Sunday, April 1, 2012

Gas Prices and Other Stupidity

By -  Bill Holmes

Once upon a time when I was an emerging driver the price of gas was around $0.30 a gallon
for "regular" leaded gas. Premium (high test) was a couple of cents higher. The only unleaded (white gas) I remember was at Amoco stations. We only used it for the lawnmower. That $0.30 gas was at a full service gas station. Full service included pumping the gas, checking the oil and cleaning the windshield. If you asked, the attendant would also check any or all other engine fluids and tire pressure. There were often four gas stations at an intersection. On occasion the stations would have a "gas war". One station would lower their price by a penny, of course to be matched by the other three stations. You can see where this is going. Within a few days gas at that intersection might be $0.17 or less a gallon. I know I saw $0.12 a couple of times and I think I remember $0.09. I'm sure they were losing money or at best breaking even. They were competing and hoping you would buy a quart of oil, a fan belt or a new tire. Maybe you would have some repair or maintenance work done. Did I forget to mention that almost every gas station did car repairs? A couple of blocks away the three or four stations were still charging $0.30. As teenagers usually driving our parent's big gas guzzlers, we loved a good gas war. Imagine getting five or six gallons of gas for a buck. Of course that only meant we could drive 50 or 60 miles.
I mention all this to compare that to today's situation. When was the last time, if ever, you saw a gas war at an intersection? There is hardly any competition for gas prices. Sure, it's a little higher by the highways and a little cheaper by the neighborhoods but only by a very few cents. We have fewer companies in the energy business. Exxon/Mobil used to be two companies. Sinclair, Pure, Ashland, Getty, Gulf, Sunoco were all independent companies. They are now either part of merged or acquired companies or gone. Fewer companies refining, franchising and selling gas leads to less competition. Now we have a few huge energy companies making obscene profits. Exxon/Mobil made over $9 billion in profits last quarter . That's about $28 for every US citizen.

So, less competition, probably at least a little more corporate greed, inflation all contribute to $4 gas. That being said, I think the biggest culprit is the energy speculation market. If Mahmoud Ahmadinejad gets a pimple on his butt or Chavez in Venezuela wags his finger the price of future oil goes up. If it goes up very much the price of gas goes up immediately even though that oil won't reach a refinery for months. If the butt pimple pops the price of future oil might go down. Very little has to do with actual oil production or consumption. It's mostly based on perception, rumor and of course greed. There is so much money in the speculative markets (not just oil) that they now set the price rather than wait for the results.

In my perfect world the speculators would be much more regulated. The other alternative would be to have completely unregulated markets. Truly buyer beware. These partially and ineptly regulated markets give a false sense of security. In the last several years all the markets have become less about value and more about leverage and/or turning a 50 nanosecond profit. So since the NYSE, NASDAQ, Chicago Board of Trade and other exchanges are just like casinos, lets treat them as such. Casinos are regulated, audited, heavily taxed and restricted. Speculators need at least as much regulation. Make the speculators have much more skin in the game. Let's make speculation and gambling a little less prevalent in our markets and maybe bring back more value and supply and demand into our markets. We should have learned more and fixed things more quickly from the 2008 housing and market crashes. Speculators are gamblers, they should lose more than they win. Just like I do at the casinos. Fun and exciting but not profitable over the long term.

Bubbles Burst.


  1. I think you have hit on the primary reason for the gas prices accelerating. Speculation. It is hard to see how with demand falling and more supply that is being consumed how prices could keep rising. Only answer I can think of is the bets the investors are making. good stuff Bill.

  2. The speculative markets do need an audit and likely some specific regulation to protect against a few powerful entities artificially manipulating the price. However, one monopolistic group rakes in a whopping 33% on every gallon of gas no matter what company actually finds, drills, refines, or sells it. Compare that to the 6% to 8% the oil company makes...the ones who actually do all the work. I'm not saying the oil industry and speculative markets should continue as-is, rather I am saying a very large part of the cost and control is "out of control". We all know who that monopolistic group is - it's our "out of control" federal, state, and local governments. The federal government, even with the department of energy, has squandered the last 40 years without producing any kind of realistic energy policy (its original purpose). How about we cut off the monopoly's entire 33% not directly attributable to "roads" until, at all levels of government, they figure out a real energy policy! I vote for a policy that moves us to energy independence and thus eliminates the need for most of our military, foreign aid (bribes), and interventionist policies.

    1. I agree. I think the us of taxes coming from fuel should indeed be focused on highways and other transportation infrastructure and that it is out of control. Needs to stop. Good comment Eric.

  3. Talk about "obscene profits", AAPL - 23% profits on $28.27B in sales vs Exxon/Mobile -7.7% profit on $121.6B in sales. The problem is the $121.6B and the fact the federal government allowed them to become "Exxon + Mobile" vs the 7.7%.

    We need smart leadership and legislation to work on the problem side of the equation (the $121.6B minus 7.7% it COST ExxonMobil to deliver the product). ExxonMobil has every right to make a reasonable (7.7%) profit.

    "this comment entered via my MacBook Air"...

  4. Eric - I agree that our Energy Department is a joke and energy taxes need to be spent on what they were designed for. One of problems with higher gas prices is that the governments "share" goes down as prices increase. Take just the "at the pump" taxes. They are per gallon not a fixed percentage of the price. US average tax per gallon for January 2012 was $0.495. Let's round that to $0.50 for the math. At $3.00 a gallon that tax is approximately 17% while at $4.00/gal it's 12.5%. It's the same amount of tax per gallon but people buy less gas and have less money to spend on other taxable items. The speculators and oil companies get much of that extra money. So, high gas prices hurt the government coffers and the 99 percenters pockets. That leaves guess who to benefit? Could it be the one percenters? Surprise.

    Thanks for the comments Eric.


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