Wednesday, November 09, 2005

Gasoline, Oil, Home Heating Oil - Prices

I don't pretend to be an expert, but I do have a good memory of some things.

I remember the US oil industry collapsing a few years back when oil hit $12 a barrel. Wildcatters, equipment suppliers, bankers all went under. It is pretty hard to get folks to put their money up to drill new wells, manufacture equipment, or create infrastructure when there is no way to project what they can sell the end product for.

I remember the cost of gas in the 50's at $.20 a gallon. I also remember cokes for $.05 in a glass bottle from a machine, and candy bars for $.05. Seems like $2.50 for gasoline with $.60 of that for taxes is pretty much in line.

I remember my economics classes in college where we were taught about supply lines. I live that reality every day. Right now the cost of oil is down as is natural gas, gasoline, and home heating oil. But plastics keep going up. That's because the raw material is carried to the plants by trucks and trains over roads and railroads, and those are still not fully back in operation in the South. Gas and oil travels through pipelines, not so much over rail and road, so those commodities are able to move through the supply chain again.

Moreover, the price of things is not merely determined by the supply of the basic raw material, but also by circumstances at each level of sale. It is possible to have plenty of oil, but not even refining capacity. Therefore, oil prices are down, but refined products are still expensive.

Or you could have plenty of oil and gasoline, but the tanker truck drivers could go on strike. That would still make the supply problematic, and cause costs to go up at the pump. So far we've only discussed the supply side of the equation.

What if there was plenty of the commodity, but a substantial increase in demand. Lets say they found out that riding buses and trains caused cancer. Silly, I know, but just for fun. Now those riders would be getting into cars. The supply would be rapidly diminished with no excess refining capacity to quickly increase supply. Costs would go up.


To the extent that they can get away with it, they do. That is good business. However, they always have to be wary of the competition dropping their price and gaining market share. So they keep their finger on the trigger to drop prices if the competition looks like they are making a move to the low side.

Having said that, if there are real shortages or threats of shortages, almost any business owner will try to make hay while the sun shines. It is not illegal to maximize profits, even if it exploits someone else's troubles. It is only illegal to do so through collusion or fraud, or if the exploitation becomes extraordinary.

There are plenty of greedy people out there, but the greedy consumers sure like to lap up cheap commodities even if the wildcatters or farm families struggle. It cuts both ways.

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