Working out gas prices

Sunday’s Meet the Press was funny. Everyone was struggling to make sense, and I left the show thinking only Daniel Yergin and Jim Cramer were not being disingenuous in some way. The money exchange: MR. RUSSERT: Mr. Secretary, if, if demand is up but supply is down, why are the profits so high? MR. BODMAN: ...

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608631_pumpingjack.thumbnail5.jpg

Sunday's Meet the Press was funny. Everyone was struggling to make sense, and I left the show thinking only Daniel Yergin and Jim Cramer were not being disingenuous in some way. The money exchange:

Sunday’s Meet the Press was funny. Everyone was struggling to make sense, and I left the show thinking only Daniel Yergin and Jim Cramer were not being disingenuous in some way. The money exchange:

MR. RUSSERT: Mr. Secretary, if, if demand is up but supply is down, why are the profits so high?

MR. BODMAN: For that reason.

MR. RUSSERT: No, think about that.

MR. BODMAN: You know?

MR. RUSSERT: Play it out.

MR. BODMAN: Demand is up.

MR. RUSSERT: Correct.

MR. BODMAN: Right?

MR. RUSSERT: Right.

MR. BODMAN: So you’ve got more demand, you’re going to force price up.

You’ve got, you’ve got limited supply, and you’re going to have…

MR. RUSSERT: But that’s a decision by the oil companies.

Russert either forgot the supply/demand curve slopes, or meant to ask why supply wasn’t rising to meet demand. I’ll assume the latter. I think the answer is fairly straightforward.

The American firms that everyone is lashing out at produce about 10 percent of the oil supply, as Yergin said. If they wanted to collude they’d have to collude with the state-run oil companies of the world. That’s proabably not the issue here. A quick scan of the headline news is a big part of it: Iraq, Iran, Sudan, Nigeria, Chad, etc. That’s a lot of political risk a market dominated by governments.

Demand is also increasing in places it hasn’t typically done before, such as India and China. Last November, Saudi oil minister Ali Naimi said the oil market is “beautiful” because supply was meeting demand and there was a small spare capacity of 2 million barrels per day. That’s not the case now.

As far as the price at the pump is concerned, I’m not qualified enough to disagree with Robert Bryce and Michael J. Economides who write in this month’s issue of Energy Tribune (subscriber-only): “What makes gasoline so much more expensive is clear. The U.S. now has the most stringent, most complex motor fuel regulations on earth. And American motorists are paying the price.” There’s no question that the legally mandated transition to ethanol has been difficult. 

We also are falling short on refinery capacity.  

To flesh the more forward-looking part of this answer, I’ll need another post…

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