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The Inconvenient Truths About Gas Prices
rmn ^ | May 31 | Robert Hardaway

Posted on 06/01/2007 8:05:41 AM PDT by george76

Few politicians can resist the urge to exploit consumer angst over gasoline prices, and thereby deflect where the blame certainly lies — with them.

Here are 10 things the politicians won’t tell you:

1. At over $3.00 a gallon, the U.S. inflation-adjusted price for gasoline in May 2007 is now less than it was in 1981, a remarkable decrease in price over a 25 year period during which real prices in other sectors, such as health and education have tripled and quadrupled.

2. This decline in the price of gasoline since 1981 is enjoyed almost exclusively in the U.S. In most other developed counties in the world, the price of gas is at least double what Americans pay. Consumers in the Netherlands now pay an average of $7.77 gallon, while those in Great Britain pay over $7 and consider it a bargain.

3. The gross profit margins of the major oil companies is far less than that for many other sectors, such as beverages, electrical equipment, chemicals, and computers.

4. At present gas prices, the major oil companies make a profit of between 10 cents and 12 cents a gallon...

5. At present prices, combined federal and state government profit (i.e. taxes) on each gallon of gas is 28-68 cents a gallon, depending on which state you live in. Pelosi’s San Francisco enjoys tacking on an extra 26 cents bite.

9. Crude oil prices, which make up 90% of the total cost of running gas refineries, are set by the international market of supply and demand, which fluctuates hourly, and not by private companies; while the major oil producing countries can form cartels (such as OPEC) which can set prices at higher than a free market, these countries are not subject to U.S. antitrust laws.

(Excerpt) Read more at blogs.rockymountainnews.com ...


TOPICS: Business/Economy; Extended News; Government
KEYWORDS: energy; gas; gasoline; gasolineprices; gasprices; gastaxes; inconvenient; inconvenienttruths; opec; prices; taxes; truths
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To: MNJohnnie
Ah I see. The facts don't fit the your Leftist opinions so of course the facts must be changed to fit your political dogma.

Gas IS more expensive than it was in 1967. That is a fact. It does not make me a leftist.
161 posted on 06/02/2007 12:12:06 PM PDT by mysterio
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To: gas0linealley
Insurance costs money and who will ultimately pay for it? The consumer of course.

So corporations should not take out insurance? I guess that means no fire insurance for their buildings, either.

162 posted on 06/02/2007 12:13:13 PM PDT by SupplySider
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To: Toddsterpatriot

Define “efficient” as it applies to the market for IBM stock, then I *might* answer.


163 posted on 06/02/2007 12:21:57 PM PDT by dynoman (Objectivity is the essence of intelligence. - Marylin vos Savant)
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To: dynoman
But they are in markets, why? Obviously to make money right? One must assume overall they do make money, and if they do where does the money they make come from?

Speculators make money when they buy goods at low prices (thereby raising them) and sell goods at high prices (thereby lowering them). In other words, they make money when their actions reduce price swings.

Generally, markets are more efficient when prices are more stable than when they are more volatile. The money that goes into speculators pockets is generally a product of the increased efficiency.

To be sure, speculators will sometimes drive a market into wild and crazy swings that would otherwise not have occurred. Generally, though, the speculators who drive such swings lose their shirts.

164 posted on 06/02/2007 12:27:14 PM PDT by supercat (Sony delenda est.)
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To: dynoman
Define “efficient” as it applies to the market for IBM stock

Which market do you, as an investor, prefer for your purchase or sale of IBM stock?

then I *might* answer.

LOL!

165 posted on 06/02/2007 12:31:52 PM PDT by Toddsterpatriot (Why are protectionists (and goldbugs) so dumb?)
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To: Toddsterpatriot

I’ve made significant money when I’ve guessed commodities price movements right -— and felt quite smart.

I’ve lost significant money when I’ve guessed wrong -— and felt pretty stoopid... and hopefully learned since then what the difference was.

You’re right about the mechanisms, and have done a good job trying to explain it. The commodities markets serve as a buffer for the producers and the consumers, who use the speculators (in the end) to absorb some of the risk of price movement between the start & end of production. I don’t know whether people here are pulling chains trying to act as if they can’t understand it, or if they really don’t.

I’ve got time to try once before I leave the ‘puter, and won’t be able to respond to replies: It’s probably more simple for people to understand how it works for a farmer who is engaged in growing wheat, and a mega-baker, say WonderBread who is using that wheat.

