Thursday, 3 July 2008
Politics Of Gasoline Part 1
Now that gas prices have risen over $4.00, it is fair to say that the price of gasoline has become the top political issue of the season. As I have stated previously, the big reason for the high price of oil is the fact that so much money has moved into the commodities market. Much of it has been moved into oil. Why? My guess is the collapse of the loan industry and the weakness of the stock market have caused cash to move to where it is profitable. Right now that market is oil.
In the process it is creating a bubble in the market. Much like the dot com and housing bubbles this one will burst and the price of oil will fall back to more reasonable levels. Which in turn which will cause gas to fall back into the $2.00 range. Unfortunately, there is no telling how long this bubble is going to last. In the mean time it wouldn't surprise me if the price of gas keeps getting higher. While the short term crunch will be difficult for just about everyone, there is nothing that can be done about it. We just have to ride out the wave.
Of course politicians can't abide not being able to do anything about it. They can't just sit back and wait. Instead we are treated to stupid stuff like Gov Beshear and Mayor Abramson asking AG Jack Conway to investigate "price gouging" in the Louisville market. I guess these morons are oblivious to how free markets work. Let's start with some facts.
An analysis of regular unleaded gas prices since August 2007, as tracked by AAA Kentucky, shows very little difference in average prices among Cincinnati, Covington, Louisville and Lexington until late February.
On Feb. 22, for example, the average price for regular unleaded was $3.16 in both Covington and Louisville. On March 3, the average price in Louisville climbed to $3.22 while Covington's price fell to $3.14.
There have since been a series of increases and declines in prices, which meant Louisville was one cent lower on June 12 and as much as 21 cents higher June 30.
Back in February when Louisville wasn't using reformulated gasoline, the prices were the same. Since the spring and the adoption of government mandated reformulated gasoline the prices have gone up to higher rates than those not using reformulated gas.
Now let's try to understand why. Since we are talking about two different types of gasoline, we are really comparing apples and oranges. The supply of the two products is going to be different just like apples and oranges. Secondly, demand is going to be higher for a product in densely populated areas. That is why gas prices are usually higher in bigger cities than slightly more rural areas.
Everyone who understands the supply and demand curves will realize that higher prices in Louisville is partially from the higher demand, but more importantly are from lower supplies of seasonally mixed reformulated gasoline.
The answer is as simple as that. It is highly unlikely for the reason to be price gouging. The number of stations and suppliers that would have to be involved is just to great. The temptation would be immense for one of them not to lower there prices to sell more product.
Yet politicians need to be seen as doing something. So they might as well look into price gouging to make everyone feel better. Because that is all it will do. It will do nothing effect the laws of supply and demand in which the markets operates. For those who doubt me, do you want to bet that they don't find any evidence of collusion?
