price difference. E85’s price advantage has sometimes been more than four times better and averaged 17 percent last year, according to the state Commerce Department.

At Lerum Auto, the only E85 dealer in Richfield, owner Dean Lerum had another 1,000 gallons of E85 delivered on Wednesday — at the new, unsubsidized price.

“I am going to let the market decide,” said Lerum, for whom E85 once represented 25 percent of fuel sales, but now accounts for 5 to 7 percent. “If it drops a whole lot more, I will get rid of it.”

Two more related stories from around the web

Kevin Drum at Mother Jones makes the call: “Ethanol Subsidies: Not Gone, Just Hidden a Little Better

As the Congressional Budget Office wrote back in 2010, “In the future, the scheduled increase in mandated volumes would require biofuels to be produced in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included.” [Italics mine. -KD] In other words, the mandates have grown so large that the tax credits barely made a difference anymore. Demand for ethanol is driven by the mandates, not by the tax credit. When you take away the tax credit, nothing happens: Demand stays high because the law says so, corn prices go up accordingly, and corn farmers stay rich. The subsidies were a nice little fillip on top of that, but at this point it’s basically chump change.

The RFS mandates are the real reason that buffoons can ramble on about the history-making public policy magnanimity of the ethanol lobby. Drum cites Aaron Smith, of UC-Davis, writing in the American Enterprise Institute’s American.com: “Children of the Corn: The Renewable Fuels Disaster

[W]hy did the powerful corn ethanol lobby let [the subsidy] expire without an apparent fight? The answer lies in legislation known as the Renewable Fuel Standard (RFS), which creates government-guaranteed demand that keeps corn prices high and generates massive farm profits. Removing the tax credit but keeping the RFS is like scraping a little frosting from the ethanol-boondoggle cake.

And Smith is just getting started, so if want more reasons to hate ethanol policy then read the whole thing.

ADDED, Here is a more complete analysis of the relationship between the Renewable Fuels Standard mandates and the (now expired) tax credit, and also see the list of readings at the end of the commentary: de Gorter and Just, “The Forgotten Flaw in Biofuels Policy: How Tax Credits in the Presence of Mandates Subsidize Oil Consumption,” RFF Weekly Policy Commentary (June 9, 2008).

New York Attorney General proposes to prohibit use of business-related reasoning in gasoline wholesaling

Michael Giberson

It sounds kind of funny to say the New York Attorney General wants to prohibit business-related reasoning in gasoline wholesaling. After all, gasoline wholesaling is a business activity and generally business-related reasoning would be entirely appropriate. It sounds like asking a court not to act on law-related reasoning or asking a politician not to think politically. But read the report put out by the AG’s office, “Report on New York Gasoline Prices,” and see what it says on pages 37-39.

At issue is “zone pricing,” a practice by which wholesalers charge differing prices to retailers in different locations, usually based on an estimate of what the market will bear. A New York state law passed in 2008 tried to ban zone pricing for gasoline, but it didn’t seem to have much effect. The report noted, “Certain areas of the state that had relatively high retail prices before the law took effect in 2008, such as the South Fork of Long Island and northern Westchester, still tend to have relatively high prices.”

The problem, according to the AG’s report, is that the anti-zone pricing law prohibits only arbitrary price differences between different locations. (See New York’s General Business Law § 399-ee at 1 (m): “Zone pricing means the arbitrary price differences within the relevant geographic market.”) The report notes that wholesalers admit charging different prices to retailers in different locations, but say the price differences are not arbitrary because they are “based on business-related market and economic conditions such as operating costs, degree of competition, the specific location of a station, and other factors.”

The report says “the inclusion of the word ‘arbitrary’ in the definition of zone pricing renders the prohibition toothless.” The AG’s solution is to propose deletion of the word from the definition. Where the law now merely prohibits certain arbitrary price differences, the AG wishes to prohibit price differences. If the state legislature agrees, the law would then prohibit the use of all kinds of normal business-related reasoning in New York’s wholesale gasoline business.

The state legislature ought not to accept the AG’s recommendation, but rather ought to toss out the zone pricing ban.

As the AG’s report itself indicates, there is no evidence of any consumer harm from zone pricing. With zone pricing affluent consumers may pay a little higher price for gasoline than lower- and middle-class consumers, but there is no reason to expect consumer prices are higher on average due to zone pricing.  (As I put it back in November 2008, “anti-zone pricing legislation is essentially consumer protection for affluent customers unwilling to spend their time shopping around for lower prices”). The toothless zone pricing ban is apparently causing no harm either, so doing nothing would simply leave an empty law on the books.

On the other hand, prohibiting the charging of reasonable price differences by gasoline wholesalers in New York would serve to screw up the whole state’s wholesale gasoline market in an effort to keep customers in affluent areas from paying a few more pennies per gallon of gasoline. Seems like a too high price to pay.

 

[NOTE: The report also includes the AG's report on gasoline price movements in the state during 2011 and a discussion of price gouging. These other issues may be discussed here later this week.]