Interesting commentary on gasoline prices

[REWahoo]

It's a given that gas prices go up rapidly with the price of oil, but decline slowly when the reverse occurs. That said, what's taking place at the moment is more than a little extreme: The price of oil is down to what it was last July, but the price of gas is $0.40/gallon higher. That $0.40 price increase amounts to a $40 billion drag on the US economy. Ouch.

What goes up doesn't always come down

 

[MasterBlaster]

A few comments...

Crude oil only accounts for maybe half (or less) of the price of gasoline. Other factors such as refinery utilization and seasonal factors can have big (bigger) effects on price.

The author quotes the WSJ that inventories are high. Does the author know that those numbers are only kept for US supplies of crude ? There are absolutely no statistics on worldwide inventory levels. Traders use many surrogate statistics (the tea leaves) to estimate what real worldwide inventories are. Since oil is easily transported worldwide, US stats on supplies are of marginal utility in predicting (worldwide) crude prices.

While spot prices of crude have indeed fallen lately, most oil is sold under long term contract. The prices on these contracts, taken as a whole, move much more slowly (even glacially) compared to spot prices.

In short, The author, the article and it's premise present only part of the story.

 

[Leonidas]

I can see why this happens. When vendors have to replace the commodity, they're going to immediately raise prices to reflect the replacement cost. And they're going to drag their feet on the way down based on what they think the market will bear, to let the higher prices they paid be reimbursed, and to try and hang on to profits.

The oil industry always has high profits during times of increasing prices, and leaner profits when the price goes down.

But it's not all just about retailers and wholesalers protecting their profits. When you're talking gasoline you're talking about multiple different refined products that bear the name gasoline, but are different depending on what part of the country they're sold in, and the time of the year. The refineries are frequently shutting down the production of one product to switch over to making something else. It seems that there will always be lag time there as supplies go up and down during seasonal switches, or due to regional inefficiencies.

It looks bad in the short term:

But if you stretch the time horizon you get a different view:

 

[audreyh1]

Interesting. From those charts it looks like gasoline doesn't react quickly - i.e. it doesn't go up as high as might be expected from a sharp rise in crude prices, and rises more gradually, so that when the crude price starts coming down, the gasoline price is still "catching up" with the previous rise. But if the crude drop is steep or sustained long enough, the gasoline price catches up and starts to drop.

Audrey

 

[Zathras]

Hopefully the price of oil will have less and less of an impact on the economy than it does now.
I know it will never (well, not for a very very very long time) go to zero, but less over time.
As transportation costs go up, people will shift to buying more local foods.
As fuel prices go up, more efficient cars will be sold, and alternate fuel powered vehicles will become more available.

 

[chinaco]

I can see why this happens. ...

I can too. But my explanation is less technical.

When I was in the USMC, we used the term BOHICA when we knew we were getting scr3wed over!

 

[Independent]

From the article:

It's called protecting your margins. I would say that it's more like gouging.

I don't know what "gouging" is. It sure sounds bad, but the author doesn't explain why he decided that "protecting your margins" (really, maximizing your margins, which is what I learned in econ 101) needs a different name.

 

[REWahoo]

I don't know what "gouging" is. It sure sounds bad, but the author doesn't explain why he decided that "protecting your margins" (really, maximizing your margins, which is what I learned in econ 101) needs a different name.

I think the definition depends entirely upon your perspective - whether you are the [-]gouger[/-] retailer or the [-]gougee[/-] consumer.

 

[ziggy29]

From the article:
I don't know what "gouging" is. It sure sounds bad, but the author doesn't explain why he decided that "protecting your margins" (really, maximizing your margins, which is what I learned in econ 101) needs a different name.

As long as the market is truly competitive (i.e. no collusion or price fixing), I don't think there's really any such thing as "gouging" except in the context of jacking up prices to extreme levels to capitalize on something like a natural disaster.

 

[Leonidas]

When I was in the USMC, we used the term BOHICA when we knew we were getting scr3wed over!

We used a similar phrase: "Bend over, here comes the green weenie!"

As long as the market is truly competitive (i.e. no collusion or price fixing), I don't think there's really any such thing as "gouging" except in the context of jacking up prices to extreme levels to capitalize on something like a natural disaster.

I agree, in general, that it is a competitive market driven by the forces of supply and demand. But games are played - not so blatantly by the majors as opposed to many investors who basically monetized oil. With the falling dollar of a couple of years ago the prices were going up like a rocket and carrying physical oil was a money making deal - especially during what some are calling the super-contango period a couple of years ago.

With the dollar seemingly strengthening against the euro prices could get cheaper soon - heck, we may have already seen the summer high prices. But if demand in Asia comes back strong, prices could stay stable and possibly even grow. Who the heck knows. Yeehaw, this investing stuff ain't fer cowards. But I'm hanging on to my XOM, BP and NE for the time being.