A counter-rebuttal :RE: A rebuttal RE: Boo-hoo (Wuz: Great gas out!;

["Geoff Jenkins" <jenkinsg@pilot.msu.edu>]

A few observations come to mind:

> [mailto:owner-quattro@coimbra.ans.net]On Behalf Of Avi Meron
>
> * First and foremost the price of petroleum is totally manipulated by the
> oil companies and governments  (and the oil producing nations), it has
> absolutely nothing to do with supply and demand.

1) The OPEC nations (to a large degree) _are_ the suppliers of petroleum.
They may not have much to do with demand (note the difference between the
demand for a commodity and the quantity demanded at a given price), but they
most definitely _do_ have a lot to do with supply. The market clears
moderately efficiently. That indicates, in and of itself, that at today's
market price, today's demand is at least approximately equated to today's
supply.

> * The petroleum companies are manipulating the supply of oil in order to
> increase their revenues, it is a repeat of the 73 artificial oil price
> increase, (blamed on the Arab countries).

2) a) If you ran a cartel for a good with a highly inelastic demand (i.e.
people can't do without it) and you could (albeit temporarily) raise prices,
and hence increase revenues massively (supply falls slightly, prices shoot
up), wouldn't you do so? One might as well ask why the big 3 charge enough
for their SUVs to make up to $15k per vehicle profit. Same reason: because
they can, and because it's good business to do so.

b) Until the most-recent price rise, the real (i.e. inflation-adjusted) cost
of gas was somewhat lower than it had been pre-1973.

c) The ability of an unenforceable cartel (such as OPEC) to sustain
diminished production and high prices is almost nil. Why? Imagine the
following game: OPEC: If all the major oil-producing nations kept their
production low, prices would be very high, profits would be enormous. If one
major nation cheats and the others keep to the low quota, the cheating
nation will sell a lot of oil but will drive down prices only slightly, and
the others will sell a small amount at the same slightly-lower price. If all
the nations cheat, then oil prices will be low, and so will profits.

If (e.g.) Iran thinks the cartel will stick to the agreement, Iran can do
very well by cheating. If Iran thinks that the cartel will cheat, Iran may
as well cheat (better to sell a lot of oil at a low price than little oil at
a low price). Irrespective of the other nations' behavior, Iran will be best
off by pumping more oil. Thus, while the ink on a new OPEC price-fix is
still wet, all the members have an overwhelming interest in cheating on the
deal, hence soon driving down prices.

> * The supplies of oil  are not shrinking,on the contrary, they are the
> highest they ever been, and will go higher. The techniques of
> drilling  and reaching untapped sources of oil are much improved over the
past.

3) a) The _potential_ supply of oil is continuously decreasing (and will
continue to do so as long as we consume more than we produce synthetically
(or more than is currently geologically developing)).

b) The _current_available_ supply of oil is higher than it was in the 1970s.
Why? Because the high price of oil (bad) in the 1970s encouraged oil firms
to explore more, leading to the discovery of previously unknown reserves
(good). Ironic, no?

> * The price of oil in the rest of the world will not increase in any
> meaningful way (unless the governments want that to happen). ONLY in this
> market (prices will increase), reason is, we are (the customers) the ones
> that pay for the fuel, where in the rest of the  world Governments buy the
> fuel (IN BULK) and resale it to customers, it is very easy to
> screw us over.

4) No. In the US, the prime determinant of pump-prices is the cost of
refined petroleum. In  much of the rest of the world, the prime determinant
of pump-prices is the level of fuel taxation. Take for example, the US
versus the UK (the figures here are spurious, but the argument is not).
Imagine that the US has no gas taxation, and the UK has the equivalent of $4
per gallon. If refined petroleum costs (with profit) $1 per gallon, then the
pump price in the US will be about $1, while the price in the UK will be $5.
Now the world gas price goes up by 10c. The US price goes up by 10c, as does
the British one. However, the US consumer sees a _10%_ price hike, while the
British consumer sees a rise of only _2%_.

To a very large degree, that's why US prices are perceived as being so
volatile.

> * Rest assured that we (US customers) pay THE HIGHEST PRICE IN
> THE WORLD for fuel (sometime ,not always) because we buy it a gallon
> at a time.

5) a) Which bothers you more: the price of the raw commodity before taxes,
duties etc. or the cost you actually pay?

b) Among the other reasons why the US pays a relatively high price for gas:
high US wages, high US overhead costs (environmental included), the US
government's desire to maintain a strategic reserve, and one predominant,
overwhelming reason:

The average US consumer is able, willing and (owing to the lack of
alternatives) forced to pay a price that consumers in much of the rest of
the world would balk at. The oil market knows this, and prices accordingly.

If you could supply your services to a consumer who wouldn't cut back
consumption no matter what you charged, wouldn't you tend to think in terms
of raising your price?

Geoff Jenkins
'94 S4