Arnold Kling  

The Gasoline Market

What I'm Going to Do on My Sum... Name Your Price: When Will Gas...

Megan McArdle likes to tell a story with charts.

I like to tell it this way. There is a wholesale market for gasoline, and there is a retail market for gasoline. Gas stations buy in the wholesale market and sell in the retail market, with essentially no profit margin.

If I'm a gas station selling for $3.18 a gallon, the instant that the tax is cut by $.18 I have an $.18 profit margin. That is not going to last. It is going to be competed away.

I might try to lower my price and sell more gas. If every gas station does this, then the price goes down and the consumer benefits. But in order to get more gas, I have to bid for it in the wholesale market. And we can't get more gas out of the wholesale market, because for the next few months the supply is essentially fixed. So what's actually going to happen is that the gas stations are going to bid up the price of gas on the wholesale market. In fact, this process is going to reach a point where in order just to keep my share of gas, I'll have to bid higher by $.18. The net result is that more money goes to refiners, my gas station pays less in taxes, but we pay more for gasoline wholesale, and the consumer gets no benefit.

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CATEGORIES: Microeconomics

COMMENTS (9 to date)
mgroves writes:

How would a halt in strategic reserve purchases affect this situation?

Joe Marier writes:

Here's a question: what if a place with a three dollar a gallon gas tax zeroed it out for the summer?

David Friedman writes:

Unaccustomed as I am to agree with Hilary Clinton on anything, it seems to me that there is one minor thing left out of your argument: the rest of the world. The U.S. is not the only consumer of gasoline. Even if we believe that the world supply curve is perfectly inelastic, the U.S. supply curve is not, because we can bid oil away from consumers in other countries.

Is the missing step in your argument the claim that it is only practical to consume gasoline refined in the U.S., and that all U.S. refineries are operating a capacity?

JR writes:

For mgroves:
We are putting 60,000 barrels per day into the SPR which is about 1/2 of One Percent of what we import daily.

The 18.4 cent Federal gasoline tax is about 5% of the cost of a gallon of gasoline at the moment.

For David:
In 2007 the USA imported 148,144,000 barrels of finished gasoline.

The top 10 sources were:
1. United Kingdom 25.147 million barrels (total for the year)
2. U.S. Virgin Islands 23.590
3. France 11.209
4. Canada 10.605
5. Netherlands 10.518
6. Norway 8.406
7. Germany 8.351
8. Russia 7.387
9. Italy 7.239
10. OPEC Countries 5.516

Source Link:

Why? Because the output of oil refineries depends on what type of crude oil is put in AND what type and scale of processes are within the refinery. European use of diesel has been growing faster than their use of gasoline and thus they have an excess of gasoline which they can sell in the USA. However, there is no surplus of diesel and thus contributing to diesel prices in the USA being higher than gasoline.

Back-of-napkin calculation: (just to give you an idea of the scale of things)
In 2007 USA produced maybe 4.5 billion gallons of ethanol. There are 42 gallons in a barrel of oil (31 in a barrel of beer) so the USA imported more gasoline than it produced ethanol.

John Thacker writes:

The net result is that more money goes to refiners,

Ah. Hmm. Refiners? Many of the refiners are pure play types that have to buy their crude from oil producers. Oddly enough, refiner margins are down this year, since gasoline prices have not risen as quickly as crude oil prices. For that reason, the DOE claims that refiners are operating somewhat under capacity right now. I wonder how much goes to the refiners versus the producers, and whether that means that supply might well increase a tiny bit.

Jesper writes:

This argument goes both ways, doesn't it? If we can lower taxes on gasoline and the consumer price stays the same, then we should be able to up the taxes, and that will only eat into refinery/producer profits and not affect consumer prices. Neat! So perhaps we can let the Saudi oil profits go to US tax coffins instead, this way? :-)

But AFAIK, the US supply isn't fixed - you only consume 25% or so, so you compete with the rest of the world for it. So, reserves and infrastructure make the market liquid enough to make tax changes affect the retail market prices quickly and permanently.

Paul McKellar writes:

It seems a dead end. It basically goes back to the basic economic concept of supply and demand. Gas and Oil is always going to be in demand to run our cars, motorcycles, our businesses, and the million other things that call for gas and oil. Supply is the tricky part. I agree that it seems tough. It seems logical for gas stations to just lower the price a little and then bye more gas to sell to the public, but sense when they can only bye a fixed amount. The gas station pays $.18 on taxes and the profit just goes to the refiners and normal everyday consumers get no benefit. We need to try to think of other options. Maybe solar powered automobiles, Maybe other materials or substances can be used as a replacement for gas and oil to run cars. The Government should act and not just watch and make obvious statements about our current economic state.

Arnold Kling writes:

I do think that raising taxes on gasoline would tend to take some money away from foreign producers.

David Friedman and others,
My understanding is that in the short run it is difficult to substitute foreign refined gasoline for domestic. I could be wrong.

william writes:

Opponents of drilling for our own oil always use the argument: That oil is 10 years away. How many years away is a competative alternative fuel along with the distribution and dispensing network to make it available over the 4,000,000 square miles that make up the US. I would say decades at a minimum.

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