Rising price of oil

[Anton]

A useful tip from Top Gear: It's not the car, it's the man on the pedal.

[popsiclestix]

Except you're incorrect. In the long-run inflation is affected by the money supply. In the short-run there are numerous factors that determine inflation. Also, after the 1980s commodity prices have been a terrible indicator of inflation rates. They actually generally tend to over predict inflation which is what you're basing your point on.

Commodity prices are an indicator. The price of bread is an indicator. However, I would say that you will see products get smaller rather than more expensive. Its hard to repackage gasoline since you buy it by volume. Look for different packaging of the same food products but of a different size. With gas prices going up, everything else will move up. The food you buy is probably from the other side of the country, they don't just appear in the supermarkets. It will cost more to harvest, produce, package (plastic is made of oil), and deliver the foods, on top of getting to food products.

I'd like to know what are the "short term indicators that determine inflation".

Here is a protip from the folks of Ducktales:

[Ferion]

With gas prices going up, everything else will move up.

Yes, that is called cost-push inflation. You learn about it about a week into any intro macroeconomics class.

I'd like to know what are the "short term indicators that determine inflation".

I'm not talking about indicators, I'm talking about what causes inflation in the short-run and what causes it in the long-run. There is a huge difference between the two.

Commodity prices are an indicator.

No, they aren't anymore. http://www.frbsf.org/econrsrch/econrev/96-2/furlong.pdf

When you find something a little more reliable to base your ideas off of then a Duck Tales video yelling at the government, I'll start responding again.

[Gwynplaine]

http://www.nytimes.com/2011/05/06/bu...er=rss&emc=rss

No surprise. Speculators are to "blame" when prices go up, but once prices go down the word "speculator" doesn't appear.

[kuronosan]

Oil prices might have gone down but gas prices went up in my neighborhood. I still blame speculators, whether you hear it in the news or not.

[Ratatapa]

Here it's currently 1.38 per liter

Went up to 1.46 last week

I wish the QC Government will put his feet down and put a limit on gas price like in the other provinces

[Kuya]

http://www.nytimes.com/2011/05/06/bu...er=rss&emc=rss

No surprise. Speculators are to "blame" when prices go up, but once prices go down the word "speculator" doesn't appear.

What's with your hard-on for speculation?

[Gwynplaine]

My hard-on is for truth and comprehension of economics. (Not to mention justice to speculators who are working people too)

Like I already explained they are a secondary means of prices rising and falling, but people only want a scapegoat to feel angry at when their lives are affected negatively. When prices fall it's not "yay speculators made prices fall" Only "boo speculators make prices rise". Which is hypocritical. Many people misunderstand it.

[Drex]

Oil prices might have gone down but gas prices went up in my neighborhood. I still blame speculators, whether you hear it in the news or not.

Gas prices typically take a couple weeks to follow oil prices. I'd expect them to drop in a week or two.

Like I already explained they are a secondary means of prices rising and falling, but people only want a scapegoat to feel angry at when their lives are affected negatively. When prices fall it's not "yay speculators made prices fall" Only "boo speculators make prices rise". Which is hypocritical. Many people misunderstand it.

Because speculators drove it up in the first place. I don't blame people for not celebrating when the prices return to where they "should be".

[Kuya]

If speculation is what made gas prices rise, people aren't going to cheer when speculators make the price fall. I really don't understand what you're trying to get at here.

[Gwynplaine]

Because speculators drove it up in the first place. I don't blame people for not celebrating when the prices return to where they "should be".

There is no "where it should be" except where the market decides to value it. I'm not going to explain further because I've already offered enough extensive details I just wanted to point out the news story because these topics always heat up when gas rises, then are immediately forgotten should they fall.

[notorious bum]

2 steps forward, 1 step back. There's never any logic in that. Trying to make sense of speculators or behaviors of oil companies is a waste of energy.

Even if nothing will ever be done to combat rampant speculating or price gouging, I'd like to see measures like this being passed here at home, as a start.

