Asymmetrical Information

Agree with most of the points, but gas consumption is not quite as inelastic as you might expect. Lynne Kiesling has a few old posts on this.

For example, in October 2005:

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.

There are very few good substitutes for gasoline consumption.

This combined with (9) rising gas prices represent a highly regressive impact on incomes, I think, is a big part of the issue.

Gas becomes almost tax-like, in terms of most of the country's ability to work. It impacts the well off surprisingly little, because usage per-gallon is pretty constant across class lines, but rising cost becomes a large percentage of the working poor's paycheck.

I can't recall where I saw this, but the average person in the US consumes 1100 gallons of gas/year (directly - I don't think that accounted for indirect consumption). So, the jump between spending $2200 and $3300 is hugely significant to someone making under, say, $33000/year.

Since a rather large number of people make less than $33000 a year, the media is going to talk about it.

Seems simple, no?

I'd also add that because of the various oil crises in the 1970's, coupled with stagflation, the hostage crisis, Soviet expansionism (the end of the space program, etc., etc., etc.), high gas prices rub a cultural open wound, and have a political effect out of proportion to their actual harm.

I think that it is tied into the American sense of independence and individuality. We can make choices to decrease our consumption of gasoline, but the alternatives are not pleasant by American standards - car pooling, less vacations, public transportation, (gasp) non-motorized transportation.

Americans, generally, enjoy the self-reliance that cars give us.

Question though - almost every aspect of American life is compared to the EU. Why the missing price of gas comparison? We are still MUCH better off than France, Germany or England. If life in EU is much better than here, then maybe this is just a step along the way.

EU/US comparisons are a bit dicey when it comes to gasoline consumption given certain structural factors that make the Europeans inherently less fuel-dependent: more mass transit, less suburban sprawl, and a greater willingness to walk or use bicycles.

"4) The price is visible and because demand is almost completely inelastic, little effort is made at price discrimination--there are no coupons for cut price gas."

Two nearby stations cut the price of premium $.10 every tuesday and friday. I make every effort to gas up there exclusively.

To add to fishbane, not only is gas "almost tax-like", but a large percentage of the price people pay for it *is* (overt) tax. Even in the US, where (as Europeans will gladly point out) our gas taxes/prices are sinfully low. As fishbane points out, this is essentially a regressive tax. Moreover, as oil prices get higher, the gas-tax component of the overall tax structure increases, making the overall tax structure less progressive.

Few politicians seem eager to acknowledge the extent to which their funding relies on this regressive tax (or even that there is a tax). And the "liberal" faction of our polity, which in most contexts favors progressivity, in this case happens to favor even higher regressivity, for extraneous ideological reasons of their own. So as a result, the gas-tax is almost absent from how the debate is framed, and although the immediate problem people seem to be complaining about is "rising prices", there's almost no constituency for lowering tax %'s on the item whose price is rising (am I wrong/alone in finding this odd?).

So, I wonder if part of the reason that gas-price-rises are considered "so special" in the political world is because they essentially have the painful effect on the public of backdoor-regressivizing the tax code, but no one acknowledges that, lest people put 2 and 2 together and start asking "Hey, since oil prices have risen, why not lower gas taxes then?", which few seem to want. The seemingly exaggerated/"crisis" treatment of this topic (in particular, the conspiracy-theorizing we inevitably get with it) might be, in a sense, a symptom of mass denial that is preventing us from addressing the issue fully honestly.

P.S. No, I'm not suggesting that lowering the gas tax(es) would "fix" every problem deemed to be associated with high gas prices. Or even any problem. What do I know.

6) Gas is heavily implicated in other consumption. When the price of milk rises, you stop drinking milk and start drinking calcium-fortified OJ (or vice versa). When the price of gas rises, you stop going to the movies and start watching the science channel.

There's another way it's implicated in other consumption. Sooner or later the higher costs of, e.g., trucking the veggies to the Kroger's gets passed along as higher food prices. (Or at least people start to worry that will happen.)

