Lynne Kiesling
In KP’s three years of life there’s been a lot of coverage of oil and gasoline markets, and some dominant themes have persisted:
- The unintended consequences of price caps are usually pernicious.
- Environmental regulation, in this case in the form of the EPA federal fuel oxygenate requirement, causes balkanization of regional gasoline markets, causes price differentials across regions, and exacerbates seasonal price spikes.
- The price of oil is one among many factors influencing gasoline prices; environmental regulation is another, as are taxes. Regulation and taxes vary by jurisdiction, causing prices to vary.
- Gasoline prices, like most other retail prices, follow a “rockets and feathers” pattern of response to oil prices. However, just because retail prices are slow to fall when oil prices do, that does not mean that retail gasoline markets are uncompetitive. It’s more a reflection of the inelastic demand for gasoline.
- Part of the reason why the demand for gasoline is inelastic is what I mentioned this morning; fuel is a smaller share of household budgets for most US households.
- Every spring like clockwork, gasoline prices rise for a combination of complex reasons (winter-to-summer fuel switchover, summer driving increase, etc.).
- Every spring like clockwork, Illinois Senator Dick Durbin whinges about “greedy, price-gouging” oil refiners who are sticking it to consumers.
- Every spring like clockwork, the Federal Trade Commission spends a lot of time and effort to investigate the competitive conditions in retail gasoline markets. Every spring like clockwork, they find no evidence of oil refiners’ abilities to influence retail prices in an anticompetitive fashion.
- Right now, high oil prices are being driven by China’s (distorted and subsidized) demand and by risk premia due to uncertainty in the Middle East, Venezuela, and Africa.
- OPEC and its shaky ability to sustain a successful cartel (because of hard-to-detect cheating from smaller members) does not determine world oil prices. OPEC’s decisions influence world oil prices, but they are only one part of a much more complex story, and that complexity is beneficial because it dilutes their ability to withold and raise prices.
- [I saved this for last because it’s the important long-run point] Petroleum is scarce, perhaps even finite, in its supply. Technological change has helped us locate more of it, and pull it out of the ground where we might otherwise not be able to or where it would otherwise have been too costly. That’s the primary reason why prices fell in the 1990s. OPEC’s inability to sustain a cartel exacerbated that price decline. Price increases reflect expectations of future scarcity relative to demand and risk. That is the most powerful mechanism by which we learn both to conserve and to innovate.
[Leaves professor mode, goes downstairs to make herself a well-deserved Manhattan]