Yes, Very Expensive

Lynne Kiesling

The outright demagoguery from DC is disgusting but not surprising. More FTC studies of “price gouging”, more threats of “windfall profits” taxes, more ranting and puffery. Ladies and gentlemen (and I use that moniker to be polite, not truthful) of Congress, look within yourselves if you want a true explanation for the increase in gasoline prices this spring beyond their previous spring increases. Today’s Wall Street journal editorial (subscription required) said it beautifully:

There’s been unconscionable behavior all right, most of it on Capitol Hill. A decent portion of the latest run-up in gas prices — and the entire cause of recent spot shortages — is the direct result of the energy bill Congress passed last summer. That self-serving legislation handed Congress’s friends in the ethanol lobby a mandate that forces drivers to use 7.5 billion gallons annually of that oxygenate by 2012.

At the same time, Congress refused to provide liability protection to the makers of MTBE, a rival oxygenate getting hit with lawsuits. So MTBE makers are leaving the market in a rush, while overstretched ethanol producers (despite their promises) are in no way equipped to compensate for the loss of MTBE in the fuel supply. Ethanol is also difficult to ship and store outside of the Midwest, which is causing supply headaches and spot gas shortages along the East Coast and Texas.

These columns warned Republicans this would happen. As recently as last year, ethanol was selling for $1.45 a gallon. By December it had reached $2 and is now going for $2.77. So refiners are now having to buy both oil and ethanol at sky-high prices. In short, the only market manipulation has been by politicians.

For the record, the FTC has an entire crew that pores over weekly average gas prices in hundreds of cities, looking for evidence of gouging — to no avail. Perhaps this is because no oil company controls enough of the market to exercise enough power to raise prices. The Hastert-Frist call for an investigation is nothing but short-attention-span political theater.

See also recent discussions at Environmental Economics and Jim Glassman’s article in Tech Central Station on President Bush’s “disingenuous” speech today to alternate fuel producers.

Here’s a situation in which I really hate to say “I told you so”. Even politics-hating, non-active me, I am ready to call my senators and try to teach them some economics upside the head on this one. Grrrr.


35 thoughts on “Yes, Very Expensive

  1. How about a big, resounding “Feh!” for our politicians?

    Oh, we now have roughly 300+ million gallons per year of biodiesel refinery capacity under construction. We produced 75 million gallons last year. Biodiesel is now less expensive than regular diesel in some places.

  2. Another regulatory impact on the gasoline supply was that the 30 ppm low sulfur mogas regulations fully phased in this year. The regulations may marginally reduce domestic supply and also make it more difficult to import gasoline…And we can look forward to the 15 ppm sulfur highway diesel regulations coming in June…

  3. “Congress could help a little in the short term if it asked the Bush Administration to end the 54-cent-a-gallon tariff on imported ethanol”

    ALL global warming scaremongers should be challenged — the way to reduce is to increase gas taxes. [and get booted out of office!]
    Any who don’t want higher gas taxes, aren’t serious about global climate change.

    Nobody likes higher prices, because nobody wants to change their own demand. Supply AND demand doesn’t work that way.

  4. “Congress could help a little in the short term if it asked the Bush Administration to end the 54-cent-a-gallon tariff on imported ethanol”

    ALL global warming scaremongers should be challenged — the way to reduce is to increase gas taxes. [and get booted out of office!]
    Any who don’t want higher gas taxes, aren’t serious about global climate change.

    Nobody likes higher prices, because nobody wants to change their own demand. Supply AND demand doesn’t work that way.

  5. Sure, there’s no one gasoline company that has a majority of the market. But it’s ridiculously naive to think that gasoline companies aren’t working together to set their own prices.

    I mean…according to the laws of supply and demand, then there should have been a tremendous increase in demand for gasoline over the past month. I don’t know about you, but neither me nor anyone I know has suddenly started taking 300-mile trips every day. And yet gas prices have gone up by 25% in a month. A MONTH.