I think it's about the emotional effect of the inability to negotiate or mitigate the incidence of sudden increases - if you are making less than $33000 a year and spending $3300 on gas that cost $2200 last year, how real are the alternatives to consume less? Can you afford to take on new consumer debt to purchase a more efficient vehicle? Can you afford to move your family residence closer to your work? Can you change jobs or negotiate to work from home if you are a person working at that level of income? What % of people making 33000 a year live in areas served by public transportation? The US, as a whole, is not crisscrossed by lines of commuter rail or local bus routes and many, many people live outside major metropolitan areas.

Over time, people can make choices that move them to consume less, but the immediate effect of a jump in prices is a painful incidence to people of modest income levels...

Peter, you mention that the EU and US are hard to compare because of "more mass transit, less suburban sprawl, and a greater willingness to walk or use bicycles" in Europe. Those things is connected to gas prices in a feedback loop -- all of those things are true partly because of higher gas prices/taxes in Europe. Not to say "on your bikes" to Americans. Suburban sprawl, for example, isn't one of those things you reverse overnight. Nor can we quickly greenify the stock of cars out there, as Megan mentions. Nor does mass transit show up overnight. The fixes are long-term and expensive.

I'd suggest one more thing: Megan says gas prices are especially "visible". And how! I'd say they're the most literally visible price of any single thing out there -- how many times on the average day does the average American pass a 30 foot sign advertising the price of milk? I'd submit that there is no remotely comparable product in that regard.

I'd also add that because of the various oil crises in the 1970's, coupled with stagflation, the hostage crisis, Soviet expansionism (the end of the space program, etc., etc., etc.), high gas prices rub a cultural open wound, and have a political effect out of proportion to their actual harm.

TJIC, thanks, the above, to me, is an inspired take that, now thinking about it, probably is additive to the consternation felt by those in their 30's and beyond.

I was going to say that the Gasoline is such a political touchstone because Cars hold such a seemingly irreplaceable role in the mechanizations of American's daily lives.
Coupled with the whole "Mom, Apple Pie, and Toyota" thing....

I, for one, am concerned (or at least annoyed) by the diamond cartel. That's why I'm so excited about the advent of lab-created diamonds and other precious stones.

Alas, I don't see economical lab-created gasoline coming any time soon.

9) Unlike most issues, business and individuals are on the same side. We feel the heat gassing up the car to go to work, where we then have to deal with rising costs and 'fuel surcharges'.

Oh, and the reason cars are a necessity in America and not Europe is that America is BIG. Really really big. Gigantic. Even if you lived within walking distance of your office, could you still walk to the grocery store, the bank, the pharmacy, the doctor, the hairdresser, and so on? There aren't many locations in the US where you can do that. I could do without a car indefinitely.

But then again, there aren't many affordable homes on a nice half acre lot in England. On the whole, I'd rather have the space.

Contributor A:
"Those things is connected to gas prices in a feedback loop -- all of those things are true partly because of higher gas prices/taxes in Europe."

Nope--Europe is compact because those cities had existed (in their current form) for 800 years. Even when cities are destroyed and rebuilt (Baron Haussman's Paris, London after 1666, most German cities after WWII) they were rebuilt within the existing footprint.

If you look at cities in the US where mass transit "works," (NYC, BOS, ORD, SFO) they tend to have been inhabited in their current form for years. Where cities sprawl (HOU, ATL, MCO, LAX), they tended to have grown after the private car became common.

Note that although most sprawl cities do have public transit, no one you know uses them..just like no one you know in NYC actually drives himself to work...

I do remember when there was great complaining about the price of bread, enough to be part of what inspired Nixon to try to set prices from Washington. (It didn't help when it was revealed that there was less than 5 cents worth of wheat in a 1 pound loaf...) But gasoline has usually been the most complained-about, for several reasons.

1. For most items, there is no single price. Instead, there is a wide range of prices for different brands and at different stores. If one store suddenly jacked up the price of milk by 25 cents, you'd start going to other stores for milk - not only is it unlikely that they'd all move prices together, but most people wouldn't know the "before" prices at enough stores to be able to identify a concerted movement.

