Oil Prices Sag Yet Pump Keeps Zooming Says Group

Oilintel.com ^ | 05/28/2008 | Staff Reporter

[MichaelP]

Santa Monica, CA - U.S. gasoline prices rose more than 33 cents a gallon to $3.937 in the last month despite driving cutbacks that have steadily reduced demand, said Consumer Watchdog. Oil prices sagged today along with U.S. economic indicators; yet even if they continue to fall, motorists are unlikely to see much relief at the pump -- or at the grocery story, with diesel breaking the $5.00 mark.

"Producers who have been making their record profits from drilling and selling oil are now trying to do the same on the refining end by keeping fuel supplies short in the summer driving months," said Judy Dugan, research director of the nonprofit, nonpartisan Consumer Watchdog. "High oil prices, combined with a drive to increase refinery profits, will be a double whammy on consumers this summer."

In recent months, refiners have cut back their production to match drops in consumer demand and prevent retail prices from dropping. This May, U.S. refineries have operated at an average of 86.5% of their maximum, while the modern average for May, especially before last year, was about 95%. (see weekly refinery utilization averages since 1990 at http://tonto.eia.doe.gov/dnav/pet/hist/wpuleus3w.htm and historic monthly averages at http://tonto.eia.doe.gov/dnav/pet/hist/mopueus2m.htm ) National gasoline prices hit $3.937 on average yesterday, according to both AAA and the federal Energy Information Administration's weekly gasoline report. Diesel was about 40 cents a gallon higher than gasoline, and in high-priced California now averages $5.124. Some stations in the state are selling diesel for $5.50 a gallon and up, impacting the cost of almost all goods and food.

"The speculative frenzy in oil prices may be cooling slightly, but consumers are unlikely to benefit," said Dugan. "Congress is talking about getting speculation under control but should not ignore the role of refineries in price spikes just because pump prices have recently been driven by crude oil prices. Unless government also oversees refineries and the national supply of gasoline and diesel, consumers and the economy won't see the benefit if crude oil prices decline." Consumer Watchdog noted that major oil companies reaped record yearly profits from their refining businesses in 2006 and 2007, at some points likely profiting by $1.00 or more a gallon just on refining. This drove pump prices to then-records at a time when oil cost half what it does now. "Refineries want to boost their profits in the summer," said Dugan. "With drivers cutting back and truckers going bankrupt it's still business as usual for oil companies, even if it means wrecking the economy."

[mysterio]

That's because they are exporting ethanol.

We can do it, although we shouldn't pick ethanol. Perhaps biodiesel and butanol.

[thackney]

They export a bit less than 20% of what they produce.

http://uk.reuters.com/article/oilRpt/idUKB53020120080305

Did you know the US now produces more ethanol than Brazil?

http://www.ethanolrfa.org/industry/statistics/#E

[mysterio]

Yes, but we cannot produce enough ethanol to meet our demand. Which is why we shouldn’t rely on it for energy independence.

[thackney]

Agreed, it can supplement but will not become a major percentage of our transportation fuel.

My only real gripe with it is the targeted subsidies.

[Dog Gone]

We are being pinched by price manipulation of the speculators on one hand, and the industry on the other. This will only end when there is no more meat to pick off the bones, or congress finally steps up!

Gasoline prices have not risen nearly as dramatically as oil prices in the past year.

When you're in agreement with a leftist organization, you should wonder why.

[businessprofessor]

Brazil is already energy independent.

Brazil should sell its oil on the world market and pay the same price for oil as the rest of the world. They will be fools to subsidize gas and other petroleum based products. Brazil also produces lots of ethanol to supplement their petroleum.

I agree that we are foolish not to develop our own energy supplies. We are the only country that refuses to develop our own oil, coal, and nuclear energy sources. It is a suicidal policy but it makes the rats feel good. All of this development along with alternative energy development will not make us energy independent. Most of the energy will be sold on the world market. We will pay the same price as the rest of the world. However, with increased supplies and substitutes, the world prices for various energy sources will be lower. This innovation will occur here as well as abroad.

