Friday, September 02, 2005

Gas Prices

I'm going to give my analysis as an amateur economist. I hear many complain about the prices as they go up. I'll break it down in the simplest terms.

First, oil is sold in a market as though it were being auctioned. The US purchasers have customers that are placing orders. They must buy a certain amount and fear that if they bid too low, they will not be able to purchase what they need to satisfy their customer's orders. Because of increased demand from the industrialization of China, buyers have been bidding too high. This is where the high cost of oil per barrel is coming from.

Second, EPA restrictions make it cost-prohibitive for oil companies to build more refineries. Instead, the refineries focus on maximizing capacity at existing refineries. Consequently, there is little room to absorb demand spikes. The refineries are our biggest bottleneck and one of our biggest opportunities for reducing fuel costs. We just need more refineries. On top of this, different states have different requirements on the particular mix according to what the state legislatures think the mix ought to be for the best environmental impact. Therefore, the refineries need anticipate regional demands and make what they think will be ordered ahead of time. This requires additional cost to administer.

Third, different areas have different distributors. These distributors don't necessarily have the same cost structures. They differ depending on their organization and distribution demands. Lower population areas will cost more to deliver because they tend to be farther form the distribution center and require more time and fuel for delivery.

Fourth, trends can be tracked, and deliveries scheduled, but exceptional circumstances cause rescheduling nightmares. If you deliver early to one station, you inevitably deliver late to another station. This rescheduling drives costs up to a premium. This means that the local gas stations have to pay more to keep fuel in stock so they can keep their pumps open. They may have bought the fuel already in the station, but they need to pay for the next delivery.

You can't blame all the fuel costs on the "oil companies" and "price gouging". It may happen some, but the Federal Trade Commission actually does a fair job of keeping things from getting out of hand. If you want lower fuel prices, do the following:

1. Use less. Slow down, carpool, and learn to conserve.
2. Advocate for common sense alternatives to petroleum.
3. Advocate for more refineries to be built and more oil to be drilled.
4. Don't buy into the "greedy oil companies" propoganda put out by the anti-capitalists. Research the problem and address the real issues.

2 Comments:

Blogger Pseudo-intellectual lunatic said...

cvool blog

Fri Sep 02, 03:53:00 PM GMT-5  
Blogger DrGano said...

"No Talk Shall Be of Dog", he said, "When Wolf and Grey Wolf Meet..."
Many have asked, bitterly, if any other countries are helping America during its troubles with Hurricane Katrina.
Isn't Blogging Fun? I love grabbing a cup of coffee and spending hours reading blogs.

Fri Sep 02, 03:57:00 PM GMT-5  

Post a Comment

Links to this post:

Create a Link

<< Home