How Does Hurricane Impact Affect U.S. Gas Prices and Market Dynamics?

[Blahness]

Why did gas jump $.4 when hurricane Katrina hit, when it only removed 5% of what we produce, and MUCH less of what we use?

If it hits Texas, how much of our gas production will be lost? Will it justify a $3 dollar jump in price?

 

[EnumaElish]

Because the short-run gasoline demand is highly inelastic. Specifically, it's much smaller than 1, so a 5% fall in supply raises the demand price by more than 5%. Additionally, it may have to do with a longer-term (expectational?) reduction of refining capacity, further shifting up the supply curve.

 

[russ_watters]

http://www.investopedia.com/university/economics/economics4.asp

 

[mattmns]

Hmm, here gas prices have gone down about 20 cents in the past 2 weeks.

 

[loseyourname]

Are you near the gulf? I was listening to some business program or other a few weeks back that was predicting a price drop in certain places because the lowered demand due to Katrina (refugess don't use much gasoline) exceeded the drop in supply.

 

[mattmns]

Nuevo Mejico.

 

[Moonbear]

They went back up 10 cents today. I just know that even if Rita doesn't do any damage to the refineries, they're still going to use it as an excuse to raise prices again, and then they never seem to come back down later.

 

[Pengwuino]

Gas has dropped about 10c here in Frescrap, Crapifornia at shell..crap. No increases to speak of for rita.

I read an article on MSNBC Money about the reason for the price increases was because individual store owners are jacking up the prices. According to the article, the oil companies don't set the prices that we all pay, the individual store owners do.

 

[dlgoff]

http://www.investopedia.com/university/economics/economics4.asp

I didn't see anything about the greed factor?

 

[EnumaElish]

I didn't see anything about the greed factor?

You won't. If a seller has the power to set price he or she would already have been doing so before the increase in the wholesale price (= retail cost). And, a profit maximizing seller will not increase price more than the increase in cost (a retailer's pass through rate is < 1). All told, increasing prices can be explained by elasticity of demand and the reduction in wholesale supply (even if it is only an expectation).

 

[dlgoff]

So why investigations into price gouging?

 

[EnumaElish]

When prices start to increase people start complaining to their representatives, who ask govt. economists to "look into it" so they can say to the public that the matter is being investigated.

 

[dlgoff]

So the 6 to 10 dollar/gal. after Katrina wasn't gouging?

 

[EnumaElish]

So the 6 to 10 dollar/gal. after Katrina wasn't gouging?

I don't have validated numbers on my fingertips. IMHO it should be explainable by the factors I have so far stated.

 

[dlgoff]

"Florida investigators believe that, more often than not, it's the oil suppliers who are illegally raising the cost of fuel, forcing innocent gas station owners to pass along the price hikes."
http://www.cbsnews.com/stories/2005/09/12/earlyshow/living/ConsumerWatch/main835066.shtml

 

[EnumaElish]

"Florida investigators believe that, more often than not, it's the oil suppliers who are illegally raising the cost of fuel, forcing innocent gas station owners to pass along the price hikes."
http://www.cbsnews.com/stories/2005/09/12/earlyshow/living/ConsumerWatch/main835066.shtml

That article does not answer or explain why a wholeseller should try price gouging if he or she had an optimal price to begin with. Unless either they engage in price fixing or expect prices to go even higher in the future and begin to stockpile (that's what I meant by "expectational"). The price fixing scenario begs the question if they had the means to fix prices, why didn't they all along (and waited until everybody started looking at them suspiciously after the hurricane)? The expectations scenario might be similar to a self-realizing prophecy and a little more sensible if only superficially. However, since oil storage is costly, stockpiles will have to be released at some future point which will put downward pressure on prices. So neither scenario is foolproof IMHO.

 

[dlgoff]

It's too bad that we have to even worry about such things. Well thanks for the conversation. I learned a little E101 here.

 

[russ_watters]

I was a little unclear on the concept of "price gouging", so I Googled and found some interesting articles...

http://www.edlotterman.com/PriceGouging.htm
http://www.townhall.com/columnists/thomassowell/ts20040914.shtml

As I rather suspected, "price gouging" really doesn't have any meaning in a market economy. Sellers are by definition allowed to sell their products for whatever price they can get. Charges of "price gouging" are an emotional response to an adverse market condition.

Don't forget, this isn't like when OPEC cuts production to raise prices. That's collusion that makes OPEC a cartel, and if OPEC were made of American companies, it'd be illegal. But Katrina did create a real change in the oil supply. Gas stations did run out of gas and people did hoard it.

 

[BobG]

In a normal market, I agee. Price gouging has little relevance.

Normally, price gouging has been considered as taking advantage of a temporary emergency. Suddenly, everyone realizes they need bottled water and run to their stores. Because the demand rose so unexpectedly, the store owner can reap a huge profit by raising prices to meet demand. People take offense to the idea that only the rich should get water while the poor die - the profits or lack of profits of the store owner don't even figure into the rationale. They put lower income people on a closer to equal footing by changing the rules to: "The early bird gets the worm while procrastinators die."

 

[russ_watters]

By the same token, with the price kept artificially low, people are more likely to hoard. In this case, higher prices mean more people will get at least some of that water.

Gas stations really did run out of gas(and stores ran out of pretty much everything else that had high demand) and having the prices go up did make that take longer.

 

[EnumaElish]

People take offense to the idea that only the rich should get water while the poor die

Perhaps the more relevant criterion is being liquid rather than rich Price mechanism is a form of rationing, to be sure. If prices are frozen, some other rule of rationing will have to be used. In effect, time is replaced for money.

 

[EnumaElish]

By the same token, with the price kept artificially low, people are more likely to hoard. In this case, higher prices mean more people will get at least some of that water.

Excellent point; that's why price freezes have to be complemented by additional rules such as "one bottle per person" to function at all.

 

[Lapin Dormant]

Why the prices went up? hows about the minute that the stock market hear 'Natural Disaster' it is a Little like "Chicken Little" yelling "The sky is falling" or "Katrina's comin" so the perdominant reasoning is BUY, then the suppliers, needing that extra cash to fund there next purchase for next months supply, raise their immediate price, on this months supply, to try to make sure their wave, cash flow, keeps flowing, and the consumers pay through the monetarily affective system, as per distribution costs, on everything.

The case for it going back down is supply, oversupply, which is, at best, a short time scenario as all supplies get used, eventually, one way or the other, used or goes bad.

 

[TheStatutoryApe]

I haven't seen a big hike where I live either. I actually found someplace that was cheaper than it has been but the prices have stayed more or less the same.

 

[dlgoff]

What about those Senate hearings?

 

[russ_watters]

What about those Senate hearings?

Politicians ranting for the cameras, that's all.

 

[loseyourname]

Well, prices here have gone down over $.60 to the gallon from where they were directly after Katrina. It's hard to believe the day would come when drivers here would be happy to see gas at $2.34 per. I still remember the last time I paid under a dollar - January 2002 in Oklahoma City.

 

[mattmns]

Yep, it is down to about $2.44 here.

 

[brewnog]

Whinge whinge whinge whinge whinge.

I spent £50 (US $80?) filling up the other day, and it's only a 45 litre tank. I'VE got something to whinge about!

In my day, where I come from, you could get up in the mornings, wipe the ice from the inside of the windows, get a bus into town, a packet of Woodbine's at the newsagent, a Sunday Times, a packet of Monster Munch, 3 pints of Magnet, a full tank of petrol, and a cuddly toy all for £5, and you'd still have change for a Chomp.

How times change...

 

[dlgoff]

Two days to go up; Two months to go down. What is that?