Cynical Synapse

Tue, 06 Jan 2009

Oil and Gas Prices Make No Sense

Filed under: Business, Gas Prices, Hugo Chavez, Life, Oil, Politics — cynicalsynapse @ 10:20 pm

I understand the concept of supply and demand. I also understand that filling stations need to charge prices based on next week’s requirements. That may partially explain why I paid $1.779 in Lansing MI this morning, but this afternoon the price was up to $1.999. What confuses me is I bought gasoline in Lansing this morning because the price in my northern Detroit suburb was $1.859. So, why is my neighborhood price still $1.859 (cash)?

Frequent readers will know gas prices are one of my “hot buttons.” I just can’t believe there was so much demand to drive prices to $150 or so a barrel and that demand has dropped so precipitously to less than $50 per barrel over the last year. Everyone wanted to go somewhere last spring but now they all want to stay home? There’s $100 difference in the price of a barrel of oil! I’m just not seeing the substantial changes in demand that first brought the high prices and now equate to the low prices. Something smells here, worse than the sulfuric smell of hydrocarbons.

Gas prices in my area had fallen to almost $1.50 per gallon before OPEC decided to cut production. Since then, they have gradually increased. Today, they jumped from $1.779 in Lansing to $1.999. What’s different today? Hugo Chavez said no more free heating oil. While I’m saddened by the additional strain on those truly in need, I take solace in the economic impact Venezuela’s “elected” dictator is feeling. His heating oil aid program for the Northeas program was merely propaganda anyway, an anti-Bush jab. In my mind, this makes Chavez no different than any other politician. Actually, it makes me wonder is this how Chavez is going to build better relations with President Obama in just a few weeks?

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3 Comments

  1. One of the things you aren’t considering is the value of the dollar and also the forward looking nature of markets. The dollar has risen signficantly since oil was $150 and the outlook for demand in the future is decidedly more gloomy. Another factor is the current contango in the oil market. Prices for futures dated a year from now are significantly higher than the near month futures. When that happens, speculators will take delivery of oil now, sell it for delivery a year from now and pay for storage in the meantime. As long as the cost of storage and the cost of financing are less than the spread, you can lock in a nice profit. Right now the spread is so wide that companies are leasing tankers and floating inventory because all the storage at Cushing is full.

    There’s a lot that goes into the price of oil futures. A good deal of it has to do with interest rates and the value of the dollar. Supply and demand are not just about how many miles people are driving.

    Comment by Joe Calhoun — Tue, 20 Jan 2009 @ 9:25 pm

  2. Thank you for your comment. Your remarks seem to support the OPEC position that $150/barrel prices were largely due to speculators. While I have no doubt speculators had a role, and I understand gasoline prices are dependent on future deliveries, I have a hard time with prices jumping 20 cents and more per gallon.

    Stations know when the next delivery is coming and how much it will cost. They also don’t all get the next deliveries on the same date for the same price. So why do they all raise their prices at about the same time?

    Also, as I noted in my post, the price went up in one market (Lansing MI), but not in another (northern metro Detroit). Why? Supply and demand can’t be that drastically different and the value of a dollar is the same for both.

    What I didn’t say is this is a fairly regular event. Often, gas prices go up about 20 cents in Lansing on Thursday afternoon, then they start dropping until, by about Tuesday, they’re lower than in the Detroit area. Meanwhile, Detroit says the same through the whole period. Obviously, that’s not always the case, but it happens too often to just be coincidence, in my opinion.

    Comment by cynicalsynapse — Sun, 25 Jan 2009 @ 8:46 pm

  3. Well, I wouldn’t call them speculators but yes there was an investment demand for natural resources. History shows that this is a natural reaction to the devaluation of the currency.

    I wasn’t really addressing the local gasoline issue of your post. I don’t know anything about the local market or why prices would be so volatile. Occam’s razor would probably apply though. There are probably many factors that go into the pricing of gas in a local market and we certainly don’t know them all. Why? Beats me, but the answer probably isn’t very sinister.

    Comment by Joe Calhoun — Sun, 25 Jan 2009 @ 11:31 pm


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