Friday, August 26, 2005

Oil Five-O

On September 1, 2005 Hawaii will be the first state to impose gasoline price ceilings in an attempt to lower the state's higher than average gas prices.

When I first heard this story on NPR today, the economic commentator correctly pointed out that this will lead to shortages as people will want to buy more and sell less. But there are two interesting facets of the law that the commentator left out.

The first is that it's wholesale--not market--price that's capped. Thus it will be the gas stations that will bear the shortage and since they are free to set their prices, they will increase them to compensate for the lower supply. The law bent on making gas at the pump cheaper will make it more expensive.

The second little bit of info is that the government will adjust the cap weekly. Since they are trying to make it closer to the continental US, as the local market price goes up, the goverment will lower the wholesale cap, encouraging the market price to go yet higher.

I'm very interested in how this will play out over the next couple of months.

9 comments:

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Anonymous said...

How about a real comment?

I missed that part of NPR, but I'm wondering if it mentioned oil futures? You see supply/demand don't influence oil and gas prices like it used to. These days oil FUTURES are the most important factor. It takes a long time for oil to get here and be turned into gas. The price paid for a gallon of gas today is not based on the price of the oil it came from. It is based on what the price of oil may be in the future. That is why gas prices skyrocket and then slowly goes down, if it does at all. Do note I didn't include the price of oil today. That only indirectly affects the cost of gas. Today's oil prices influences oil futures which in turn influence today's oil prices.

The problem isn't with supply or demand, it's with how the futures are being run. America needs gas, lots of gas, so the risk of exploitation is high and we're seeing it here. I feel the price we pay for gas should reflect either the original cost or yesterday's price. Not tomorrow's possible price.

What happens when a news report from the mideast says something like, "which MAY increase oil prices" the cost of gas goes up the next day. But when the price of oil doesn't go up, what happens? The cost of gas doesn't return to previous levels. People aren't refunded for the price difference. If the cost of gas drops at all, it's very little.

Jason

David said...

"You see supply/demand don't influence oil and gas prices like it used to."

I'm not sure what that means. Unless there's been a technological regression in refining, supply and demand have always influenced the price of oil with a delay considered. (There might be an exception in the early days of gas, when it was rarely used and not that important.)

This is hardly atypical of commodities. If you go to the Chicago stock exchange (or any stock exchange, really), you'll notice they have a big tv screen that constantly shows the weather. Why? Because if it looks like a storm will destroy crops or they will get a lot of rain, prices now are effected by that through futures.

Similarly, if a report from the Mideast says the production MAY go up, the price goes down. Supply and demand do have an effect on oil now and the futures, thus they play a fundamental role directly and indirectly.

"The problem isn't with supply or demand, it's with how the futures are being run. America needs gas, lots of gas...."

Case in point: America needing gas is demand. If we were talking about something America doesn't need nearly as much of, like fine china, futures wouldn't be so important. And they're not.

"I feel the price we pay for gas should reflect either the original cost or yesterday's price. Not tomorrow's possible price."

Be careful. If I buy squash on Tuesday and a big storm on Wednesday destorys half the squash crop, I could sell my squash for much more than the original cost or yesterday's price. And since yesterday's price establishs the starting point for this change, the final price plays a very important role.

But why should predictions influence today's price? Because the experts (and lets not kid ourselves, the good ones are experts in oil) are adding to the market's body of knowledge of the commodity, shouldn't they be compensated for it? Just because you don't like the outcome, doesn't mean it shouldn't happen; I never hear people complain when the futures decrease the price of gas.

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