Some More Sensible Commentary on Gas Prices

Lynne Kiesling

With apologies for the shameless self-promotion: this Chicago Tribune article on gas prices in Illinois has some quotes from me, and others, on putting these gas prices in a proper context.

I also found this New York Times article from Sunday on “price gouging” to be a more sensible and analytical view on the question than many news articles I’ve seen in the past month.

Like night follows day, politicians in Washington immediately vented their outrage. Standing in front of the Capitol Hill Exxon station on May 9, Democratic lawmakers announced bills to punish “price gouging” and the record profits that oil companies earned this year. “Gas prices and oil company profits are both at record levels, and consumers are left with no way of knowing whether they are being taken for a ride,” said Senator Maria Cantwell, Democrat of Washington.

Ms. Cantwell and others planted themselves at the Capitol Hill Exxon just one year ago, for much the same purpose, and countless other lawmakers have staged similar events over the years whenever gasoline prices have climbed sharply. But if the oil industry is so powerful, why did it let gasoline prices fall through the floor throughout the 1980s and part of the 1990s?

For that matter, why did it let gasoline prices fall sharply after they spiked in 2005 and 2006?

Good question. Here’s some of the really sensible analysis in the piece:

The most common reason for such increases in gasoline prices is a steep increase in the price of crude oil. But crude oil prices are set in global markets, and even the biggest American or European oil companies are modest players compared with state-controlled oil companies in the Persian Gulf, Russia and Latin America.

Even the mighty Organization of the Petroleum Exporting Countries, which defines itself as a competition-limiting cartel, has only a limited grip on world oil prices. OPEC countries watched helplessly as oil prices plunged in the early 1980s and remained mired below $20 a barrel for most years (excluding the time of the Persian Gulf War in 1991) through the mid-1990s.

It seems hard to believe today, but world oil prices briefly drifted below $11 a barrel in 1998. Not surprisingly, few lawmakers in Congress took that opportunity to denounce “unconscionably excessive” price declines.

The Federal Trade Commission has been skeptical about accusations of price-gouging on gasoline prices. In 2004, the agency studied price changes in gasoline from 1991 through late 2003. It concluded that about 85 percent of the price variability — both up and down — reflected changes in crude oil prices. …

INDUSTRY executives say the anomaly [this year’s retail price increases even while oil prices are relatively stable] reflects a temporary drop-off in refinery activity, partly because of scheduled maintenance and partly because of unscheduled interruptions. On top of that come ethanol prices, which have soared, because refiners now blend a small percentage of ethanol into standard gasoline.

The broader issue is that refinery capacity has not kept up with American demand for gasoline. Oil companies, caught with vast amounts of excess refining capacity in the early 1980s, systematically reduced capacity during the long lean years when energy prices and profit margins were the pity of Wall Street.

2 thoughts on “Some More Sensible Commentary on Gas Prices

  1. “I ask Congress to join me in pursuing a great goal. Let us build on the work we’ve done and reduce gasoline usage in the United States by 20 percent in the next 10 years. (Applause.)”

    “To reach this goal, we must increase the supply of alternative fuels, by setting a mandatory fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017 — and that is nearly five times the current target. (Applause.)”

    The above is from Bush’s 2007 State of the Union address. With the President jawboning about reducing gasoline consumption and increasing alternative fuels, is it any wonder that Oil Companies would be reluctant to expand refining capacity. I would only anticipate the problem of lack of refining capacity to get worse in the future.

  2. Too many people in this seem happy to keep their “knowledge problems.” There are certainly people who like to keep to the dumb model of “gouging.” That works for little people who simply want to express their outrage. And it works for politicians who want to pander.

    But, that’s not the only knowledge problem. The dumb idea that market forces make these prices “cheap” in real dollars, and are certain to keep them “cheap” in the future, is just as dangerous.

    Both simplifications stall important adjustments. Let’s just say “gouging” or “cheaper than 1981” and go about our business, right?

    Well, in other news today 60 percent of oil and gas execs believe trend of declining reserves is irreversible.

    If that proves true, what we want is to get off the stick, and make some important “personal” market adjustments, based on a little more symmetrical knowledge. Stop complaining and buy a darn hybrid!

    Shorter: people have a knowledge problem when they think prices will “return” to some natural low price.

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