Posted on 06/05/2006 8:43:21 AM PDT by thackney
Here's what one reader wrote: "Williams, I can understand how the destruction of Hurricane Katrina and Middle East political uncertainty can jack up gasoline prices. But it's price-gouging for the oil companies to raise the price of all the gasoline already bought and stored before the crisis." Several other readers made similar allegations. Such allegations reflect a misunderstanding of how prices are determined.
Let's start off with an example. Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you'd sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices. When I stop by to buy another pound of coffee from you, how much will you charge me? I'm betting that you're going to charge me at least $5 a pound. Why? Because that's today's cost to replace your inventory.
Historical costs do not determine prices; what economists call opportunity costs do. Of course, you'd have every right not to be a "price-gouger" and continue to charge me $3.25 a pound. I'd buy your entire inventory and sell it at today's price of $5 a pound and make a killing.
If you were really enthusiastic about not being a "price-gouger," I'd have another proposition. You might own a house that you purchased for $55,000 in 1960 that you put on the market for a half-million dollars. I'd simply accuse you of price-gouging and demand that you sell me the house for what you paid for it, maybe adding on a bit for inflation since 1960.
(Excerpt) Read more at jewishworldreview.com ...
If it wasn't important enough for you to even know where they stand, let alone contact them about, why should they think it was important.
I'm still sort of holding out hope that the high prices will spur a market alternative.
I work in the oil and gas industry. What the prices have done is spur the huge investments we needed back in 1998-2000 to produce the resources we want today. Rig counts are way up, huge amounts of dollars are being planned, permited, engineered and constructed both in traditional and non-traditional sources (deep water, oil sands, etc).
Obviously, you cannot read. Limited vocabulary limits understanding. That must be your problem.
Do you know the difference between fact and hypothesis? You don't refute one with the other.
"It's really sad that most people don't understand even the most basic economics."
I agree. It is scary. It should be a required high school course. Economic knowledge makes better voters.
re: "What we have right now is not a free or competitive market"
What we have is a mixed economy: Partially Socialist, Partially Capitalist, Partially Mercantilist.
Much of the confusion comes in not recognizing that Mercantilism is just as much an enemy of capitalism as is socialism.
Smoot-Hawley
If BP increased 17 per gallon and Exxon 5 per gallon, nobody is forcing you to buy BP. Nobody is forcing you to buy a major brand.
I consistently buy the off brand that buys on the spot market. 80% of the time they are cheaper than any name brand. 10% of the time they are the same price. 10% of the time they are more expensive. Even then, I support the "little" guy.
It is a mystery to me why more people don't buy on price. They bypass the cheap gas; buy the expensive brand; and then complain about the price. Where is the motivation to drop the price when people don't buy on price?
BTW, all 5 of my cars run equally well on cheap and expensive gas. The performance difference is between the EPA imposed blends. I get 10% less gas mileage on the Chicago blend than the downstate formula. Thus in Chicago I burn 10% more of a cleaner fuel for a net gain of zero in pollution prevention and a 10% impact on the energy shortage. Furthermore, requiring a different blend in Chicagoland strains the limited refining capacity and causes a 5% increase in price.... all due to the EPA and not the gasoline companies.
Totally apart from the oil drilling / supply issue, abolishing the EPA and its savant bureaucracy would reduce the price of gasoline by at least 15% (45 cents on $3 per gallon). It won't bring back 1970 when I paid 13 per gallon and got free glassware and greenstamps to boot from Purple Martin stations. But it would be a move in the right direction.
The superstition is in thinking that somehow the EPA regulations improve the environment. No, they just give power to the spiritual alchemists in the bureaucracy.
We are expanding more than one, and have been for a while. Refineries have been expanding within and around their existing locations, and efficiency is also up. As Fig. 5 shows, refining "capacity," however defined, has been trending upward nicely over the last 15 years.
Do you mean when guessed that congress had mandated 10% ethanol I should not have responded with the fact that they had not?
True, and I can think of a few individual Democrats that I'd prefer to certain Republicans. Just the same, we still have to bear in mind the entire institutional baggage that comes with the parties. In general, the Dems are big government tax'n'spenders and the Reps aren't.
Longer than that.
We hear pundits harping about no new refineries all the time, usually right before they start calling for some goofy new federal energy "solution". We only seem to hear about the rest of the refinery story on the Freerepublic.
No new refineries have been built because they haven't been needed. The oil price shock of the late '70's made a big change in the worlds oil usage. So much so that OPEC doesn't even want to think about pulling a stunt like that again.
A quarter century later we're barely back up to where we were as far as using what was there. We've got a long way to go before new refineries are needed, if ever.
I'm slow today. How do your numbers differ from my post?
Because you are stating that we aren't going to need to build any refineries for a long time. I disagree. Running at 95% capacity is not sustainable unless nothing ever goes wrong and you never have to shut one down for maintenence. We are a first world country, and yet we are not even close to energy independence. On top of that, we are running close to 100% capacity at any time. That's not sound energy policy.
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Re usage going back to 1950 I'd be willing to agree with you that 95% is not sustainable, if you'd agree with me that it can continue to be "unsustainable" indefinitely.
...we are not even close to energy independence.
If energy independence is really that important to you, then you can be as independent as you want so long as you do it with your own money and not through some kind of goofy federal energy policy. Like, America is not coffee independent either, and since the percentage of imported coffee is even higher than the percent of imported oil, how about we first have a sound coffee policy. Then maybe we can talk about our foreign chocolate and banana dependence too.
Don't forget molybdenum. How about caviar! Then all those chopsticks too..
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