Exxon, Shell See Profit Hikes; Venezuela Unveils Oil Windfall Tax

Oil companies continue to report major profit increases amidst rising prices for gas and oil. On Thursday, Exxon Mobil said it posted a $10.7 billion profit in the first quarter, a gain of 69 percent. Royal Dutch Shell earned $6.3 billion, up 30 percent. The news comes as the Venezuelan government has announced a new tax on oil companies’ windfall profits. The tax kicks in at 20 percent when oil hits $40 dollars a barrel, reaching up to 95 percent if oil tops $100 barrel. Venezuela says it expects to collect between $9 billion and $16.3 billion this year, with the money going to social programs. In a statement, the group Public Citizen called for a tax on oil companies’ windfall profits in the United States, saying, "Prices at the gas pump are jumping, even though the cost of drilling hasn’t changed… Big Oil is able to pocket the difference—at the direct expense of consumers."

[Drex]

There is no "where it should be" except where the market decides to value it. I'm not going to explain further because I've already offered enough extensive details I just wanted to point out the news story because these topics always heat up when gas rises, then are immediately forgotten should they fall.

So we should praise them for raising the price (for no other reason than because they expected it to go up) and then allowing it to come back down?

I think people's problems arise when the "market" is not just people using the oil, but people who are only buying because they expect the value to go up. Then again, a lot of these same people buy stocks with similar expectations, so I can't buy into either the haterade or the praise.

[*Shinzon*]

Had posted this in here before, but apparently not many read it. Gas prices don't drop as quickly as they rise because people don't shop around for best prices, when available, and thus stations have no motivation to reduce prices.

Why gas prices go up much faster than they go down

Bob Sullivan, msnbc.com —Why gas prices go up much faster than they go downYou might have heard over the weekend that skyrocketing gas prices have finally "plateaued." If gas prices were like gravity, you would anticipate they would start plummeting soon. Raise your hand if you expect that.

Me neither. While the words "skyrocketing" and "gas prices" often end up in the same sentence, "plummeting" and "gas prices" rarely occupy even the same paragraph. In a perfect free market, prices should float up and down with equal speed. But in our market, what goes up doesn't seem to come down, at least not at once. What gives?

We've been told for months that instability in the Middle East spooked the traders who set gas prices, which are almost $1 per gallon more at the pump than a year ago. Prices jumped 30 cents from mid-March to mid-April alone, to an average $3.88 a gallon. What are odds, do you think, that average prices will return to $3.58 by mid-May?

The quick rise/slow fall phenomenon will feel familiar to most consumers, who often explain it with this conventional wisdom — greedy retailers take advantage of temporarily high prices as long as they can to sock away a little extra profit.

Economists tend to scoff at conventional consumer wisdom, but basic economic theory holds no explanation for the sharp rise/slow fall price pattern. Twelve years ago, economist Sam Peltzman — a free market advocate not known for consumer-friendly research — conducted a vast study of price "shocks," which could have dispelled these complaints as yet another whiny consumer myth. Instead, it fueled the fire. His review of 77 consumer goods that had been subject to abrupt price increases – including gas — led Peltzman to write a paper called simply "Prices rise faster than they fall."

"The title summarizes the main result: the person in the street is right and we are wrong," Peltzman wrote.(PDF) In fact, the results were so vexing he called it "a serious gap in a fundamental area of economic theory."

Consumers might call it price gouging; economists like Peltzman have settled on a more neutral term: "asymmetric price adjustment." And while economists have conceded this time that whiny consumers happened to be right, they aren't yet ready to sign up for their conspiracy theories.

For economists interested in the more general problem of pricing, gas prices are a fantastic real-world laboratory. Nearly all consumers need gas. Prices fluctuate often, and there is (theoretically) widespread competition, making gas stations a nearly ideal marketplace to study. And nowadays, thanks to services like GasBuddy.com, it's relatively easy to gather price data across wide geographic regions.

The first research into what some called gas price "stickiness" was published in 1997 by a research team headed by Severin Borenstein, who found that gas prices fall about twice as slowly as they rise after a price shock. For example, if prices rise 50 cents in four weeks, and the cause of the increase is eliminated, it'll take about eight weeks for the prices to return to pre-shock levels.

Matt Lewis, an economist at Ohio State University, has been studying gas prices for more than a decade. He's considered some of the usual allegations, like pricing fixing and collusion among stations. He doesn't entirely discount those, but he thinks he's found a better explanation for the fast rise/slow fall phenomenon. Here's his theory in a nutshell: When prices fall, consumers are so relieved that they stop shopping around for the best price. That eliminates the normal downward pressure on gas prices and allows stations to squeeze out a few more cents of profit while prices slowly fall.