The farmer, before he plants, can “sell” a good portion (say 75%) of his expected crop on the commodities market -— and thereby “lock in” his price for the season, or next season. That allows him to plan his financial future. It could well turn out that as the season progresses, the “speculators” would drive the price higher (scant harvest expected, weather problems, etc.) or lower (good harvest expected), but the farmer doesn’t care much: he’s got his price locked in. He knows he’ll be able to pay his bills. Of course, he’ll have to deliver his xx,000 of bushels of wheat, but unless he’s wildly misguessed his production, that won’t be a problem. It gives him (and his creditors) some secure, fuzzy feelings. Of course, he hopes he didn’t sell for too little, but he realizes that his security is worth paying some “insurance” for. He also hopes that the price is a bit higher at the end of the season so he can get a good price for that part of the crop he hasn’t sold.

Meanwhile, a huge user of wheat will be buying wheat contracts. Again, that allows them to lock in a price, and plan their financial future in this respect.

This ultimate seller (the farmer) and the ultimate buyer (baker) are now insulated from the risk of how much the cost of wheat fluctuates due to vagaries of the weather or the government or whatever. That price risk falls on the speculators, who depending on how well they “guess” can either make or lose money.... but the real benefits go to the producer and consumer who have some price stability in what often are very volatile markets due to very volatile conditions. That volatility ALSO forces the ultimate seller to be willing to sell a little low as price insurance. The ultimate buyer often has a tougher job in trying to guess a price he should expect, but he’ll often be willing to pay a bit higher price in fear that there will be a crop failure and the price will skyrocket.

Usually, “ultimate sellers” will sell far in advance of production. “Ultimate buyers” will typically buy closer to when they need the item. So, the speculators have some “natural” price spread there, but their cost is the risk that they can be wildly wrong about the direction production or demand takes (look at the price of corn skyrocketing because of the ethanol story ... some people have lost a boatload of money as a result of that ... some have gained a lot)

I’ve got to run now... but the long and short of it is that the commodities markets serve both producers and consumers... but as far as “speculators” ... often the real winners there are the brokers who are charging to simple “place the bets” for the gamblers, and who can’t lose.


166 posted on 06/02/2007 12:52:44 PM PDT by AFPhys ((.Praying for President Bush, our troops, their families, and all my American neighbors..))
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To: SupplySider

In your example, the “insurance” guarantees the price of the commodity at a future date, which is supposed to translate to lower prices for the consumer.

Now relate that to the oil business. What do we see? Real or imaginary supply disruptions result in almost immediate increases at the pump. The consumer, who must ultimately pay the cost of the “insurance”, finds that he is not the beneficiary.


167 posted on 06/02/2007 12:56:36 PM PDT by gas0linealley
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To: SupplySider

What would prevent oil producers from bidding up their own product thru frontmen, aka. speculators? And, what prevents those same producers from manipulating the news in order to manufacture a climate of uncertainty? A sabre rattled here, a pipeline blown up there...


168 posted on 06/02/2007 1:06:16 PM PDT by gas0linealley
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To: gas0linealley
I don’t see any appreciable difference between the activities of futures traders, and shills. Am I wrong?

Yes. A shill in an auction does not provide any useful service to the purchaser of a good. By contrast, futures traders often provide useful services to both producers and consumers of goods.

Often times producers of goods will want to sell futures if their costs of production are predictable and they want to be certain of making a profit. For example, a farmer may sell futures to ensure that he'll have money at the end of the year even if demand for his crop tanks. Large consumers of goods will often want to buy futures so they can make advance sales of derivative goods and services. For example, a cruise line might buy oil futures so it can sell advance tickets; if it didn't buy futures and oil prices skyrocketed, it would be unable to raise prices on the tickets it had already sold.

If the futures that producers wanted to sell always coincided with the ones consumers wanted to buy, there would be no need for futures traders. As it is, though, they don't. Futures traders act as middlemen, allowing producers to sell futures for which there is no immediate demand, and then for consumers to buy futures when there is no immediate direct supply.

169 posted on 06/02/2007 1:12:47 PM PDT by supercat (Sony delenda est.)
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To: dynoman
Are you implying non-delivery speculators are super altrustic people with the good of the market and consumer at heart?

A speculator is only going to make money if he purchases goods cheaper than he sells them. His actions will thus increase prices when they are low, and reduce them when they are high. A speculator will make the most money if he buys at the bottom of the market (reducing its depth) and sells at the top of the market (reducing its peak).

Occasionally the market can get rocked by 'pump and dump' speculation, wherein someone who bought goods cheaply encourages people to keep buying them at prices well above market equilibrium (such action in turn pushing market prices higher). The agitator then sells his goods before the market comes crashing down. Such actions can hurt people outside the futures market (by pushing price peaks higher than they would otherwise go) but most of the cost for such action will be borne by the suckers who kept buying into the market and pushing it higher.

170 posted on 06/02/2007 1:21:31 PM PDT by supercat (Sony delenda est.)
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To: gas0linealley
Insurance costs money and who will ultimately pay for it?

The consumer of course.

Most people who buy insurance will lose money on the deal. Some, however, will benefit from the transaction.

