Greg Roach's Berkshires Blog
Saturday, January 13, 2007
  Rockets and Feathers
A while back, in Andy's comments, Ross tried to explain how the gas companies were not really trying to gouge American consumers. Even with all of his formidable agruments my sincere friend was unable to convince me that the illogical, yet completely predictable (always bet against the end consumer), relationship between oil markets and pump prices was not rigged. My simple premise is that pump prices are quick to rise and slow to fall. Ross blamed this phenomena on "Mom and Pop" gas stations gouging drivers.

So when I read this it sounded familiar:
If it seems like gasoline prices are quick to skyrocket when the price of oil goes up, but then take their sweet 'ol time coming back down when crude prices sink, the answer is simple: They do.

"There is a rocket and feather aspect," said Tom Kloza, chief oil analyst at the Oil Price Information Service. And the reason seems to be simple economics.

The service stations are still selling the same amount of gasoline when wholesale prices fall, said Kloza, "so there's no reason to drop."

Human nature being what it is, [service stations] typically react [to a spike in oil prices] by pushing prices higher, even before they replace their inventories," said Geoff Sundstrom, spokesman for the motorist organization AAA.

"And [again] human nature being what it is, unless other stations bring their prices down, he's going to be very reluctant to bring down his."
So we have an oil industry shill and a AAA PR flak making the same argument - blame "Mom and Pop" filling stations. That seems to be the industry's newest line of defense. But then I remembered hearing this:
Say you're an oil executive and you want to keep the Republicans in control of Congress. What can you do prior to an election?

Well, you can keep your refineries running at full speed, flood the market with extra fuel, and take less per gallon in profit than usual.

And guess what: Department of Energy data suggest that's exactly what the oil companies did this fall.

By the second week in October, gasoline prices fell 70 cents from summer's record highs. Refineries were running full throttle and America's gasoline inventories were up nearly 7 percent from the three previous Octobers.

The rise in supply came despite BP's major pipeline disruption in Alaska. Ordinarily, that's an industry excuse to shrink supplies and raise prices.

Now, the oil industry claimed pump prices fell because crude oil prices dropped.

But gas prices dropped far more steeply than crude oil. Crude oil comes in barrels. There are 42 gallons in a barrel and the price of each gallon was down 10 cents this October over last. But gas prices fell 61 cents a gallon over the same time last year.

In other words, in the run-up to the election, oil companies cut gasoline prices 500 percent more than their raw material cost fell. And it wasn't because refining and distribution costs rose. They're relatively stable.

Oil companies simply took less profit from their refineries for a short period of time. Could it have been to influence a political outcome?

Well, right after election day, the price of gas suddenly rose after two months of sharp decline. Post-election, refineries have slowed down, inventories are shrinking, and gas prices are climbing.

It's back to business as usual, unless the new Congress starts to do business differently.
One of the above is an editorial based upon hard data. The other is a great example of corporate interests shopping around a new public relations strategy to a willing dupe in the media. I'll let you figure out which arguement I give more credence to.
Generally, I find that the big fish often try to pass the blame to the small fry - it's typical in order to shift anger and blame. Anytime someone claims that the small fry is the actual culprit, it's worth a lot of investigation before believing the accusation.
Greg: I could never in a million years deny that most of Big Oil are questionable corporate citizens who are not above misrepresentation and greed.

I want to make sure you've represented my position accurately, though. Part of my point about gas price fluctuations is that they're far more complicated than most people realize. Arbitrage happens on every drop of Ultra 93 starting months before it is ever drilled, tankered, cracked, racked, jobbed, and pumped. It's not just the oil companies that determine the numbers above the pump, a fact made evident when you look at two gas stations 1/3 mile from each other charging different per gallon prices.

My position should not be at odds with yours, over the long term. It is important to realize that there is a price chain that starts with extracted petroleum and ends with you swiping your Capital 1 No-Hassle Card at the Cumbie's on the Mohawk Trail, and Big Oil is not responsible for the entirety of it.

You cannot deny that there have been CNN-driven short term price spikes caused by local operators reacting to developments that simply have not had time to affect the gasoline they have bought and paid for yet.

I, for my part, will not deny that Big Oil and their friends-with-benefits, the Legislative and Executive branches of the US Government, have done their best to not have high pump prices be a factor in the '06 midterms.

Another point: don't drink Jamie Court's Kool-Aid too quickly; there are a number of nitpicky statistical misleads here. I disagree with the relevance of a 7% year-on-year inventory rise as an indicator of oversupply; I also disagree with the direct attribution of per-unit crude oil and gasoline price variations to the machinations of an oil company alone. Don't discount that "consumer advocate" (not industry analyst) Court is pushing an editorial agenda of his own, just as much as that OPIS talking head is.

Big Oil's an easy target, mostly because they're not innocent. But they ain't the only folks trying to tap into the massive currency flow that petroleum creates. The motivations of the other players in the market cannot be so easily dismissed.
Fair enough.

I understand that the mess is complicated- which you summed up beautifully with "they ain't the only folks trying to tap into the massive currency flow that petroleum creates."

But the fact remains that traders, et al, get rich off of all sorts of commodities whose production/wholesale price fluxuates, yet the end consumer sees minimal spikes. Oil is a very different beast, uniquely subject to manipulation by those who "brand" it.

While I used our exchange from last fall to open the discussion, I should have made it clear in the post that I am not lumping you in with industry shills. I just found it funny that the flaks were using almost the exact same argument. Your argument was sincere, but their unison refrain is almost certainly the new flavor of the week.

As for Mr. Court, I can't say that I am familiar enough with his work to defend or deny him. This particular (and I assume vetted) piece, though, created a perfect contrast and compare scenario.

And for the record, I am aware of stations that gouged in the wake of certain events, but most were ordered to do so by corporate entities far larger than any single station. Those who took "too much" for the on-hand inventory, beyond what they were authorized by those running the distribution chain, got nailed.
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