By contrast, gas prices are posted on large outdoor signs. Brands are meaningless; don't count on the fluid flowing from Mobil gas pumps to be made by Mobil, because gasoline quality is so well controlled and unvarying that if one oil company has a hitch in delivery they'll just call a competitor and order enough to fill the gap. So, most gas stations within one market have prices for regular unleaded within a range of two or three cents - and often even those differences are utterly predictable. E.g., where I live all the gas stations east of I-75 are priced the same, and all the stations east of I-75 are one cent higher - and this difference has remained constant as the price has gone from the $0.90's to the $2.90s. The only exceptions are a few isolated gas stations that set their prices higher, sometimes much higher, because it rarely makes sense to drive several miles extra to for a lower price on gas.

I know enough people in the business to know that this is not due to deliberate collusion, but because on the one hand there is little variation in costs between vendors, and on the other hand you might as well shut down a station as post a higher price than nearby competitors. But it certainly looks like collusion to outsiders. If you think they're in collusion when they suddenly take another $20/week out of your paycheck, you're going to be upset.

2. Gasoline price increases seem to be far larger and more abrupt than occurs with most purchases. Maybe this is just an illusion because of factors discussed in #1, but also it seems like the oil companies over the decades have kept a cycle going unlike most commodities: a nearly constant price (not even keeping up with inflation) for a long period with declining exploration (because it's not profitable at that price), severe shortage, sudden huge price increases, burst of exploration, glut, smaller sudden price drops, and then another long stable period. This has been going on since the 1920's. It's as if even when most of the USA's petroleum came from domestic sources no one had both the foresight to see the shortage and price increases coming and the capital to profit from it by developing new fields just before the shortage hits.

3. Double the price of most things in a year and you're likely to be selling less than half as much of them. Gasoline demand is less elastic. About 20% of demand is quite elastic - people with several cars in the garage will drive the "pregnant roller skate" more and the SUV less, unnecessary trips are canceled, routes are better planned. Past that, though, the only ways to react to price changes are replacing your vehicle or drastically changing your lifestyle. Either one takes years to be implemented by more than a few people. In the meantime, you suck it up and reduce spending elsewhere.

4. What happens when everyone sucks it up and reduces spending elsewhere because of gasoline prices? Recession. You don't have to be sophisticated at economics (or even capable of counting to 13 with your shoes on) to see that coming, you just have to have lived long enough.

Post the prices of bottled water, milk, sports drinks, carbonated beverages, etc. side-by-side and see what happens.

Even better, stop withholding federal and state income taxes from salaries and require employees to pay them in cash from each paycheck each payday and see what happens. (Don't hold your breath for that possibility!)

Gasoline has presented an opportunity for panderers to "do their thing" since the days when the Rockefellers were "robber barons" rather than intelligence leakers from West (by God) Virginia.

I have yet to encounter the federal legislator who did not believe that the laws of economics could be amended or repealed if it suited their convenience. We elected all of them for some reasons, which obviously had little or nothing to do with their knowledge and/or mastery of economics, science, engineering, accounting or finance. I presume most of them are good at something, but I have no clue what it might be!

"or even capable of counting to 13 with your shoes on"

14, if you're male.

Sorry, I couldn't resist.

Far more interesting to me is why gasoline is associated with a bizarre ignorance of basic economics. For instance I hear lots of people say that there MUST be price fixing because every station on the same block has the same price.

Or that pump prices should not go up when well head prices go up since it is such a long way from the well to the pump. First time I heard that was from an MBA grad.

So far I have found the best way to deal with high gas prices is a few shares in Exxon-Mobil.

If you look at cities in the US where mass transit "works," (NYC, BOS, ORD, SFO) they tend to have been inhabited in their current form for years. Where cities sprawl (HOU, ATL, MCO, LAX), they tended to have grown after the private car became common.

The stronger correlate than length of habitation (LA was founded – admittedly as a village - long before New York or Boston) is the rise of impossible traffic coupled with, of course resulting from, and financed by, a high population density.

Occam -

Los Angeles is not older than New York or Boston. LA was founded in the early 1700s; Boston and New York in the 1600s. LA did have suburban sprawl before cars became universal, though, as it had a nice commuter rail system in the 1920s.