    Oh, right, “consumer confidence”. You know what? Gas would have to cost SEVENTY THOUSAND DOLLARS A YEAR before I’d stop using the same amount that I do now. That’s because I use gas to get to my job, and I make seventy thousand a year.

  6. Sure, there’s no one gasoline company that has a majority of the market. But it’s ridiculously naive to think that gasoline companies aren’t working together to set their own prices.

    I mean…according to the laws of supply and demand, then there should have been a tremendous increase in demand for gasoline over the past month. I don’t know about you, but neither me nor anyone I know has suddenly started taking 300-mile trips every day. And yet gas prices have gone up by 25% in a month. A MONTH.

    Oh, right, “consumer confidence”. You know what? Gas would have to cost SEVENTY THOUSAND DOLLARS A YEAR before I’d stop using the same amount that I do now. That’s because I use gas to get to my job, and I make seventy thousand a year.

  7. No one should be surprised at this outcome. For 30+ years, the government’s “energy policy” has been at war with itself, as any econ 102 student would understand. One the one hand, the government claims to be promoting conservation of petroleum; while on the other hand, policy has done everything imaginable to shield consumers from the effects of high petroleum prices. Such as? CAFE, which lowers the cost of driving by requiring every vehicle to go farther on the same amount of fuel. The entire misbegotten “Emergeny Petroleum Allocation Act” of the 1970s, which put a complicated two-tier price control scheme on crude oil, allowing a market price for “new” oil and capping the price of “old” oil. (Interestingly, only after this was repealed did supply and demand begin to come into balance.) The Natural Gas Act, which did the same thing for natural gas. At the same time, domestic environmental concerns have limited the opportunities to exploit new geographic areas and have shut in other ares (e.g. the California coast) from new production.

    Can there be any wonder that demand has exploded while supply has not? While some of this demand is fairly easily reduced, another part of it is not. Given their 10-year life cycle, it will be fairly easy to reduce motor fuel consumption by replacing overweight 2 1/2 ton truck-based SUVs with other more rightsized passenger vehicles. However, it will not be easy to undo the effects of low-density urban land-use policies that, in combination with declining (on an inflation-adujsted basis) motor fuel prices, have favored the creation of “a mansion on God’s half acre” suburbs ever more distant from places of employment. This kind of land use will continue to extract a price in motor fuel as the occupants of these houses continue to require relatively long distance motor vehicle travel to get to work and stores.

  8. Let’s all remember that this country hasn’t built any new refineries in the past THREE DECADES. Oil could drop back down to $40.00 a barrel, and the cost of gasoline would still be high. The bottleneck in the supply chain is with refining. We now have to import not only crude oil but refined gasoline because we can’t produce enough gas on our own.

    That’s rather pathetic, if you ask me.

    So when last year’s hurricanes hit the Gulf Coast, they also hit about one-third of our refining capacity. You think that won’t make a dent in the gas supply?

    Between the government screwing with the free market, and the captitulation to the extreme eco-freaks in regards to building refineries, we as a country have put ourselves into this situation. And it’s not going to get any better any time soon. We need to build more refineries, drill for oil where we can, and get the congresscritters out of their market meddling ways.

    Think it’ll happen? Any of it? I don’t.

  9. I like “DensityDuck”‘s reply. It is the conventional wisdom amongst Americans. If the price went up so much in so short a time, with nothing like Memorial Day or Hurricane Katrina, it must be evidence that the oil companies are colluding.

    This is the economic equivalent of creationism. There’s no real evidence to support the charge of collusion, just a perception that it “must” be going on.

    If neuroeconomics was a real field of inquiry and not mere quackery, I think that the perception of collusion when prices go up would be one of the highest priorities in the field. Instead, we just get pseudoscientific debunking of Adam Smith via MRI.

    There are plenty of explanations for the rise in gas prices. They might be a little too… subtle for the economic creationists out there to understand, but that doesn’t make them invallid.

  10. I like “DensityDuck”‘s reply. It is the conventional wisdom amongst Americans. If the price went up so much in so short a time, with nothing like Memorial Day or Hurricane Katrina, it must be evidence that the oil companies are colluding.

