Monday, February 27, 2012

Headed to Five Bucks a Gallon?

Increasing prices at the pump seem to be more of a self-fulfilling prophecy than a reflection of the marketplace.  When the media start doing stories saying there are predictions that gas will hit four bucks a gallon by Easter, and five bucks a gallon by this summer, voila!  It happens.

I’m convinced the free market has little, if anything, to do with this.

The “free market”, by the way, is a world market.  The U-S can do almost nothing to control the price of a barrel of oil; that’s done by the countries that produce the oil, a list on which the U-S is way down toward the bottom.  But anyone who’s observed the market can quickly point to many examples of domestic gas prices increasing while crude oil prices are decreasing.

Last week, when the price of gas rocketed up in Madison (and nowhere else in Wisconsin) the usual sources talked some ridiculous crap about a problem with a refinery in Washington state and Iran rattling sabers about the Strait of Hormuz.

I have nothing but a firm conviction to support my belief that oil companies jack up prices simply because they can; and they do it at a whim.

I had a relative (who passed away many years ago) who had more than a nodding acquaintance with the pricing strategies of major domestic breweries – back when big breweries like Anhueser-Busch were actually American companies – and he said back then one of the reasons it was so hard for local breweries to get a toe-hold was that if a local brewery started making a dent in sales of one of the major national brands, that brand would simply drop the case-price and up the advertising in that market, until their market share was recovered. 

This didn’t even nick the big brewery’s bottom line, because it would simply raise the case-price and drop the advertising budget in markets where there wasn’t a challenge.

I think this is what is operating, on a global level, with the oil companies.  Of course, where you buy your gas has more to do with where you are at the time you need it, than any sort of “brand loyalty” that may have existed in the past. 

The five largest private oil companies in the world – BP, Chevron, Conoco-Phillips, Exxon-Mobil, and Shell – are phenomenally profitable entities.  Over the past decade they have booked nearly a trillion dollars in profits.  Yet, here in the US, since the oil companies walk both sides of the street by giving huge donations to the campaign coffers of both political parties, they’re on track to get 46 billion dollars in federal subsidies in the next decade.  Disconnect?  You bet.

So stand by to pay a lot more for a gallon of gas in the next few months.  The gas companies will be hiking prices mainly because they can, and will pocket more windfall profits.

The solution isn’t more drilling and domestic exploration.  The solution is to develop transportation technologies that break the stranglehold the oil companies have.

Don’t hold your breath.


  1. Tim: First, we all need to abandon the term "free markets" because there is no such thing and never has been. There's market capitalism, state capitalism (China) and crony capitalism (United States). But nowhere is any market actually free from gov't rules, regulations and interference....nor should they be.

    Check your basic econ. for oil prices. Every time we have basically zero interest rates and very loose monetary policy, one or more commodities go through the roof. The one that does has to have some element of shortage fear in the market before the investment bank traders can use their enormous piles of borrowed, interest free cash to affect prices. The Fed recently said that they wouldn't raise interest rates until 2014, so there's no rate increase fear. So ships of oil get purchased off bank's balance sheets, then parked and traded almost every day, but not emptied until a sufficient profit is made. In the business, it's called "Dark Inventory." So the Fed is as much to blame as the sabre rattling on Iran. But those are the two main price drivers since consumption of gas is down signficantly.

    Yes, you're right. Reducing demand is the ultimate answer. But I also find your second to last sentence interesting since you wholeheartedly opposed a train that could do just that.

    1. Most excellent points, Anon.

      I have re-thought my position on the moderate-speed train which would have connected Milwaukee with Mpls/StP through Madison. I would give it lukewarm endorsement at this point.

      But still remain a Luddite on any sort of "local rail" scheme.

  2. I suggest that both you and Anon have addressed an understanding of the mechanics of pricing gasoline...I only wish there was some way that we had a choice...sort of like Charter Cable no competition...maybe the move to natural gas as an alternative fuel would offer competition, but again, no profit no motive to develop this option....I do agree that the news media fans the flames and gives the oil companies the opportunity to raise prices...maybe the next level is $4.00 and once they get us there and feeling comfortable, $4.29 will seem like a bargain.....I really liked it when it was .299/gal, but then again there were also many other things that I did not like..we ride!

    1. True dat, Garyjay - I'm betting you'll remember, like I do, the "gas wars" of our youth, when it would get down to a dime or 12 cents a gallon.