Economics of prices {price-gouging oil companies}

JewishWorldReview.com ^ | May 31, 2006 | Walter Williams

[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.

[mysterio]

And I thought I'd go a day without hearing the coffee strawman. lol.

[expat_panama]

the coffee strawman...

Ah yes, your post 6 where you bragged how you've finally gained holistic awareness of your coffee dependence issues, even though you don't yet feel that at this time you're in a position to own you choices with oil.  We're making progress but maybe we can come back to that next week.

Back to work.  As long as I'm not asking you to cover the costs of my preferences, you got no right to take your problems and start up some massive new federal government program using my taxes.

[mysterio]

It's a strawman because you can choose not to buy coffee. If you buy anything, you buy fuel. I'm not sure whay that's difficult to understand and accept.

[expat_panama]

...you can choose not to buy coffee. If you buy anything, you buy fuel...

This is the part of the movie where I came in.   What happens next is I say that I got dozens of neighbors that don't buy fuel and when I buy things from them I don't buy fuel and I choose to buy fuel when ever I can just and they're saving up their money so they can too--

OOPS, I don't want to give away the ending here...

[ClaireSolt]

No. Now everyone has told you that you don't understand the basics. Instead of insisting like a stubborn mule, why not buckle down and study economics until you don't embarras yourself so in public.

Now consider this. Suppose I want to return the fuel you say I bought for a refund. How can I do that when my receipt says I bought butter, milk, and cheese?

[ClaireSolt]

No. That is not what I mean. Obviously you do not know.

[thackney]

No. That is not what I mean. Obviously you do not know.

Please enlighten me. I would welcome the discussion.

Do you know the difference between fact and hypothesis? You don't refute one with the other.

I would suggest that facts are a valuable tool for refuting poorly developed hypothesis.

[expat_panama]

You must not be aware that butter and cheese contain water, and most of the water that Americans consume is imported from offshore export areas.   No matter what you buy, you're buying foreign water.

We need a sound federal water policy to make us water interdependent.  Give your life savings to the feds immediately!!

< / sarcasm >

[mysterio]

So you are arguing that even though the cost of fuel is passed directly on to you that are not buying fuel? Did the truck run on fairy dust?

Now consider this. Suppose I want to return the fuel you say I bought for a refund. How can I do that when my receipt says I bought butter, milk, and cheese?

Return the butter, milk, and cheese, possibly? You would be refunded the whole price, including the price you paid for the fuel to transport it to the point of sale.

[ClaireSolt]

I din't pay for the fuel. Someone else did. Get a grip. Saying that the cost of an item includes costs that are passed along is not the same as actually paying it, becausxe the actual buyer has choice and leverage. If you want to get fixed on the hidden costs of something you buy, look at how much of it is taxes. I think it is about 1/2.

[never4get]

This makes sense if in fact when oil inventory goes up and prices to the oil companies goes down then why do we not see that immediately reflected in gas prices at the pumps being the cost to replace the inventory has now decreased...Gouging is gouging. Please do not defend these pieces of crap for gouging prices due to monopolistic practices.

[ClaireSolt]

I have read many threads in which people raise and develop hypothetical arguements against ethanol. Some of them may have been addressed. Nevertheless, due primarily to geopolitical factors of our trade balance and irresponsible dictators, a decision was made to ramp up ethanol and get off foreign oil. At this point, it is much more germane to look at what is actually going on. It is a race against the clock, the ticking time bomb of Chavez and Ahmenijad.

Maybe because dems want this issue, the coverage has been poor, but I have spent some time looking into it. It appears that our actual demand for oil has declined in the US by 5% since last September. Ethanol doubled last year and is set to double again this year, as are ethanol stations. Some Republican governors (Pataki, Bush, Indiana) appear to be working on this in addition to the energy bill finally passed by the Congress.

GM and Ford are both retooling to produce a very different fleet of American cars including hybrids, flex fuel, and hydrogen for the military which has a goal of reducing gas by 75%.