    This is the economic equivalent of creationism. There’s no real evidence to support the charge of collusion, just a perception that it “must” be going on.

    If neuroeconomics was a real field of inquiry and not mere quackery, I think that the perception of collusion when prices go up would be one of the highest priorities in the field. Instead, we just get pseudoscientific debunking of Adam Smith via MRI.

    There are plenty of explanations for the rise in gas prices. They might be a little too… subtle for the economic creationists out there to understand, but that doesn’t make them invallid.

  11. On this and a series of other issues, politicians have demonstrated that, while some species evolve, some also devolve.

  12. On this and a series of other issues, politicians have demonstrated that, while some species evolve, some also devolve.

  13. On this and a series of other issues, politicians have demonstrated that, while some species evolve, some also devolve.

  14. Back in the late 1970’s and early 1980’s, after Jimmy Carter signed into law the Windfall Profits Tax aimed at Excess Oil Profits ( 8 years later this law was repealed) the Oil Companies intentionally closed many prefectly good oil refineries, and they still remain closed today, just waiting to be converted to Ethanol production. Dont kid yourself. Where we stand today, was all planned out and manipulated by the Oil Companies years ago. The only shortage of oil is that which is created by the American Oil Cartel….just like it was back in the 1970’s.

  15. Back in the late 1970’s and early 1980’s, after Jimmy Carter signed into law the Windfall Profits Tax aimed at Excess Oil Profits ( 8 years later this law was repealed) the Oil Companies intentionally closed many prefectly good oil refineries, and they still remain closed today, just waiting to be converted to Ethanol production. Dont kid yourself. Where we stand today, was all planned out and manipulated by the Oil Companies years ago. The only shortage of oil is that which is created by the American Oil Cartel….just like it was back in the 1970’s.

  16. It is preposterous to state that an oil refinery can be converted to ethanol production. That’s just ignorance.

    That any refinery should be closed is perplexing to me. One here in Chicago was shut down in 2000, just as gas hit $2.25 a gallon for the first time (the Clark refinery in Blue Island).

    But instead of looking for conspiracies, perhaps you should think about how clean air laws make it unprofitable to upgrade smaller, older refineries.

  17. It is preposterous to state that an oil refinery can be converted to ethanol production. That’s just ignorance.

    That any refinery should be closed is perplexing to me. One here in Chicago was shut down in 2000, just as gas hit $2.25 a gallon for the first time (the Clark refinery in Blue Island).

    But instead of looking for conspiracies, perhaps you should think about how clean air laws make it unprofitable to upgrade smaller, older refineries.

  18. It is preposterous to state that an oil refinery can be converted to ethanol production. That’s just ignorance.

    That any refinery should be closed is perplexing to me. One here in Chicago was shut down in 2000, just as gas hit $2.25 a gallon for the first time (the Clark refinery in Blue Island).

    But instead of looking for conspiracies, perhaps you should think about how clean air laws make it unprofitable to upgrade smaller, older refineries.

  19. I have to agree with CuzButt here, as well as several posts ago. Conspiracy theories just don’t hang together for me. It seems evident that our largest issues right now are the rise of Chinese consumption as well as various constraints acting on the delivery of specialized refined gasolines to various locations, including the prices of and constraints on various inputs such as ethanol and MTBE.

    You know, we’re all just bumbling along. There’s nobody out there with enough foreknowledge to pull off a conspiracy as good as the ones some of you guys are thinking up, while looking backward no less. I realize that in a way it can be comforting to think that somebody out there has a handle on all of this. I just don’t think so. The smartest people I know don’t think they understand it all. The things I understand about life and the universe tell me that anybody who thinks they understand it all is wrong. But many of these smartest people are developing theories that show that these market behaviors can arise all by themselves.