San Francisco proper is dense and compact, and MUNI might actually be a financial success were it not run by SF politicians. But it's also only 10% of the Bay Area by population. The rest of the area has sprawled a lot, and BART isn't particularly successful, except at supplementing the Bay Bridge.

"Also note that mass transit in the Bay Area (BART) only dates to 1970s,"
San Francisco itself has had mass transit for around a century. Remember cable cars?

:D

Gasoline isn't the only factor in our inelastic demand for oil. I live in New York and don't have a car, so I didn't think the rising price of oil would seriously affect me. But my building, like many others, uses oil heat, and my landlord just informed me that when my lease expires, he'll have to raise my rent. He's actually been more than generous - I've been paying less than the legal rent for years, and I'm not the only one - but he just can't afford it anymore. And the increase is over $400 a month. That's a crisis for me, and I'll bet many people are in the same situation.

Another factor: Many people are living with decisions made 1 to 10 years ago, such as the purchase of a house or car or heating system, which seemed reasonable at the time based on then current fuel prices. The inability to undo those decisions creates frustration, fear and a general sense of unfairness.

Please visit www.dieoff.com. If oil/gas prices go up, there is an immediate and negative impact on peoples' lives. If the price increase is truly related to peak oil, then the pain at the pump we're currenlty experiencing will very rapidly become "the good old days".

I have a question related to John's comment: Is it possible to use coal-powered cars? Coal is one of the cheapest fuels around.

It will also make "peak oil" be a bit moot.

Joseph, during WW2, Germany and occupied Europe ran a lot of vehicles with some sort of coal gasifier. I don't know all the details, but it's possible. Research is under way to convert coal to diesel. As the price of gas goes up, all the alternatives become more feasible.

Of course, coal has some unpleasant side effects for the people who live where it's mined, but that shouldn't keep the rest of us from our 40 mile commutes, eh?

e e

This is a great gambit. The industry advances unprecedented profits against the measured improbability of effective social response. Here the paradigm is cast against consumers. In recent decades several industies perfected consumer structures. This is creating the addict. Now one industry is exploiting the structure, the consumer structure. The addict is defenseless to act in his own true self interest, and abandon the addiction-consumer habituation. Political interests are a subset of social interest; subsequently policy makers are constrained by inability of out of box thought and action.

Present solutions offered in media are intended to placate. No real solution is yet offered. For example, one solution offered in Fox cable news is the removal of federal gas tax. This is a lose/lose situation. Eliminating the federal tax on gas creates a margin, a margin for the industry to increase prices. The consumer already has been habituated to pay the margin.

One possible solution is to raise the tax, like an import tariff. Hypotetically, if you tax fuel at the pump two additional dolllars or more, this will drive demand down. The industry would be pressed in finding a workable margin. The public would increase usable tax for public projects, etc.

This is a great gambit. The industry advances unprecedented profits against the measured improbability of effective social response. Here the paradigm is cast against consumers. In recent decades several industies perfected consumer structures. This is creating the addict. Now one industry is exploiting the structure, the consumer structure. The addict is defenseless to act in his own true self interest, and abandon the addiction-consumer habituation. Political interests are a subset of social interest; subsequently policy makers are constrained by inability of out of box thought and action.

Present solutions offered in media are intended to placate. No real solution is yet offered. For example, one solution offered in Fox cable news is the removal of federal gas tax. This is a lose/lose situation. Eliminating the federal tax on gas creates a margin, a margin for the industry to increase prices. The consumer already has been habituated to pay the margin.

One possible solution is to raise the tax, like an import tariff. Hypotetically, if you tax fuel at the pump two additional dolllars or more, this will drive demand down. The industry would be pressed in finding a workable margin. The public would increase usable tax for public projects, etc.

"there are no coupons for cut price gas"

Is that a gramatically correct statement?

