A Case Study in Cluelessness

I saw a familiar name today in a news article, which I will get to in a bit. I was reading an article from the Sacramento Bee that said that gas prices may have bottomed out. (I won’t link to the article, since it requires registration). I have been saying that gas prices couldn’t fall much further based on weekly EIA inventory numbers, and were poised to rise. Gas pricing is pretty simple, really. You basically have to watch gasoline inventories, which are reported every week at:

This Week in Petroleum

If you want a very reliable indicator of which direction gas prices are headed, watch the gasoline inventories graph. When inventories are plunging, as they were in the first quarter of this year, gasoline prices are headed upward. They have to in order to bring supply and demand back into line. If prices did not rise, then we either run out of gas, or we have to count on European imports to make up the shortfall. But if prices don’t rise, there really isn’t much incentive for European refiners to ship their gasoline to the U.S. So, falling inventories usually mean rising prices, and vice-versa.

Gasoline inventories started to rise sharply in September, and prices fell in response. Conspiracy theorists everywhere started suggesting that oil companies were manipulating prices to influence the election. Ha! They simply don’t have that kind of stroke. ExxonMobil, which we think of as the behemoth of oil companies, controls about 3% of world oil production. They just can’t dictate pricing on global commodities like oil and gas.

So, what happened when prices fell? Demand picked up as personal budgets weren’t quite so constrained by gasoline prices. As demand picked up, gasoline inventories went into free-fall. The inventory draw started near the beginning of October, and up to this point has showed little indication of slowing. This has led me to comment at The Oil Drum (and a number of posters agreed) that gasoline prices would have to rise in response unless this trend reversed itself pretty quickly. This is simple supply and demand.

So, back to the familiar name. I was reading the Sacramento Bee article, and I came across this gem:

Some 42 percent of Americans believe the Bush administration somehow drove gas prices down to help Republicans in the elections, according to a Gallup Poll last month. Democrats were far more likely to believe the theory than Republicans, the poll said.

“There was a political motive to keep gasoline prices low,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “Now that the election’s over, we’re going to see prices going up. … Oil companies are going to go back to artificially shorting the market.”

Court’s cluelessness has been documented before in this blog. Twice:

Another Uninformed Consumer Watchdog

And

Inventory Management

First, we have the fact that Court believes that gasoline should be less than $2 a gallon for everyone. Yes, wouldn’t it be great if we could all use up our gasoline reserves just as quickly as we can, while producing loads of greenhouse gases in the process? Somehow I bet that Court wants cheap gas and a reduction in greenhouse gases.

But as I documented in one of the essays above, I am not alone in thinking Court is out of touch with reality. The California Energy Commission studied the pricing issue in California, and concluded:

The report, by the California Energy Commission, puts down refinery outages leading to a supply squeeze, coupled with a surge in exports, as the key factors behind record high prices in the state this year.

The lengthy report cites a stunning number of planned outage days at California refineries in the first six months of 2006 compared with same period last year – 175 vs. 58. Most of the unplanned outages, comparing the same periods, lasted twice as long this year.

Also, it found port congestion a factor, as well as high additives costs and the introduction of the new ultra-low-sulfur diesel fuel (ULSD).

It dismisses the notion held by some that pump prices dashed to $3.33/gal because refiners practiced price gouging (dubbed goug-onomics by some consumer groups).

The extended refinery outages in 2006 were a result of delayed maintenance in the fall of 2005, as refiners had to keep making gasoline when Hurricane Katrina knocked a lot of production offline. Of course Court wasn’t about to let something like facts get in the way of his preconceived notions:

The Foundation For Taxpayer & Consumer Rights, an industry watchdog, called the CEC’s findings a “whitewash.”

“Oil companies are ripping off Californians in exactly the same way electricity profiteers did by artificially shorting the market,” snapped FTCR President Jamie Court.

All I can say to that is that a basic understanding of economics is clearly not a prerequisite for the presidency of FTCR. If I had a watchdog that displayed such a stunning level on incompetency, I would drop him off at the animal shelter. I don’t know why anyone would ever take this guy seriously.

A closing caveat. I don’t mean to imply that pricing is entirely dictated by inventories. As I have written previously, the transition between summer and winter blends also has an impact, as do gasoline imports and some other assorted factors. But you will find the strongest correlation with gasoline inventories (and the price of oil, which is correlated with crude oil inventories).

9 thoughts on “A Case Study in Cluelessness”

  1. If I had a watchdog that displayed such a stunning level on incompetency, I would drop him off at the animal shelter.

    brilliant! It even has a double meaning. 😀

    Side topic:
    I believe you when you say that Bush had nothing to do with the price of gas before the election. However, I do have to wonder if the oil companies couldn’t be a factor. This is a hypothetical only here.

    It’s extremely well documented that ADM price fixed a vast array of products. The oil companies get billions of dollars in subsidies each year. How hard would it be for them to boost production in the short term just to decrease oil prices for an election? Yes I know it’s much easier to go up then down but I’m wondering if it could be done. Yes, I know that is really stretching the conspiracy theory but it is a curious notion.

  2. And yes I know this question is kind of redundant but there is a slight difference between Bush controlling the oil prices and all of the oil companies secretly joining forces.

  3. I believe you when you say that Bush had nothing to do with the price of gas before the election. However, I do have to wonder if the oil companies couldn’t be a factor.