Full size
One chart from Lewis' research, showing the inexact relationship between wholesale and retail gas prices during 2003-2005 in the Los Angeles market. Notice the soft, rounded peaks on retail prices, as opposed to the sharp peaks on wholesale prices, showing that prices don't go down as quickly as they could. Also notice that stations' profit margins often shrink as prices rise.

"Consumers shop around more intensely when prices are going up. When they are falling, they don't shop around as much," Lewis said.

A key element of his theory is something economists call a "reference price." Your local car salesman might know it as "framing." Once consumers get a number in their head — $10,000 for that car, $3.70 for that gallon of gas — all subsequent choices are impacted by a new price's relation to that reference price. When the car dealer says, "OK, $9,500," you think you have a good deal. When the nearest gas station drops the price to $3.63, the average consumer impulsively stops searching.

"If prices are falling, you pull into a station and think 'I have a good deal,'" Lewis said.

The last big gas price shock — the speculation price bubble of 2008 — created a perfect opportunity for Lewis to test his theory. Consumers can use GasBuddy.com to search for the lowest gas price in their area. As prices soared in the first half of 2008, Lewis charted a similar spike in GasBuddy.com traffic. When prices fell that fall, GasBuddy.com Web traffic fell, too — showing gas shoppers became less interested in shopping around while gas prices waned.

Lewis' more recent research has added another nuance to his theory that might make consumer conspiracy theorists feel a bit better. Lewis has, for years, observed several Midwestern retail gas markets that don't behave like other U.S. markets. Intense competition in some small towns near his Columbus, Ohio, home has led to regular cyclical price wars. Stations undercut each other on a daily basis, engaging in short-term price wars that might drop prices from $2.50 to $2.38, for example. But after a few weeks, one station will bite the bullet and raise prices back to $2.50. Other stations follow suit. Then, the cycle begins again.

In these areas of cyclical price wars, Lewis has found that the fast rise/slow fall phenomenon doesn't apply. In other words, stations facing intense competition can't get away with what consumers might call "gouging" and economists call asymmetric price adjustment.

Lewis isn't ready to generalize those observations just yet, but conventional wisdom will tell you there's not enough real competition in gas prices. Twelve years ago, Pelzman predicted imperfect competition would be blamed for the sharp rise/slow fall price pattern. He dismissed that explanation as "unlikely to be rewarding."

But Lee Branstetter, an economist at Carnegie Mellon University, said that local monopolistic behavior is probably the fundamental cause of "downward price rigidity." When prices go up, retailers who don't react immediately lose money. Failing to raise prices in lockstep with higher wholesale prices leads to an obvious, quantifiable loss. But when wholesale prices go down, many gas station owners play the game every retailer does – "How much extra can I get away with charging before I lose consumers?" And even with competitor's prices so obviously posted, station owners face little risk in trying to grab a few extra pennies per gallon from drivers

"Retail gas sellers in the same neighborhood can function as a kind of local oligopoly," Branstetter said — a small group of businesses that collectively operate with monopoly power. And consumers are often loath to change their buying habits. "If you are lagging behind a little bit — all your consumers aren't going to desert you immediately. … (Consumers) are willing to be abused a little bit in the short run."

Any study of retail gas prices risks ignoring complex factors in a market that is anything but pure: The spot price is controlled by speculators making bets on the whims of the oil producing nations' cartel, the threat posed by government-subsidized energy alternatives and the likelihood of another environmental disaster, to name a few. A mysterious wholesaling and distribution system adds to the cost in difficult-to-measure ways. Also, gas stations often make very thin margins on retail gas sales – many use gas as a loss leader for chips and soda sales. As prices go up, their razor-thin margins shrink toward zero, Lewis said – and station owners naturally try to recover some of those lost profits as prices head back down.

Making the issue even murkier, behavioral economists will tell you, is the fact that gas shoppers are anything but rational agents who constantly seek out the best price. Instead, many are pesky realists for whom the nearest station will do. On the other hand, some consumers overestimate the true value of a cheaper gallon of gas, because they underestimate the cost of driving to get that cheaper gas (what economists call "search costs").

In "The Cheapest Gas in Your Area Can Cost More," Loyola College Professor Joseph Ganem makes the argument succinctly.

