I’m Shocked, Shocked to Find Competitive Dynamics Going On

Lynne Kiesling

The Wall Street Journal reports this morning that “gasoline prices fall as imports rise, demand drops”. Naturally, I cackled gleefully and clapped my hands when reading this. The EIA weekly petroleum status report indicates that

Total product supplied over the last four-week period has averaged over 20.0 million barrels per day, or 3.2 percent less than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged nearly 8.9 million barrels per day, or 2.2 percent below the same period last year.

Two important things there: first, total product supplied is down 3.2 percent, even though 20 percent of refining capacity is still offline. Among other things, this indicates both that imports are higher, and that refiners are squeezing more gasoline out of every barrel of crude (the WSJ article notes both points). Second, high prices have led to a decrease in demand; demand is not very elastic, but at the margin price increases have reduced quantity demanded. The combination of these offsetting factors has led to prices falling, although they remain above pre-Katrina prices.

Here’s the information about imports:

U.S. crude oil imports averaged 9.2 million barrels per day last week, up 588,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 8.9 million barrels per day, a decline of 1.1 million barrels per day from the comparable four weeks last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged over 1.5 million barrels per day, setting a weekly record for the third week in a row, while distillate fuel imports averaged 311,000 barrels per day.

In normal refining conditions we don’t import that much gasoline from Europe, but now, with refinery capacity still not fully online and continuing high prices (although they have declined), imports are attracted to the US market.

This example provides an elegant illustration of the dynamics of market processes. Exogenous shock. Production capacity falls, prices rise due to supply curve shifting in. Quantity demanded falls, and perhaps even demand falls, shifting demand curve in, leading to further price reductions. Simultaneously, other suppliers bring product to market, lured by the higher-than-usual prices, shifting supply curve out. Incrementally, quantity and price change until they reflect the prevailing costs and preferences.

[NOTE: the KP Dad is visiting, and I’m on his laptop, and because he’s a security weenie his cookie setting doesn’t work and play well with the WSJ website for a link to the story. It’s on A2 of the print edition.]

4 thoughts on “I’m Shocked, Shocked to Find Competitive Dynamics Going On

  1. Wow … you’re Dad’s a security weenie about his laptop.

    For my Dad that means he wrapped a bun around his hot dog to keep his lap secure from mustard.

  2. As the money supply contracts during the coming mechanistic economic devolution, the value of all assets including oil, houses, precious metal, and equities will

    Google’s Telltale EEG (Exclamation Exhaustion Gap) Spike Near
    The Very End Of The Composite Market Second Decay Fractal

    It is fitting that the current three year 30/75/60 weekly
    fractal growth series, echoing in a smaller valuation manner, the
    great fractal progression from October 1998 to March 2000’s
    sixty-eight year Wilshire high should end with an exhaustion gap of
    Google, the dominant high tech software company.

    The exhaustion upped Google’s PE ratio from 74 to 75. Google is a
    remarkable reference source. However, its collective innovations and
    the real utilities of those innovations for the global economy, like
    so much of the earlier tech stocks, are probably overestimated and
    overvalued. Its PE ratio of 75 with linear projections for even
    greater PE ratios and a technically very telling exhaustion gap to
    new highs this last Friday occurred in the setting of a lower high
    and saturated current composite market. This is an aged and decrepit
    market that is already near the end of its second decay fractal and
    one that is being propelled by the afterburners and nearly exhausted
    fumes that represent the present historically cash poor mutual funds.
    This set of circumstances should be Deja Vu satori for those
    individuals and mutual fund managers who suffered 50 percent loses in
    the 2000 high PE high tech market. In 2000 alone Yahoo lost over 90
    percent of its market value in 12 trading months.

    The Wilshire 5000 equity valuation is ultimately and primarily fueled
    by the debt creation of the American consumer who in turn is
    dependent on American wages. The Wilshire remains the global bell
    weather equity composite index. The total cumulative value of the rest
    of the world equities roughly equals the value of the Wilshire 5000.
    The elusive but solvable solution for the Wilshire’s primary fractal
    decay pattern will retrospectively be very simple. While the
    macroeconomy is complex, the summation equity valuation product and
    patterns are not. Equity valuations grow and decay and otherwise
    generally ‘travel’ in non complex maximally efficient fractals.

