Arnold Kling  

Gas Price Conspiracy?

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The Cincinnati Enquirer writes,


How can prices climb so much, seemingly overnight, when the gasoline in the tank beneath the station was bought by the retailer a day or two before and was probably refined from crude oil weeks or even months ago?

James Brock, professor of economics at Miami University, blames a smaller pool of gasoline providers who have bigger pricing power than ever before.


What nonsense. Why should a gas station price gasoline based on the price when they bought the gas? When you sell your house, do you base your selling price on the price you paid for the house? Or do you base it on current market prices?

Sheesh. The good news is that the article does provide some anecdotal evidence of people conserving on gasoline.

For Discussion. Would it be good public policy at this point to use price controls to reduce the price of gasoline?


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COMMENTS (25 to date)
mcwop writes:

Didn't fuel price controls fail in the 70's?

Jim Erlandson writes:
Would it be good public policy at this point to use price controls to reduce the price of gasoline?
Only if you like walking to work.

Let's suppose a new efficient source of energy is discovered today. Then the price of gasoline in the market will go down considerably. Will the consumers agree to buy the gasoline from the gasoline providers at the rates prevailing when they acquired the gasoline?

The retailers (and any business for that matter) bear the risk as well as stand to profit from the inventory they carry. They both go hand in hand! Consumers cannot say suppliers should bear the risk but forgo the rewards and suppliers cannot say that they can profit but want to avoid the risk.

scarhill writes:
Would it be good public policy at this point to use price controls to reduce the price of gasoline?

As someone who is old enough to have waited in gas lines in the 70's, I think not.

I might be willing to consider price controls on newspaper economics stories, seeing as how they would tend to reduce the supply.

Jim

Axel Kassel writes:

Of course not. Next question.

p writes:

If we allow scarcity to influence price, then we might as well let willingness to pay influence price as well. Utter nonsense! Not at all FAIR

Jim Glass writes:

It's always a conspiracy when gas prices are rising.

It's never a conspricy when gas prices are falling.

Matthew Peppe writes:

I see no relation between the pricing behavior and a smaller number of firms. Being responsive to market changes isn't a problem, it allows more efficient distribution of resources. It certainly doesn't imply any problems with competition. I don't follow Brock's reasoning here.

Edge writes:

It is quite likely the spring increase in gasoline prices, as every year, is driven by a couple of factors.

One is the shift from the heating season to the driving season.

A second is a shift from the winter formula, I believe for VOCs, to the summer formula, which requires switching over refining processes.

How those exactly feed into unrefined oil prices and inventories, I don't know.

Bob Knaus writes:

Absolutely! A fabulous idea! Many people today are too young to remember the price conrols of the '70s. Or, they have forgotten. We should do it today, just to give everybody an awful experience. That should dampen the clamor for price controls for another generation.

Think of it as a social vaccine. By injecting a small but painful bad idea into the national experience, you innoculate the populace against outbreaks of worse bad ideas.

Hopefully we won't need a booster shot too often :-)

Ian Lewis writes:

From what I understand, the Federal Government could reduce gas prices by $0.50 per gallon by eliminating the Federal Gas Taxes.

Mark Bigelow writes:

Price controls? Did we learn nothing from Nixon?

Randy writes:

Ian,

Amen.

spencer writes:

During price controls -- remember we had universal wage-price controls, not just on gas under NIxon -- I always thought you should find a way to invest in the sign companies. They seemed to be the only ones to benefit from it.

Why are you asking this question -- trying to find someone that thinks it is a good idea?

Timothy writes:

If we allow scarcity to influence price, then we might as well let willingness to pay influence price as well. Utter nonsense! Not at all FAIR

Congrats, you've just described the relationship between supply (scarcity) and demand (willingness to pay). Remedial Econ for everyone! Especially journalists.

Lawrance George Lux writes:

The basic formula for driving Speculation from Gas pricing is to tax them out of the market. The scenario would be about a $.70/per gallon tax at the refinery. No thinkee this a good Plan? Most Libertarians and Conservative Republicans would not like it. lgl

Randy writes:

What if the government set a price cap of say $5 per gallon. No explanation. Just to make people think.

Boonton writes:
What nonsense. Why should a gas station price gasoline based on the price when they bought the gas? When you sell your house, do you base your selling price on the price you paid for the house? Or do you base it on current market prices?