"If you drive five miles out-of-the-way to purchase gas in a car that gets 25 miles per gallon, that 10-mile round trip burned 0.4 gallons. If you drove that distance to pay $2.95 per gallon to fill a 12-gallon tank, instead of paying $3.00 at your local pump, you actually spent almost a nickel more per gallon for your tank of gas," writes Ganem, author of "The Two-Headed Quarter: How to See Through Deceptive Numbers and Save Money." He has a nifty "Is it worth it" calculator on his Web site.

It should also be noted that while retail gas prices – in fact, all commodity prices — remain artificially high temporarily, retailers can't get away with exorbitant overcharges for long. Gas price history bears this out.

"While it takes much longer for price of retail products to adjust downward, eventually you do observe adjustments," Lee said. "The forces of competition do eventually assert themselves."

Still, Lewis' theory has implications far beyond the gas market. If there is a general lack of price sensitivity when prices fall, basic supply and demand just took another body blow, and comparison shopping just isn't what we thought it was. The lesson for consumers is clear: As gas prices fall during the next few months, don't abandon the good price shopping habits you've acquired. While consumers tend to be hyper-vigilant while the price of gas is soaring, the real rip-offs will occur when it's declining – when you're likely to have stopped paying attention.

[kuronosan]

There is no "where it should be" except where the market decides to value it. I'm not going to explain further because I've already offered enough extensive details I just wanted to point out the news story because these topics always heat up when gas rises, then are immediately forgotten should they fall.

Why the fuck would anyone talk about prices returning to a manageable level? Do you see people on the fucking streets cheering when PS3 price drops are announced?

[Ferion]

My hard-on is for truth and comprehension of economics. (Not to mention justice to speculators who are working people too)

Like I already explained they are a secondary means of prices rising and falling, but people only want a scapegoat to feel angry at when their lives are affected negatively. When prices fall it's not "yay speculators made prices fall" Only "boo speculators make prices rise". Which is hypocritical. Many people misunderstand it.

Do you have any papers you can quote that show evidence that speculators don't cause commodity markets to be volatile? I've only skimmed through a couple papers so I could have misunderstood something, but there seems to be pretty substantial evidence (both theoretical and empirical) that speculators have a pretty large impact on price formation. Although I think one showed that there's some evidence that speculators stabilize prices in specific situations. It was a while ago, but I think I actually read that speculators lead hedgers in markets, I think they may have been looking at currency markets though so that doesn't directly apply here.

[notorious bum]

Do you have any papers you can quote that show evidence that speculators don't cause commodity markets to be volatile? I've only skimmed through a couple papers so I could have misunderstood something, but there seems to be pretty substantial evidence (both theoretical and empirical) that speculators have a pretty large impact on price formation. Although I think one showed that there's some evidence that speculators stabilize prices in specific situations. It was a while ago, but I think I actually read that speculators lead hedgers in markets, I think they may have been looking at currency markets though so that doesn't directly apply here.

This guy is feigning a higher understanding of economy by claiming he knows everything about these "hard-working" speculators that get such a bad rap.

Could he ever find it in his heart to forgive our ignorance for thinking speculators are cash-cows playing games with imaginary stocks that are tied to real-life commodities that affect REAL people's lives, all on behalf of making disgustingly rich powerful banks and hedge-funds even richer?

The Food Crisis in 2008 had nothing to do with speculators even though they outnumbered the physical hedgers by more than 4-1, right?

[*Shinzon*]

Some Good news for drivers:

The United States economy has been on the up-swing over the past year and a half, but recent data shows that economic growth is slowing and unemployment is once again creeping upward. That certainly isn't good news, but but those factors are starting to take their toll on the fuel prices... for the better.

The price of a barrel of oil dropped by $9.44 on Thursday alone, lowering the price below $100 per barrel for the first time in two months. According to the Associated Press, the per-barrel price reportedly dropped further to $97/barrel early Friday, and the trend may not reverse itself any time soon.

Some analysts feel that we may see some relief at the fuel pump, with prices dropping to an average of $3.75 per gallon by Memorial Day, and $3.50 by mid-summer. Currently, the price of a gallon of petrol rests at about $4.00 per gallon nation-wide, though many areas are paying much more.

That's great news for commuters, but the New York Times Green blog points out that the precipitous price drop was less of a trend and more of a market correction. Demand for oil in India and China, the two countries with the highest population by far, continues to grow at a substantial rate. That means any substantial drop in demand over the long term is unlikely. At any rate, the price of a gallon of gas should drop a bit in the near future, and at this point, we'll take what we can get.

At least in the short term.