    In the 1929 primary devolution, the DJIA first fractal decay base of
    11 days was determined by a preceding rising base sequence of 4 plus
    days. The 1929 high was contained in the second decay fractal of 27
    days, which was then followed by an additional third decay fractal of
    27 days in the three fractal decay pattern of x/2.5x/2.5x: 11/27/27
    days. For the primary 2005 devolution the first fractal decay base
    appears to follow a 9 day plus rising antecedent base. Inductively
    and extrapolating from the 1929 data, albeit with a single pattern for
    extrapolation, a 23-24 day fractal sequence including the 3 August
    high appears to be the defining first fractal base of what will likely
    be an efficient nonlinear equity asset destructive devolution that
    will echo the 1858-1932 Second Grand Fractal first sub fractal.

    The market equity valuations will grow only as long as growing money
    or credit is available for its support. At equity top saturation
    asymptotes smart money exits the equities and flows into debt
    instruments driving down interest rates. The debt market likewise
    travels in rather precise growth and decay fractals as investors,
    during a growth cycle compete and bid the instruments up, driving
    interest rates lower, and, thereafter, either exit the debt market or
    invest less when the interest rates are too low relative to other
    investment opportunities. This drives interest rates higher. In this
    way the debt market competes with the equity market for available

    Friday 21 October 2005 was a generally unrecognized turning point for
    the composite Wilshire. Aside from Google’s telltale exhaustion gap,
    two other important fractal developments occurred. The first was a
    completion of a 9/22-23/22-23 hourly maximal growth fractal:
    x/2.5x/2.5x for the Wilshire. Qualitative technicians and chartists would
    recognize this as a wedge formation. Even in a primary decay pattern
    there is integration of available money into elegant maximal growth
    growth fractals with small time units.

    The other telltale occurrence was the completion of a three phase
    growth fractal for the ten year note TNX and 30 year bond TYX. The
    daily debt market growth fractal count is 18-19/47-48/36-37. On Friday
    21 October investors actively competed for bonds and notes and money
    flowed into TNX and TYX, lowering interest rates. This money at
    least in part flowed from the cash strapped equity money pool.
    Compare the debt market’s TNX and TYX valuation pattern from December
    1996- October1998 with a superimposed and nearly identical sequence
    from June 2003 until present. Similar nodal patterns of money flows
    between debt and equities are repeating. Examine the fractal nodal
    low points dating from December 1996 going into October 1998. The last
    few months before October 1998 money rapidly exited equities and
    entered the debt market – dramatically lowering interest rates. That
    same dramatic pre October 1998 money exit from equities and flow into
    debt instruments will either be starting in a few days … or already
    began on 21 October.

    The primary low is anticipated in about 40-55 trading days consistent
    with previous estimations. The current best estimation for the primary
    decay fractal pattern starts on July 7, 2005 for a 23-24/54 of
    57-59/57-59 day sequence. The current pattern rhymes with the 1929
    scenario. Using the simplest scenario, the primary low would occur in
    4-5 plus 58 days or about 61-62 days. However, the terminal portion of the third
    and last 58-59 decay day fractal sequence is expected to form a base for
    the next sequence in a probable multimonthly growth sequence that will
    result in a cascading series of growth fractals with lower highs and ending
    in lower lows. With regards to the primary devolution a Fibonacci relationship
    with the 23-24 day first fractal base beginning 7 July 2000 would result in a
    primary low in 37-40 days of this final 58 day decay sequence.
    The minimal time interval to a primary low using the Fibonacci relationship
    would be 4-5 more days (54 of 58-59) plus 37 days equalling 40 days subtracting
    one day for double counting. A lower low is possible within the final 22 days of the 37
    of 58 day final decay fractal sequence.

    The current best estimation of the inverse grow of decay fractal is 15
    of 15/ 38/ 15-24.

    Expect nonlinearity. Gary Lammert http://www.economicfractalist.com/

  3. I’d like to know more about imports of distilled products (as opposed to just crude).

    There are huge differences between diesel and gas in America and Europe. There are differences in sulfur content, octane, and especially cetane in diesel. Not to mention all the boutique gasolines for sale in the US.

    I was talking to an expert on diesel combustion last week, and he called US diesel “crap” compared to what’s on sale in Europe. Gasoline too, for that matter.

    So how can there even be imports? Can European refiners be refining specifically for the US market on such a short time period? That does not seem likely to me.

  4. So a price increase on the order of +50% results in a demand decrease of about 2%. No, that’s not very elastic, is it?

    My dad was in the market for a new car. He ended up picking a moderately fuel efficient Subaru rather than a slightly less efficient Highlander. He gets about 24MPG vs. the 19 or so he would have gotten. My guess is that a lot of this is going on. Sustained high prices will result in a long term drop in individual fuel usage more than this 2%. This will be less so if people think they’ll drop. I’m hoping that we see a floor over $2.

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