How does gas pricing work?

[jsmith86]

Artificial shortages are a joke. Basically before the spring and summer driving seasons, oil companys perform maintenance on the refineries that last about a month. They pretty much take them apart and put them back together to make sure they are working correctly. I can't get a straight answer from my bro-in-law as to why they don't perform TPM maintenace throughout the year instead of this, but this causes a drop in production that you see at the pump. These procedures are why they get the large subsidies from the government, although the subsidies are supposed to prevent them from having to raise prices because of a production decrease. It's a vicious circle that will continue until gasoline isn't the #1 energy need.

The reason for doing the maintenance all at one time is because refining is a continuous flow process. You take one distillation column or one reactor out of the picture and it can mess up the flow for an entire refinery. It is also impossible to do much of the needed maintenance, such as checking the trays in a column, while the column is in operation. It is much easier to shut down the whole plant, bring in a whole lot of people and get everything done at once than it is to try to figure out what to do with all the stuff that suddenly has no place to go because the distillation it is supposed to go to has been disconnected.

 

[Wesley]

Bring back U P trains to help out the poor eighteen wheelers move goods? This will result in more layoffs.

The lack of new oil refineries is hurting this country significantly. Are they still building the one at Sioux Falls, the first one in thirty years?

 

[jsmith86]

As far as diesel goes, that has everything to do with our lawmakers in D.C. They required that diesel be ultra low sulfur a couple of years ago...and the only way to refine ultra low sulfur diesel is to refine it from light sweet crude...the same crude used to make gasoline. Until a few years ago, diesel was refined from any other basic crude that was pulled up and not light sweet crude...so that's also a big reason as to why gas prices are still slightly high as well as diesel being raised through the roof. Plus, taxes on diesel have gone up significantly in the last 2-3 years.

Gotta love our senators and congressmen!!!

You can refine it from other crude, it just takes a lot more effort, ie chemical reactions to get the sulfur out, and just isn't cost effective. You could also make the diesel from bio-oils such as soybean oil, corn oil, whatever oil, but the efficiencies for those processes aren't high enough yet to be commercially feasible either.

 

[ISUAlum2002]

Sure simple supply and demand applies to the oil industry. The demand of oil is almost perfectly inelastic, which means the demand curve is vertical on the graph. What that means is the oil supplier can set the quantity of oil at a specific point, and then charge whatever they want for the product and the consumer will pay for it.

Sounds to me like someone didn't pay attention in Econ 101 to me...

This past summer, there were proven reductions in demand while prices skyrocketed past $3.00/gallon. Supply remained relatively stable, yet prices continued to climb up and over $4.00/gallon.

Sure sounds like supply and demand were setting the price there, eh, my Econ inclined friend?

The difference? "Speculators." Speculators were guessing that supply was going to be disrupted badly but it never was. The ramptant guessing caused oil prices to go up unnecessarily.

 

[Wesley]

This past summer, there were proven reductions in demand while prices skyrocketed past $3.00/gallon. Supply remained relatively stable, yet prices continued to climb up and over $4.00/gallon.

Sure sounds like supply and demand were setting the price there, eh, my Econ inclined friend?

The difference? "Speculators." Speculators were guessing that supply was going to be disrupted badly but it never was. The ramptant guessing caused oil prices to go up unnecessarily.

Just look at the EPA during the summer. There are 20-40 different reformulations tht must be refined and sent to different cities. At one point when prices skyrocketed, the EPA considered dropping the reformulation requirement for several cities. That could still happen in the summer time.

 

[usedcarguy]

I am very confussed by the fact that as the price of crude oil continues to fall, the price at the pump stays the same, or if you live in Cedar Rapids, goes up.

Now when the price of crude was climbing, I didn't like it, but at least it made sense that the price at the pump would rise. Hard for me to understand what is going on now.

Most of it is because of local competition. If McDonald's price of beef goes down, do they reduce the price of a hamburger? The answer is no, unless the Burger King down the road does and starts to take business away. I assure you that if everyone in CR decided to drive elsewhere for a month to buy their gas, the price in CR would come down. But since everyone is used to paying $3.00 plus, why leave town?

Business tries to charge as much as it can to maximize profit. But if they raise the price too far, they risk losing sales. As long as people are willing to pay it, look for it to continue.

 

[jdoggivjc]

This past summer, there were proven reductions in demand while prices skyrocketed past $3.00/gallon. Supply remained relatively stable, yet prices continued to climb up and over $4.00/gallon.

Sure sounds like supply and demand were setting the price there, eh, my Econ inclined friend?

The difference? "Speculators." Speculators were guessing that supply was going to be disrupted badly but it never was. The ramptant guessing caused oil prices to go up unnecessarily.

And yet somehow you missed out on the record setting profits that the oil companies had this summer.

The speculators got spooked and the market reacted to them, not a decreased demand on the customers. There were plenty of customers to support $4+ gasoline - hence the record profits.

