As Oil Prices Plummet, Shouldn’t Gas Prices Fall too?
Why are gas prices not falling?
are you asking about gas as in ‘gasoline’ or as in ‘natural gas’ ?
Nat Gas prices are already at severe / dangerously low prices.
There’s typically a crack spread which means they take a barrel of oil and produce part gasoline and part heating oil or diesel. Both fuels take different processes and have different costs. Both are priced differently as well, and therefore profitability if affected. If there’s more demand for heating oil then they’ll make less gasoline.
Also, many of the American refineries are set up for WTI or sweet crude (crude with low sulfer and easier /cheaper to refine) as per the typical American oil. But much of the Middle East oil is heavy oil and requres more refining, and the American refineries aren’t specifically setup for that. So it’s more expensive to refine Mid-East oil here.
Then there’s winter grade gasoline (oxygenated) which typically, in some states, add more ethanol to gasoline as an oxygenate only during winter to help reduce cold start / cold operation exhaust emissions. The price of ethanol can have an impact to gasoline prices during the period they make the winter gasoline.
In short, there are more factors that affect the price of oil than the cost per barrel of oil itself.
gasoline…
“In short, there are more factors that affect the price of oil than the cost per barrel of oil itself.”
I understand that, but there are related to some extent.
Am I missing something here? Gas prices have dropped quite precipitously since last summer, in accordance with crude oil prices. What’s the problem?
I meant to say gasoline
“In short, there are more factors that affect the price of gasoline than the cost per barrel of oil itself.”
These links may be of interest to you:
http://www.hardassetsinvestor.com/component/content/article/1462.html
http://www.hardassetsinvestor.com/component/content/article/758.html
http://www.hardassetsinvestor.com/component/content/article/1450.html
“Am I missing something here? Gas prices have dropped quite precipitously since last summer, in accordance with crude oil prices.”
Not true…not by my crude estimates…
oil reached $150 barrel…and is not down to $50…
thats a %66.66 drop…
gas was up to $4 here…now its down to $2.10
thats a drop of less than %50…
what I really want to know is, how many of these other factors are government caused?
A lot of the costs you pay at the pump here in America is taxes, which is one government caused factor for you. Also, just because two goods are related doesn’t mean their prices will rise or fall in complete tandem. That would be like expecting the price of bread to rise exactly 20% because the price of wheat rises exactly 20%. There are other factors that go into making bread besides wheat, and the prices of each of these factors are determined by the valuations of consumers and suppliers.
For instance, there might be a large increase in the supply of wheat, which lowers the marginal utility that wheat has for wheat suppliers. As the marginal utility that wheat has for wheat suppliers falls, wheat suppliers will be more willing to sell wheat at a lower price. Or, it might be the case that the marginal utility that wheat has for wheat consumers falls, due to changes in consumers’ taste or something. Thus, consumers will not buy as much wheat, and wheat providers will be left with growing stocks of unsold wheat surpluses. The same result will occur–namely, that as wheat surpluses build up, the marginal utility of wheat will fall, and wheat suppliers will be more willing to sell wheat at a lower price.
However, wheat is not the only thing that goes into bread. There’s also, say, the labor involved in turning wheat into bread. If lots of workers start to value the income from working in bread factories less than the income they could get from working in other lines of production, then labor will start to leave the bread producing industry, and go into other lines of production that workers feel offer a better deal. As bread manufacturers are left with less and less workers, the marginal utility of bread making workers will increase, and they will be more willing to offer higher wages to bread factory workers. I.e. the cost of labor goes up for bread producers.
It is entirely possible that the price of wheat may fall due to changing valuations, even as the price of bread factory labor may rise due to changing valuations. Thus, bread prices will probably not move in complete tandem with wheat prices.
The same holds true for gas and oil. The price of gas will not move entirely in tandem with oil prices. I’m not sure what all goes into making the regular gasoline you get at the pumps here in the US, but the prices of gas’s other factors probably have not fallen as far as the price of oil has.
Whats wierd is when the oil was going down to $35 a barrel…the price of gas didn’t seem to change…in fact at some stations it was getting higher…
maybe it takes some time for that price to tricke down to gasoline…
well, even after a few weeks it didn’t go down…again, it actually went higher at some stations…
it seems like gasoline dropped when oil dropped down to $50…but that seems to be the threshold…
when oil drops below $50, gasoline does its own thing…sometimes it actually goes higher…it seems to make no difference whatsoever.
i just got a comic image of you reading graphs and stock tickers and pulling your hair out
[:P]
What’s important to take from my response above is that the price of a good is not ultimately determined by its costs. The price of a good is determined by the valuations of consumers and suppliers.
The fact that subjective value judgments are the solid, immovable determinant of prices, not costs of production, becomes much clearer when you consider the following:
It costs me $300 to produce Good A.
I price Good A at $400.
No consumers are willing to pay $400 for it, and furthermore, they are only willing to pay $200 for it.
If I want to sell Good A and recoup any of my costs, I am going to have to sell it at $200, even though it cost me $300 to make.
I.e. costs of production can be disregarded by the ultimate selling price.
If I keep the price of Good A at $400 and refuse to lower it, no one will buy Good A if they are not willing to pay $400 for it.
I.e. subjective value judgments of consumers cannot be disregarded by the ultimate selling price.
Just because oil is used in producing gasoline doesn’t mean the price of oil determines in any truly solid way the price of gasoline. Oil and gasoline are two separate goods, and the price of each is determined by individuals’ subjective value judgments. Gas prices tend to generally follow oil prices not because gas prices are determined by oil prices, but because both gas and oil prices are determined by the value that consumers place on fossil fuel energy.
Yes Freiheit, poeple often think that “costs are passed up to consumers”. It’s actually the other way around as you noticed. Consumers set a price for final product, then producers bid up the price of materials, labor etc.
Anyway, it’s maintainance season, lot of refineries were shut down completly because of low margins (usually refineries try to keep some production). Now that margin is building again.
Imagine what whuld happen if for example, lot of refineries were attacked by terrorists. The price of gasoline would skyrocket, however the price of oil would plummet. Demand for gasoline would remain , supply would go down, demand for oil would be very low (nobody could use it).