And the companies are clearly taking advantage of the conditions to keep the prices inflated. In the last couple of years everytime the the price of oil went up the price of gas went up like the next day, I might not be Einstein, but I know it takes more they 12 hours to refine the oil into a gas and ship out to the pumps, but at the same time whenever the price of oil dropped a little, the price at the pump stayed high.

How about they open up the books and let us see where the money is going and justify the prices and the profits.

But again, the question is "inflated" compared to what? Compared to what you think they should be charging? With all due respect, I'm not sure either of us (or anyone, for that matter) knows what the "correct" price of oil and gas should be.

Because I'm a geek, I assembled weekly price data from the Energy Information Administration, which is an office in the U.S. Dept. of Energy. I took weekly average crude oil prices for the U.S. and compared them to weekly average regular gasoline prices in the U.S. (all data reflects national averages). The data series begin in 1997, and run through April 14, 2008. You can find the data here.

In short, here is what I found:

1. Over the past 11+ years, when the price of crude oil increases during a given week, the average increase is 3.45%. During weeks in which an increase occurs, gasoline prices also increase, but on average, that increase is only 1.13%. In other words, for every dollar that the price of crude oil increase, ~33% of that increase has ultimately been passed on to consumers in the form increases in gasoline prices.

2. Over the same time period, when the price of crude oil decreases during a given week, the average decrease is -3.29%. During weeks in which a decrease occurs, gasoline prices also decrease, but on average, that decrease is only -0.91%. In other words, for every dollar that the price of crude oil decreases during a week, ~28% of that decrease has ultimately been passed on to consumers in the form of decreases in gasoline prices.

This very "crude" (har har) analysis suggests weak support for the proposition that gasoline prices remain relatively higher during periods in which oil prices are falling, but only weak support. After all, gas prices still fall when crude oil falls; they just fall by a smaller percentage. Quite frankly, though, the difference does not seem particularly significant.

Another way of looking at whether retail gasoline prices are relatively "inflated" compared to the cost of crude oil is to compare the two, with gasoline prices as the numerator and crude oil prices as the denominator. In theory, the higher this percentage, the more consumers are being "gouged" through "inflated" prices. Below, I have included a graph that tracks the relationship between retail gasoline prices and crude oil prices.


As you can see, the price of gasoline relative to the price of crude oil has been actually been dropping over the past 8-10 years, which suggests that increase in the price of crude oil has not been passed along to consumers as much as has been suggested. The price of each gallon of gas relative to the price of each barrel of oil has gone from 5-7% between 1997 and 2004 down to 3-5% over the past couple of years.

I don't know, but to me, these numbers don't suggest that gasoline prices are being artificially inflated. It seems to me that, relative to the cost of the primary input (i.e., crude oil), there is an argument to be made that gasoline prices have been relatively depressed!

Their books are generally open (and are arguably more transparent than the books of most government agencies). All of the major oil and gas companies are publicly held and file annual reports with the Securities and Exchange Commission. You can find them all at www.sec.gov.

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"Everything that guy just said is bull$h!t! Thank you."

-- Vincent LaGuardia Gambini

It would sort of imply that as the price of the materials has increased, the suppliers have been willing to not linearly increase the price of the manufactured product to be able to keep a competitive edge against other businesses.

It would imply if there is collusion, they aren't being very efficient about it.

It also implies that free market competition is working.

Finally, it also would support the idea that if the federal government dropped its tax, the gas companies wouldn't merely charge 18 cents more a gallon.

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Could be. The relationship between crude oil and retail gasoline prices is probably driven by a large number of supply-side (e.g., cost structure) and demand-side (e.g., economic substitutes) variables. At a minimum, though, you are correct that (for whatever reason), suppliers cannot pass (or at least have not passed) the complete rise in oil prices on to consumers. It's possible that high oil prices are finally causing some individuals to drive less, which is reducing demand for retail gasoline; but that's just speculation on my part.

And an important aspect to remember about all of this is that collusion is an inherently unstable arrangement. See cartels. Heck, for years OPEC could barely exercise its market power because there was such a strong incentive to cheat on the collusive relationship; now try to imagine hundreds (or even thousands) of major publicly traded corporations and independent actors (among them, refiners, distributors, retailers) trying to coordinate their efforts to artificially inflate the price of oil and gasoline. Not only would a significant number of these entities have to be willing to engage in criminal behavior; they'd have to be able to prevent each other from cheating on their own arrangements. This is why criminal conspiracies often fail -- how can you trust someone who's otherwise willing to commit a crime? (I mean, honestly, where's the decency in society when you can't trust even the criminals? )

I'm not saying it doesn't happen, but I am saying that it's pretty unlikely and that market forces are a better explanation for movement in oil and gas prices.