    We [humanity] just arent’t that prescient or that smart. We bumble along. Some get lucky, others fail. The lucky ones get cocky and write books and theory, and then they fail and get overwritten by others. A big mistake is to think that there has to be some centralized power driving the behavior of markets. Markets behave in surprising ways without any of that. Market behaviors emerge! We all learn about them at the same time. There may actually BE conspiracies, but there is no reason to assume that they would be successful, given that there are no God-like market participants. Frankly, I’d love to believe in conspiracies. Life would be so simple…

  20. doug – I think you’re taking the opposite extreme of the conspiracy theorists. While they think some singular entity has God-like powers over the market, grouping people into either lucky or unlucky categories is a belief that we are completely powerless over our success. Just because the markets are complex does not make rational thought futile in confronting them. We aren’t all-knowing, but we certainly aren’t all retarded either.

  21. Oh, no, I think we’re all *above* average, Rastro. đŸ˜‰

    I was speaking of we the species. Yes, there’s a wide distribution of intelligence out there, and many individual stories of success and failure. That said, average human intelligence is not all that good, and half the population is dumber than that. đŸ˜‰ In any case, world market behaviors emerge from the combined actions of all of the individual agents and groups of agents. Nobody controls these behaviors.

    I certainly didn’t intend to suggest a lucky/unlucky dichotomy (and I don’t think I did), nor was I even thinking about “success.” But since you brought it up, don’t miss Fooled by Randomness, by Nassim Taleb. Great book.

  22. According to the WSJ editorial, “Ethanol is also difficult to ship and store outside of the Midwest”. How then would it viable to import ethanol if the import tariff were lifted? Wouldn’t you still face similar technical hurdles?

  23. According to the WSJ editorial, “Ethanol is also difficult to ship and store outside of the Midwest”. How then would it viable to import ethanol if the import tariff were lifted? Wouldn’t you still face similar technical hurdles?

  24. According to the WSJ editorial, “Ethanol is also difficult to ship and store outside of the Midwest”. How then would it viable to import ethanol if the import tariff were lifted? Wouldn’t you still face similar technical hurdles?

  25. Jim,

    If the tariff was removed, we could figure that (how to ship Cane Ethanol) out very quickly. I assume that one would use a tanker. I also think it is cheaper to transport liquid ethanol than bulk sugar for processing, but again, as there is a tariff, no one will find out much of anything (except how politicians squawk).

    JBP

  26. Jim,

    If the tariff was removed, we could figure that (how to ship Cane Ethanol) out very quickly. I assume that one would use a tanker. I also think it is cheaper to transport liquid ethanol than bulk sugar for processing, but again, as there is a tariff, no one will find out much of anything (except how politicians squawk).

    JBP

  27. Jim,

    If the tariff was removed, we could figure that (how to ship Cane Ethanol) out very quickly. I assume that one would use a tanker. I also think it is cheaper to transport liquid ethanol than bulk sugar for processing, but again, as there is a tariff, no one will find out much of anything (except how politicians squawk).

    JBP

  28. Check out “Two Cheers for Expensive Oil” by Leonardo Maugeri in Foreign Affairs, March/April 2006. He takes an intersting historical look at capital investment globally for the past 30 years (100 years in some cases) in oil refining and wildcatting/drilling in order to explain the current supply squeeze.

    One of his central points is that the price response that drives capital investment for the oil companies is so slow, that the industry goes through gluts and droughts of supply for near decades at a time. The title is exclaiming over the coming round of heavy investment and the resulting glut.

    If you are pro-alternative energy, its sad to read because assuming he is correct, the altenergy industry has less than a decade to get a strong foot hold in the market before the price of crude and gasoline collapses again.

  29. Check out “Two Cheers for Expensive Oil” by Leonardo Maugeri in Foreign Affairs, March/April 2006. He takes an intersting historical look at capital investment globally for the past 30 years (100 years in some cases) in oil refining and wildcatting/drilling in order to explain the current supply squeeze.

    One of his central points is that the price response that drives capital investment for the oil companies is so slow, that the industry goes through gluts and droughts of supply for near decades at a time. The title is exclaiming over the coming round of heavy investment and the resulting glut.

    If you are pro-alternative energy, its sad to read because assuming he is correct, the altenergy industry has less than a decade to get a strong foot hold in the market before the price of crude and gasoline collapses again.

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