    Actually, it’s the other way around. Bush actually has some influence on oil prices. He can decide to delay filling the SPR, as he did. This will limit demand. He can make public statements that put the citizens at ease. He can tone down the rhetoric toward Iran. Those things can influence gas prices.

    Oil companies, on the other hand, don’t have enough market share or influence to do this. It would take massive collusion. ADM was able to fix prices because they were by far the dominant producer. There is no oil company in that position.

    Regarding production changes, yes, that could influence pricing. But again, you would have to get multiple companies to go along with this. In addition, refinery utilization is a published statistic. Utilization would have to be going down for no apparent reason while prices were going up.

    Cheers, RR

  4. I was looking at your post on a case study in cluelessness.It is a good hard look at some people’s idea of what constitutes a fair price for gasoline, and it struck me that taxing fuels rather than giving tax breaks to biofuel producers may be a better way of promoting the use of bio ethanol and boidiesel, assuming that is what society wants to do… and I know that Robert thinks biofuels are a boondoggle.

    It strikes me that supply and demand is hard for people to believe in when there are large oil companies to blame. Even if the biggest like ExxonMobil ‘control’ about 3% of the market, as you say
    I guess its emotional arguments that sway people more than the cold hard logic of the market, especially if we’re dealing with something hard-wired into swathes of the American people that the “ideal” price of gas for many motorists being about $1/gal (or maybe a little below).
    Now, should the price of gas more accurately reflect the amount of carbon dioxide and other global warming gases that will be produced when it’s burnt? Should we include and element of carbon offseting in the price of fuel? Fuels produced using non-reneable resources would be more expensive than renewables. Would that be a useful way of improving the viability of biofuels?

  5. I know that Robert thinks biofuels are a boondoggle.

    No, that’s not true. I am supportive of many biofuels. I support biodiesel and biobutanol, sugarcane ethanol and the potential of cellulosic ethanol, and especially biomass gasification. I think corn ethanol is a boondoggle.

    I guess its emotional arguments that sway people more than the cold hard logic of the market.

    This is of course true, which is a big reason that I do what I do.

    Would that be a useful way of improving the viability of biofuels?

    I believe, and I have argued, that this is exactly how to improve the viability of biofuels. Make fossil fuels more expensive by taxing them, and you make all biofuels more competitive. You also don’t pick out a favorite; you let market forces pick the biofuels winners. Corn ethanol will suffer because it has a heavy input of fossil fuels, and they will become more expensive. So, the ethanol industry will be forced to become more efficient.

    Cheers, Robert

  6. I suspect that donation-supported groups such as FTCR often find that they have to take compromising positions at the extreme of issues or fail to survive. Their message has to resonate sufficiently well with a sufficient number of the public, however ill informed, on hot button issues to keep the donation pipeline full. That or they have to generate funds through legal settlements in successful court challenges. Stimulating the public to part with their hard-earned dollars is not much different than stimulating them to vote for you over your opponent in the recent election. Advocacy in this form can’t run without money.

    FTCR looks fairly large in terms of staff and thus expensive. Unless they are independently wealthy, staff can only donate so much time relative to the market value of their expertise.
    http://www.consumerwatchdog.org/about/

    (One staff member was even in Robert’s neck of the woods – Judy Dugan “. . . also taught at Eastern Montana College in Billings, Montana.”)

    Some years ago (pre-Internet) I joined Greenpeace and my wife joined a state PIRG, primarily to gain access to information that we weren’t seeing otherwise in the media only to discover that the information was scarce but the pleas via letter or phone for donations were incessant. In fact, the useful information was almost zero.

    Hence, the FTCR’s position may not be as clueless as it appears on the face.
    http://www.consumerwatchdog.org/energy/

    http://www.consumerwatchdog.org/energy/gasprices/

    2006, the summer of discontent-
    U.S. Motorists Subsidize French, British, German Drivers
    Author: Tim Hamilton, Petroleum Industry Consultant
    http://www.consumerwatchdog.org/energy/rp/6775.pdf

  7. Make fossil fuels more expensive by taxing them, and you make all biofuels more competitive. You also don’t pick out a favorite; you let market forces pick the biofuels winners. Corn ethanol will suffer because it has a heavy input of fossil fuels, and they will become more expensive. So, the ethanol industry will be forced to become more efficient.
    Brilliant! Any ideas on how to loosen lobbyists grip on existing subsidy legislation? If you read the 2005 Energy Bill it defines quite exactly which biofuels are included at what price. We need legislation that defines renewable fuels in the most general terms, so as to make any potential fuel qualify, not just those who can afford the lobbyists.

  8. Robert,

    I would be curious to know your opinion of the allegation that Goldman Sachs effectively dropped the price of gas by unloading $6B worth of futures contracts immediately before the election.
    http://tinyurl.com/jfefw

    Whether they did in fact have this impact is one question. Whether they did it at the behest of the Bush administration is an entirely separate question, one about which we can really only speculate. But I’d like to know if you think their actions could have impacted the market as heavily as the linked article sugests.

  9. But I’d like to know if you think their actions could have impacted the market as heavily as the linked article sugests.

    As you say, it is speculating to presume ulterior motives to their actions. Whether it could have impacted the market substantially? What I would do is go back and look at what happened to prices when they were dumping the contracts. I don’t believe prices really fell off sharply until well after that, when it became clear that the hurricane season was going to be mild, and inventories were piling up.

    Cheers, Robert

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