We agree that our own energy souces (conventional and alternative) should be developed. I am not sure if we agree on the role of the private and public sectors. I want much less involvement from the public sector. The private sector can develop the technology if the public sector stops restrictions and mandates.

[redgolum]

It will end when you pay the same for basic goods as is the going rate in say, Vietnam. This is what free trade means.

It happened to Britain in the last century, and it is happening to us now.

[RightWhale]

at $135/barrel oil energy is expensive, wait to you see what “alternatives” cost

That's my line! but feel free to use it at every opportunity.

[RinaseaofDs]

It’s oligopoly at work.

[mysterio]

It is a suicidal policy but it makes the rats feel good.

And pubs controlled congress for more than a decade and the WH for seven years now.

We've been shafted by the "two" political parties.

If the American people demanded energy independence, we would get it, and we could do it.

But what to do from our position besides call and burn up their phones? I have been thinking about that for a little while now.

Who can we vote for? No one is running on a REAL energy independence platform.

You know what might work? An organized campaign to vote out incumbents every election until we are on the path to fulfilling our own energy needs. I bet you they would get the picture really quickly if that were the plan.

[Nervous Tick]

>> Open your eyes.

Oh, no, my FRiend! You have it wrong (or, at least, incomplete).

Oil is an essential monopolistic good with an inelastic price structure!

It can ONLY GO UP. Forever! I swear! Trust me.

Don’t just open your eyes, OPEN YOUR WALLET!!!! BUY MORE OIL!!!!

[Sunnyflorida]

One other thing about Brazil is that is uses sugar cane. We have some of this in FL and growing it is a big pollution problem.

[SampleMan]

Your graph is all messed up. Speculation bubbles are not balanced as shown. They peak, have a significant fall followed by a short, sharp restart and then they free fall in a near vertical line.

[txhurl]

‘My’ graph is all messed up. lol

[Nervous Tick]

>> Speculation bubbles are not balanced as shown. They peak, have a significant fall followed by a short, sharp restart and then they free fall in a near vertical line.

Uh... it’s a first order approximation? :-)

[AndyJackson]

Not true.

It is amazing how many people don't understand that when a business has a "franchise" the profit is determined not by a rising supply curve meeting a decreased demand curve, but more by a monopolistic pricing structure, i.e. what is the maximum revenue to the vendor set by maximizing sale price x volume to some potential customers. Taxes cannot be passed on to customers, who are already paying "maximum fair value," and the tax comes out of the "windfall" or monopolistic profit of the vendor.

[txhurl]

Beanie Babies and Cabbage Patch Kids charts are probably not going to resemble oil, but I’ll look.

[Sunnyflorida]

Actually

http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_on_price

This is from Wiki, but it is a bit hard to link to one of my text books. The really interesting question about the supply/demand of oil/gasoline is the price elasticity. For sure the oil companies will definitely cut back on investments and production with their profits are so low. The one big takeaway from Congress (except for Maxine the Marxist) was the claim by oil companies that to grow supply the marginal cost was very high.

[AndyJackson]

The problem with the Wiki article is that this is what happens when you have elastic supply and elastic demand curves. If you have inelastic supply and / or a cartel controlled supply, then the cartel will choose the price to maximize price x supply, and tax will come out of the cartels profit, not out of the price that the consumer is willing to pay, which was already maximized. If supply is strictly limited, with a price far above the actual cost of supply (like land in manhattan or Middle East oil), then it is like taxing a rent, i.e. the landowner pays.

[Sunnyflorida]

I do not think there is evidence that these are completely inelastic curves. My expectation is that if the tax, for example, would be removed, people the demand would push the price back up. I do not havedrive!! the time to do the fundamental research on this topic but it would be very interesting to see actual curves based on data for both oil and gas.

Plus I was commenting not just on Oil and gas to the original poster. I hear even Rush say taxes are passed on all the time. That is not true. In other words I think we are agreeing on the theory. The question remains to determine elasticity empirically. That I would love to see. If you have data vs. opinion I would like to see it. Clearly as the price of crude goes up the supply increases at the margins. Not sure about the demand side. For all the whining people seem to like to drive!!