The price of oil has rocketed up due to high demand and particularly increasing demand in the growing economies of China and India while the supply of oil is mostly in politically unstable countries or in countries hostile to the US. As a national security concern, we need to stop using oil from these countries.
The US and Canada have a lot of oil but in forms that are hard (expensive) to extract. I suggest a variable tax on imported oil (from outside North America) to raise the cost to a constant figure of say $85/barrel.
Extraction of oil from oil sands and shale oil becomes economically feasible. Companies can not be expected to make huge investments to develop these fields if the price of oil is likely to drop below their price of extraction. Canada has more oil reserves than any country other than Saudi Arabia but it is mostly in oil sands and thus has been to expensive to extract.
Consumers would adjust to higher prices for gas by buying more fuel efficient vehicles. The impact to the consumer comes from the huge fluctuation in gas prices. Gas prices were low in the 90's and early 00's so everyone bought an SUV. Gas prices are high now, everyone wants a hybrid. Consistent high prices on gas are better for the consumer in the long run.
Taxing imported oil will allow the development of domestic sources of fuel which makes our nation more secure and our economy more fuel efficient.

The price of oil has rocketed up due to high demand and particularly increasing demand in the growing economies of China and India while the supply of oil is mostly in politically unstable countries or in countries hostile to the US.

But that just ain't true. It ain't true because profits to the oil companies are increasing (check every news story over the last year for record profits).

If gas prices are increasing faster than the marginal cost of supply to the oil companies, it indicates that the market is not competitive: if it were competitive, some oil company would reduce profits back to the previous equilibrium in order to compete on price. That's microeconomics 101.

Will someone please explain to me how all of the following can possibly be true about the same market?

(a) all demand is still being met, i.e. no rationing is occurring (via the price system or otherwise, as far as anyone can tell, there's no evidence of inability to meet all the demand that would exist at the lower price);

(b) prices are increasing faster than the marginal cost of additional supply to the oil companies (profits are increasing); and

(c) no oil company is competing on price by reducing its profits back to the equilibrium level (i.e. by only increasing prices in an amount sufficient to meet its additional marginal cost).

??

Doesn't this demonstrate that the market isn't competitive? That the oil companies are using the political excuses of Katrina + Iraq/Iran, the low elasticity of demand, and the small number of players in the market/high cost of entry to raise prices in concert, i.e. informal price fixing?

And doesn't that justify legislative response to correct the market failure?

and with that, Paul introduces us to the 800 lb gorilla in the room...

And does it very neatly.

Not everyone is drinking the koolaid the office of disinformation is passing out.

Whoa, whoa, whoa:

You also forgot to mention that the US Government can, at any time it wants, significantly LOWER gasoline prices; that is why it's political.

It is politicians who are stifling refinery construction. It is politicians who require certain expensive blends of gasoline at certain times of the year, in certain locals. It is politicians who set mileage standards for automobiles. It is politicians who decide how many billions in tax subsidies will go to oil companies which then use that money to enrich retiring exeutives. It is politicans who are backdoor killing wind farms off the coastlines of their Hyannisport compounds.

Need I go on.

Damn right gas prices are political. The politicians MADE it that way. Now they pay the price.

The reason the oil companies are making huge profits is simple. Oil, as well as gasoline, is a commodity. The price of it has nothing to do with the cost of getting it out of the ground. It doesn't cost 70$ a barrel to extract, but that's what it's selling for.
I used to work for a small distributor in CT. There's a gas pipeline that runs up the CT river and lots of distributors tapped into it. We had 30+ stations with 3 different brands. The price charged is based on 3 things.
1) The trading price. The actual cost to the distributor. Check NYMEX for that. Currently $2.12.
2) Taxes. Federal, State, County and possbily municipal. I live in Pasco County FL. Fed and state taxes are $.48/gal and county taxes are $.125. That's $.605
3) Operating expenses. Payroll, insurance, utilities etc.
Our gas is $2.89 for regular. 1) + 2) = $2.725. That leaves $.165 for 3) plus profit. Profit is usually around 1 cent per gallon.
I read an article about the new Yankee Stadium. The author had a great analogy. The players are like strippers, there to entice customers to pay a cover charge and buy overpriced drinks. The gas is the same. They want to get you into the store to buy the stuff inside at a minimum of 40% markup. They'll make a dime on you tank of gas, but they make more selling you a 5 cent cup of coffee for a dollar.

If oil companies can charge anything they want...

... why weren't they doing so all along? (There's always some excuse.)