The thing you seem to not understand about supply v. demand is that the goal isn't to bring in the most customers possible but to maximize profits. Companies will sacrifice a lot of customers if doing so will bring in more profits because of the higher price.

Gas/oil isn't perfectly inelastic - nothing is. but it's one of the closest things to perfect inelasticity that there is.

 

[temperflare]

From what I understand, the current drop in oil was the FUTURES price. The reason gas prices soared the way the did was because buyers were predicting a shortage due to a projected increase in damand while also projecting a decrease of supply. It is/was a manipulated market with a false price which couldn't stay false for long. Investors can only be "duped" for so long.

So... buyers are no longer hoarding oil and have since taken a loss while the oil companies have gotten rediculously fat. The high gas prices weren't based on true supply levels, they were based on what supply levels were "predicted" to be.

Something else I learned: When a service station that is owned by an oil company, say BP, the price the service station pays for the delivered fuel is based on what the price of oil is when it is purchased for delivery. When a service station is owned by an individual or small business, the price they pay is what the price of oil is when it is at delivery. So, if the price of oil is say 1.00 a gallon when ordered and goes up to 1.50 when delivered, then they have to pay the 1.50. A BP station still only pays the 1.00.

 

[temperflare]

On another note... if I can LEGALLY manipulate a market in order for me to make an additional 200% profit... you better believe that's what I'm going to do.

There are a number of institutions that do this... the government being one of them. The difference being that the govt. does it under the guise that it is for the "good of the people".

How many other groups/organizations are good at perpetuating their own existence for profit?

 

[lmsoup]

You can get the real answer on 60 minutes tonight....they have promised to explain everything.

 

[Wesley]

You can get the real answer on 60 minutes tonight....they have promised to explain everything.

Yeah, straight from the horse's mouth.

 

[Psyclone]

I am very confussed by the fact that as the price of crude oil continues to fall, the price at the pump stays the same, or if you live in Cedar Rapids, goes up.

Now when the price of crude was climbing, I didn't like it, but at least it made sense that the price at the pump would rise. Hard for me to understand what is going on now.

Demand not cost has determines what the price is. However, a look at crude oil versus Iowa pump prices does show some correlation over the last 6 years.

 

[Clonefan94]

According to everything the American Oil companies said during the price skyrocket this summer, they always work on the same margins that every one else in business does. 7 - 8%. So it wouldn't be the American oil companies at all. Must be the price of crude (wait, that's still going down, yet prices are up 30cents from last week?) Anyways, must be taxes then. Wait, wouldn't those have gone up on the first, not the 9th of January? Anyways, no way the oil companies are tweaking things to make a little more money. :unsure::spinny: Oh yeah, I also loved their expanation of how when prices went down it took two weeks to reflect that change at the pumps. Seems strange considering it goes up at the pumps as soon as the crude prices do.

 

[jsmith86]

Demand not cost has determines what the price is. However, a look at crude oil versus Iowa pump prices does show some correlation over the last 6 years.

Psyclone, where'd you get the chart?

 

[jsmith86]

Remember that the prices of Crude, at least those quoted on TV, are usually futures. Also, the oil that is bought as it is pumped from the ground still has to be sent in a tanker overseas to be refined, this process can take some time.

 

[IcSyU]

Psyclone, where'd you get the chart?

http://66.70.86.64/ChartServer/ch.gaschart?Country=Canada&Crude=t&Period=72&Areas=IowaState,,&Unit=US%20$/G

 

[Cyclonepride]

Remember that the prices of Crude, at least those quoted on TV, are usually futures. Also, the oil that is bought as it is pumped from the ground still has to be sent in a tanker overseas to be refined, this process can take some time.

Exactly.....and the gas you are buying now was from oil purchased previously. It stands to reason that there would be a bit of a lag. Not saying that they drop it as quickly as they could, but the free market does make prices follow along.

 

[ISUAlum2002]

Pretty good report on 60 Minutes.

Just like I said, there were proven reductions in demand, proven increases in supply, and yet, the price of a barrel of oil increased $25 in one day even when that information was known.

 

[jbhtexas]

Pretty good report on 60 Minutes.

Just like I said, there were proven reductions in demand, proven increases in supply, and yet, the price of a barrel of oil increased $25 in one day even when that information was known.

Yes, it was very good report, and I'm surprised to see such little discussion here about it today.

How interesting that the industry that played a good part in creating the oil bubble (and made a bunch of money off of it) is the one that needs the $700 billion bailout.

Another thing that is troubling to me is how susceptible energy commodities are to outside manipulation. First, Enron does it with electricity, and now the financial institutions are able to do it with oil. This has got to be stopped. The economy is too dependent on energy to allow this kind of gross manipulation.

 

[ISUAlum2002]

That deregulation of speculation that they were talking about seems like exactly the opposite of what they should have done.