Consider two scenarios:

  1. You have a 99% chance of spending $0, and a 1% chance of having to spend $250,000.
  2. You have a 99% chance of spending $2,500 and a 1% chance of spending $13,000.
Which is a better deal? The average expenditure in the former case is $2,500 while in the latter case it's $2,600. Nonetheless, I think many people would consider the latter scenario preferable.
171 posted on 06/02/2007 1:32:44 PM PDT by supercat (Sony delenda est.)
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To: ClearBlueSky

What your saying doesn’t make sense. Transportation & distribution is 8%, 20% is taxes, another portion of the price is 15% to refiners, the rest is crude...

As of NOv. 2006 Federal tax was 18.4 cents per gallon
My state of Ohio added on another 28 cents per gallon

46 cents of every gallon goes to taxes!

http://www.fueleconomy.gov/feg/gasprices/FAQ.shtml


172 posted on 06/02/2007 1:39:08 PM PDT by EBH (May God Save Our Country)
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To: supercat

“A speculator is only going to make money if he purchases goods cheaper than he sells them.”

What “goods” is a non-delivery speculator buying?


173 posted on 06/02/2007 1:57:14 PM PDT by dynoman (Objectivity is the essence of intelligence. - Marylin vos Savant)
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To: AFPhys

Excellent explanation.

Thank you.


174 posted on 06/02/2007 1:57:52 PM PDT by george76 (Ward Churchill : Fake Indian, Fake Scholarship, and Fake Art)
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To: Toddsterpatriot

Ok I’ll play, I use eTrade but that probably isn’t the “market” - would what you call a “market” be the NYSE?

Now, define “efficient” as you think it applies to the market for IBM stock.


175 posted on 06/02/2007 2:03:33 PM PDT by dynoman (Objectivity is the essence of intelligence. - Marylin vos Savant)
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To: AFPhys

I’ve got to run now... but the long and short of it is that the commodities markets serve both producers and consumers... but as far as “speculators” ... often the real winners there are the brokers who are charging to simple “place the bets” for the gamblers, and who can’t lose.

I understand how the commodities markets serve both producers and consumers and like how you separate out churn and burn speculators as gamblers. Those are the ones I’ve been talking about. And the gamblers are not always little players who have no effect on the product price itself - case in point the Amaranth fiasco.

Gambler heh ties in exactly with what a fellow trader said of him “The financial markets aren’t really like a casino... but Brian treated them like they were.”

I wonder what Adam Smith would think of Brian Hunter.

.

“The financial markets aren’t really like a casino... but Brian treated them like they were.


176 posted on 06/02/2007 2:17:01 PM PDT by dynoman (Objectivity is the essence of intelligence. - Marylin vos Savant)
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To: dynoman
What “goods” is a non-delivery speculator buying?

Even non-delivery speculators are buying and selling goods.

Suppose a non-delivery speculator Steve purchases September grain futures from Farmer Bob, and sells them to Charlie's Cruise Line a month later. You might not think Steve was actually buying or selling grain, but clearly Bob was selling grain, and Charlie was buying it. So what else could Steve have bought from Bob or sold to Charlie?

The point remains: the only way for Steve to make money is to buy things cheaper than he sells them. This will raise prices then they are low, but reduce them when they are high.

177 posted on 06/02/2007 2:30:38 PM PDT by supercat (Sony delenda est.)
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To: dynoman
Ok I’ll play, I use eTrade but that probably isn’t the “market” - would what you call a “market” be the NYSE?

Yes, the NYSE is a market. Full of speculators. Back to my original question, if you were buying (or selling) IBM in your eTrade account, which of the following markets would you prefer?

Market 1, no speculators 104.50-108.50 20x20
Market 2, many speculators 106.45-106.55 300x300

Now, define “efficient” as you think it applies to the market for IBM stock.

A deep market with narrow spreads. You understand what that means?

178 posted on 06/02/2007 2:38:02 PM PDT by Toddsterpatriot (Why are protectionists (and goldbugs) so dumb?)
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Part of the speculation play is that BIG OIL has their own buyers, and they buy months and years out to secure the price for their refineries.

Lets say for arguments sake that they bought oil futures 18 months ago for July. Lets say for arguments sake they bought options for $40 a barrel. Those options are now worth, what $60? They can sell the options they don’t need, pocket the $20 a barrel and laugh all the way to the bank.

THAT is a big part of how Big oil is making huge profits. They arent really concerned with what oil costs today—they are concerned about getting the oil they need next year.


179 posted on 06/02/2007 2:49:35 PM PDT by Vermont Lt (I am not from Vermont. I lived there for four years and that was enough.)
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To: Toddsterpatriot

“A deep market with narrow spreads. You understand what that means?”

Lots of greedy hogs at the trough.


180 posted on 06/02/2007 2:53:27 PM PDT by dynoman (Objectivity is the essence of intelligence. - Marylin vos Savant)
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