So how does the fact that oil company profits are increasing deny that the price of oil is high due to demand and unstable supply? It costs no more to pull the oil out of the ground so of course the profits are increasing. High demand for a limited supply of anything increases prices and profits. Check out the beanie baby craze or maybe see your local ticket scalper.

Refiners are paying $70+ for a barrel of oil. That makes for high gas prices.

Again, it's the price fluctuation that causes pain and not the price itself. People will adapt. But a tax on imported oil would remove the fluctuation of price and allow us to develop domestic sources of energy for long-term energy independence. I am tired of our oil money going to countries that hate us.

"4) The price is visible and because demand is almost completely inelastic, little effort is made at price discrimination--there are no coupons for cut price gas."

I think that is changing (albiet slowly). There is a gas station nearby that charges $.10 less if you buy a car wash (others give cheaper car wash if you buy gas) but if he is successful I would imagine other will offer similar incentives to attract customers.

"and with that, Paul introduces us to the 800 lb gorilla in the room...

And does it very neatly.

Not everyone is drinking the koolaid the office of disinformation is passing out.

Dana, way to be. Lonely, in the minority, isn't it?

Paul,

"and the small number of players in the market/high cost of entry to raise prices in concert, i.e. informal price fixing?

And doesn't that justify legislative response to correct the market failure?"

"legislative response" brought about the 'problem' you delineate...more of the same, is not the cure... The Oligopoly that is Big Oil is a creature of the State.

It must be well noted now! Consumers are now in competition with fuel suppliers. The tactical excercises once reserved for industry competition is directed toward consumers. Only the well conceived strategy, considering political handicaps, consumer psychology, and ability of the fuel industry to retaliate will succeed.

What I don't really understand is why the retail price of gasoline is based on a FUTURE'S CONTRACT FOR SPOT CRUDE ... does it even make any sense in a day and time where if you minus the country owned comapnies - 6/7 companies control the rest (some in partnership with countries) - they aren't buying crude oil futures, are they? Or rather they don't need to - they have a set price - and basically speculators are driving the prices up (or down in some bizarro world) - why is this system even in place?

People have said it's the replacement cost - frankly, what do we as consumers care?

Oil companies make less profit than the federal government from the oil industry. Immediate relief could be had by reducing taxes.
Also, no has mentioned the role of short-term speculation and environmental regulation in the cost of oil. There are many investors who buy (for a fraction of the actual cost) the promise of oil shares, thereby making it seem to the market that the demand is spiking which drives up the costs. In reality, the demand hasn't changed overnight, but buyers don't see the motivation of the other buyers. We saw that with the housing market when too many idiots were putting $1000 bids for several houses they never intended to live in, just sell to the desperate at much higher prices.
There is also the fact that environmental groups can "hijack" oil exploration by keeping the developers in the courts for up to seven years of litigation over wildlife impacts. Meanwhile, no one is mentioning that oil is naturally seeping up through cracks in the sea floor, killing all kinds wildlife. And that Cuba is drilling 75 miles off the Florida coast since we aren't going to go get what's there.
We have our own oil supplies. Why are we not getting them?
By the way, oil is not the only commodity that shows cycles of stable prices, reduction in supply, then spikes in prices. This used to happen quite regularly in food supplies. Example:A bumper crop of wheat would flood the market and the price would sharply drop to the point that farmers couldn't make profits. A lean year would drive the price up and then everybody and his uncle would be planting it the following season, starting the roller-coaster again. This is why there are very few independent farmers (except the Amish) still around. Most of our food comes from huge corporate farms that are heavily subsidized.That's free market for ya'.

It is politicians who are stifling refinery construction.

It is politicians who require certain expensive blends of gasoline at certain times of the year, in certain locals. It is politicians who set mileage standards for automobiles.

Some of the other posters pointed out that gas/diesel is intimately involved in shipping costs. Without cheap fuel, globalization becomes problematic: it will become cheaper to make the stuff domestically than ship it across oceans. In the wintertime in the US, one can purchase melons that were flown from NZ/Australia. Other produce let us eat food that would previously be unavailable for most of the year.

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