Price controls are so easy to shoot down as an economic policy that it really isn't worth the bytes to do it. However Arnold is a little too nasty to the economics professor.

Imagine a large number of gas stations who purchase a whole month's worth of gas at the beginning of each month. Say a normal economic profit is 10% above cost. At the beginning of the month all the stations fill their supplies for $1.50 a gallon. Competition keeps the price from rising above $1.65. Let's say, however, on the 20th day of the month the gas stations learn that the price for filling their supplies will rise to $1.90 a gallon.

If there's a large number of independent gas stations very little will happen. A gas station that tried to raise its price to $2.09 (110% of the new price) will lose business to stations that don't raise their price. Even when the new month comes there will be downwards pressure on the price until all the old gas is used up. Of course, in the real world gas stations get supplied more often than once a month so increased costs in a competitive market will get passed on much more quickly.

If there is only one owner who owns all the gas stations he is able to exercise monopoly pricing to the degree that his economic profits do not induce others to enter the market. So he can indeed mark up the 'cheap gas' he has in his tanks long before he has to actually purchase the expensive gas to resupply himself. He won't have to worry about new people entering the market since new people will not have any left over cheap gas to mount an attack on his sales.

This is all an academic exercise since gas stations are supplied quite often so at best selling cheap gas at its original price will only give consumers a few extra days of comfort before the new price sets in. Anyone find anything wrong in my analysis?

Boonton writes:

I'm curious to know if anyone has ever tried to store a large amount of gasoline to take advantage of its price swings? I know the gov't stores oil in the Strategic Petrolium Reserve but that's not really for speculation purposes.

Has anyone ever tried to make a business model based on setting aside a signficiant quantity of gasoline (even if only for a month) to resell when prices increase? From what little I've read gas doesn't go 'stale' unless it is improperly stored. Would this be a viable business if not for environmental regulations?

Jim Erlandson writes:

Boonton:

More than you ever wanted to know about Gasoline Futures. (NYMEX)

Mr. Econotarian writes:

A good paper on gasoline retail pricing:
Gasoline Price Differences: Taxes, Pollution Regulations, Mergers, Market Power, and Market Conditions

The bottom line: Tax variations and mergers contribute substantially more to geographic price differentials than do price discrimination, cost factors, or pollution controls.

Then again..

Price Discrimination and Retail Configuration finds: The data suggest that price discrimination at the retail level adds at least nine cents a gallon to the average price of full-service gasoline.

All I know is that gasoline is about 10 cents cheaper in Fredericksburg, VA, than closer in to DC...

Mr. Econotarian writes:

Oh I almost forgot Economics at the Pump in Regulation, which talks about "zone pricing" of wholesale gasoline.

Jim Glass writes:

The conspiracy deepens...
~~~

Oil Prices Drop Sharply As Gas Plummets

Oil futures prices fell more than $1 a barrel Thursday afternoon, following the lead of gasoline futures, and brokers said there appeared to be further momentum lower.

"It's collapsing," said Ed Silliere, a broker at Energy Merchant Intermarket Futures in New York.... [AP]
~~~

Another cunning ploy by the conspirators.

Joshua Sharf writes:

Boonton, we don't have anything like monopoly pricing. I can drive 5 minutes in almost any direction from my house and come across 7 different gas companies. Even the ones selling gas by the same company differ in price by a nickel or more. It might be fun to take an argument to extremes as a thought experiment, but Brock is so far off base here he's playing in a different stadium.

Denver has a peculiar price dynamic, though, that has been repeatedly investigated by the authorities, one that I never saw back in DC. When prices are stable, the prices here will rise by 20 cents overnight, all over town, and then drift back down that same 20 cents over the course of a few weeks. The amount of rise and drift downward changes depending on whether prices are rising or falling nationally, but the pattern is essentially the same.

Does anyone have any idea why that is?

One interesting thing I've noticed is that the metric people use is either price per gallon, or miles per gallon. Does anyone actually use miles per dollar? Assuming, of course, that people notice a difference among gases' fuel efficiencies.

Bob writes:

Boonton,

There was an article in the NYT a few weeks back that talked about the advantage energy traders get from holding physical supplies. Not pure storage, per se, but fuel in transit/holding tanks, along with options, futures, and forward contracts.

Bottom line - yes, people are making money using physical storage to take advantage of price swings. But it apparently isn't as easy as it might look (what is?).

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