Sunday, June 8, 2008

Looking for Lower Prices in All the Wrong Places

As sure as the sun rises and sets each day, there will be a Democrat who will blame the high prices of gasoline on price gouging. The latest incarnation of the it's-not-our-fault and it-must-be-the-oil-companies-fault Democrat is Representative John Hall of the 19th District in New York (See Full Story). (That's him -- pictured -- with his little charts and graphs in his feeble attempt to make his case) His typically short-term view is that the price of gasoline rises much faster than the price of oil; a claim that has been repeated, almost semi-annually for years, by many a Democrat; whenever the price of gasoline goes higher.

Now, I don't know what charts or what data Mr. Hall is using but, here's the real story:
Gasoline prices have not risen as fast as oil prices in this country and the world. As the numerous and time-wasting Congressional hearings have "always" proven, price gouging is not widespread in this country.

At the end of May 2006 (at the beginning of the peak driving season), gasoline prices were at approximately $3.00 a gallon (See a 17-year gasoline price chart). At the same time, oil prices were at about $70 a barrel on the New York trading exchange (the NYMEX) (See May 2006 to May 2008 NYMEX Crude OIL Price Chart). Since then, the price of gasoline has gone up to about $3.90 at the end of May 2008; a price rise in 2 years of about 30%. During the same period, oil has risen 190% from $70 a barrel at the end of May of 2006 to last week's $135. If gasoline was truly following the price of oil (or exceeding it because of gouging), then gasoline prices should be up at least 1.9 times (or 190 percent) higher since May of 2006. So, in theory, gasoline prices, if they followed oil, should be about $5.70; instead of the $3.90 that we saw at the end of May.

While it may not seem like it, gasoline is a bargain based on the current price of oil. And, as you can see, gasoline has "not" risen as fast as the price of oil. The reasons for this are complex and cannot be simply derived from short-term charts or data (that's why I used a two-year span of time). For one thing, the current price of oil, the one that everyone hears in the news, is for any new, out-of-the-ground contracts that are written as of today. It will take anywhere from a few weeks to several months to actually deliver any gasoline from those new oil contracts. So, in effect, the gasoline that you are buying today was derived from oil that was purchased at a much lower price than today's quote for oil. Further, the "big" oil companies have storage capabilities which allow them to buy oil at low prices, when necessary, and store it for later processing. This saves you and I money over the long run. Additionally, refined gasoline is also stored. The refineries do this because the same refinery has to produce different grades and different formulations of fuel to meet our nation's multiple requirements. There isn't enough refinery capacity in this country so that we could have the luxury of parallel production of jet fuels, home heating oil, diesel, and the various grades of gasoline. Often, the same refinery will be "retrofitted" to produce a run of diesel fuel. Then, that same refinery will shut down and retrofitted to produce a run of 85 octane gasoline; and, so on. During these times, various types of previously produce fuels are stored to maintain an uninterrupted supply. All those stored forms of fuels were produced from oil that was bought at a variety of prices. Lastly, not all oil is equal in quality. There are different type of crude (heavy crude, light sweet, etc.) with different levels of contaminants like sulfur that be refined differently. This also forces the storage of fuels as each refinery adjusts to longer or shorter refining times in compensation for the type of oil that they are refining.

Lastly, unlike government, businesses compete for our business. Oil companies work efficiently to keep prices low. Whether its Exxon-Mobil, Shell Oil, or Citigo, they all want our business and it is not their intent to raise prices through gouging to maintain the status quo. There are just too many small and independent companies like Sinclair that will undercut the big guys to gain more customers. Apparently, the Congressman from New York hasn't ever seen or heard of "price wars" between gasoline stations and the fact that, often, one or more gasoline stations can go out of business when such wars are waged.

With oil at prices over $125 a barrel, a gasoline price of near $6/gallon is inevitable when the current stored oil and gasoline supplies are all used up. Like clock work, as the price of gasoline goes up, you can expect some future Democrat to reopen the issue of price gouging in the future. It's their only way of pass the blame to the oil companies for "their" consistent blocking of any new oil supplies in this country.

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