Every change brings new problems with it. At this point, I think the discussion could properly move from hypothetical to actual. There are 5 m flex cars on the road and more every day. There may be 1/2m hybrids. There is a protype hydrogen truck at Ft. Belvoir. As Jim Woolsey, who spearheads this thing, has said. "The Wright Brothers have flown." We have moved out of the research phase to implementation.

[thackney]

It appears that our actual demand for oil has declined in the US by 5% since last September.

You should take into account seasonal demand changes. Last March the US used 642,688,000 barrels of oil and petroleum products. This March we used 641,559,000. A decline of 0.1% (March is the latest data point) May I suggest U.S. Total Crude Oil and Petroleum Products Product Supplied. Do not look only at Crude Oil, we import gasoline, Kerosene and Distillates as well.

Ethanol doubled last year and is set to double again this year

You are comparing products by percentages when the quantities differ by several orders of magnitude. Try using gallons. With the lower energy level of ethanol, you would be even better off comparing BTU's as it takes more ethanol to move a vehicle the same distance as gasoline.

GM and Ford are both retooling to produce a very different fleet of American cars

Great. More choices can only be better, as long as it is choices and not government forcing different products.

But you still do not address the issue of what it takes to produce ethanol in the quantities you discuss. I do not believe you understand the size of the undertaking you suggest. It is not just a matter of willingness and expense.

[mysterio]

Someone else did? No, not really. You did. The price of the fuel was embedded in the price of your purchase. There's no convoluted logic you can use to change that fact. You bought fuel. And unless you buy nothing at all, you buy fuel.

[ClaireSolt]

You are a just a sophist, and that does not interest me. I am watching, instead of trying to prove I am smarter than everyone in the world. I have fine creditials, and know where I stand.

[ClaireSolt]

I give up. Your grade on this exam is "F."

[Sinner6]

The price of the fuel was embedded in the price of your purchase.
The price of the food was embedded in the price of your purchase.
The price of the water was embedded in the price of your purchase.
The price of the labor was embedded in the price of your purchase.
The price of the taxes was embedded in the price of your purchase.
The price of the computers was embedded in the price of your purchase.
The price of the pens and pencils was embedded in the price of your purchase.
The price of the ... was embedded in the price of your purchase.

Unless you buy nothing at all you buy all of those things.

[thackney]

There is no deception in my argument. You gloss over important facts and ignore reality. If you want to discuss topics, this is an excellent place. If you just want to insult and call names, perhaps another forum would be more to your liking.

[mysterio]

Yes, but the fuel cost that's embedded is the only one of those that comes from a monolithic conglomerate with little internal and almost no external competition. And additionally, the government doesn't add extra exise taxes to the other products. So it's not the same thing, really. Which you know.

My initial point is that it's impossible to cut your fuel consumption past a certain point, and that point is still a pretty significant amount of fuel for most people. The only upside of this is that hopefully the high prices will spur an alternative. I just hope it doesn't take 15 years to get that product to market.

People are furious because they feel trapped into paying whatever price is asked. To some extent, they are trapped. Some people can't afford to move, and they can't afford to invest. They just juggle bills to make more room for gas. And that's the fury you are seeing. If you can't understand that, then you have a real disconnect from a large segment of the population.

[Smokin' Joe]

And that's why you are seeing people get very, very angry

Yep.

Let me put it this way:

My lawyer is angry about fuel prices. His per hour rate had gone up 50% in the last 10 years.

My doctor is angry about higher fuel prices. His rate for an office visit has tripled in the last 10 years.

Lots of people are angry.

What does Joe do? Joe is a wellsite geologist who makes his living on an oil rig--when they are drilling. In the last 10 years the rigs spent one shut down when oil prices were lower than the cost of a barrel to put it in. Joe didn't make much money, but he still had to pay those other folks. Now, in the last 5 years, Joe has been employed steadily. His day rate has doubled over those 5 years. Not as good a curve as the other guys' wages but, wtf, Joe providees an essential service in the production an exploration for an essential commodity. Joe, like most in his industry, works a 12 hour day, away from home, 7 days per week until the job is done. Then Joe does it again.

Joe has to buy fuel, heat his house, feed his kids, etc. too. Handle it. We're just catching up with inflation.