__________________
"Everything that guy just said is bull$h!t! Thank you."

-- Vincent LaGuardia Gambini

Right on. I'd also argue that gas prices are currently at nowhere near the price needed to make effective long term changes. In the long run, when we see 50% of motor vehicles on the road as either scooters or public transportation, then there will be a dent. Causing consumers to change habits in the short run (eating out one night less per week) and slightly in the long run (oh no, college kids will use PCS!) is burdensome, but surely not outrageous.

I'd say that $8/gallon is when we will start to see real changes. It's almost funny how folks will complain about this, but won't make lifestyle changes until ultimately forced to. We're such a busy and self-serving culture that we fix problems only as they come along. It's less the capitalism and more our cultural agenda. Basically, don't blame the producers for the addiction.

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"He taught by example that part of respecting another person is taking the time to criticise his or her views."

--Melissa Lane, The Guardian; obituary for philosopher of science Peter Lipton.

Farewell Eddy Arnold...Make the World Go Away...

MAGIC THEATER
ENTRANCE NOT FOR EVERYBODY
FOR MADMEN ONLY!

Also, much of the same can be said of the auto industry. Of course they don't want to use all of their profits to revamp capital. Who would want to? If American consumers won't change their habits, then how can they expect a profit-seeking entity (run by managers who are hired to increase the stock price) to have compassion and make changes that run counter to economic intuition? Domestic auto manufacturers are already up the creek without a paddle, so they won't truly push for research (>$ out) until consumers force them (<$ in).

It really comes down to Americans making sound economic decisions. Forget the rotating gas station boycotts. If people care so much about the environment and the big bad corporations, then they will change their habits. Otherwise, it is just as much fluff as Nutter's gun fracas.

__________________
"He taught by example that part of respecting another person is taking the time to criticise his or her views."

--Melissa Lane, The Guardian; obituary for philosopher of science Peter Lipton.

Farewell Eddy Arnold...Make the World Go Away...

MAGIC THEATER
ENTRANCE NOT FOR EVERYBODY
FOR MADMEN ONLY!

Prices are set based on replacement cost, not acquisition costs. People frequently mix these up. If you're house went up $100k but all other houses went up $100k, did you really make anything? When you sell your house, if you have to buy another, you can't really say you profited from your house. Likewise, a gas station prices over and above what it will have to spend the replace the gallon of gas you just bought.

As for changes, I'd say the price of gas has already started changing consumption patters, Transit agencies across the country are reporting rising ridership. I'd say that people generally react to changes as they come and I don't think that's particularly American. Let it be said, we are living in interesting times.

__________________
"You down wit OPM?"
Fumo: "Yeah, you know me!"

That sounds like it should be a Chinese proverb...

__________________
"Everything that guy just said is bull$h!t! Thank you."

-- Vincent LaGuardia Gambini

Bryan Caplan, economist from George Mason, suggests why we should perhaps reconsider the merits of a gas tax holiday. As Greg Mankiw says, Caplan's argument seems to be "If they don't do this, they will do something even worse."

Some excerpts from Caplan: Well, I suppose more precisely you have to combine fixed supply with inelastic flexible demand. But that's just quibbling.

His two primary arguments?
This is what Tyler Cowen calls a "second-best, public choice" argument. That is, it's not an ideal solution, but if it prevents something worse from happening, let's do it.

I know Ezra and Fergie are going to love this logic: let's put money into the hands of oil companies so they aren't discouraged from looking for more oil. I can't say that I think a gas tax holiday is the best way of accomplishing this goal.

Anyway, fun morning reading for anyone who is interested in the economics of gasoline prices.

__________________
"Everything that guy just said is bull$h!t! Thank you."

-- Vincent LaGuardia Gambini

I saw on the local fox news at 10 two nights ago that some 72% of the price of gas goes back to the oil producing countries...which explains why their economies are booming.

__________________
"You down wit OPM?"
Fumo: "Yeah, you know me!"