I'm not an economist, but I do basically understand the law of supply and demand.  

(I do not want this to turn into an argument, I really want to know this)


Since I don't see or detect any tangible evidence of a shortage, or a great increase in demand (no gas stations throwing up signs saying they're out of gas, or they're running out of gas), and with the oil companies making RECORD profits last year (to the tune of, what, 100 BILLION DOLLARS), how is raising the price of gas in line with 'supply and demand economics'?

If supply fell, or demand went up, and prices changed accordingly, wouldn't the industry's profit stay relatively the same??  

That's what I want to know.  

I'm serious, educate me.  I don't want an argument.  I just want to know.  

Tag for, hopefully, some real discussion and education.

Inelasticity of demand. It means that an item has a very steep demand curve. In other words, small changes in demand or supply can drive very large swings in price.

Inelastic Demand

Tag for real answers as well

Quoted: Inelasticity of demand. It means that an item has a very steep demand curve. In other words, small changes in demand can drive very large swings in price. Inelastic Demand

bingo

inelastic demand is where price fluctuations have no impact on demand.

Prices rise to prevent supply disruptions.  If you are a gas retailer, you have to have gasoline to sell.  Your buyers must make sure you have it.  In a tight (supply) market, that means that people are competing for the gasoline that is available.  The people selling the gasoline want to get the best price possible.  At a price that is always being determined with every transaction, the buyer and seller agree.

What so many Americans don't understand, is that we aren't the only people in the world using gasoline.  We are about 300 million.  China is 1.5 billion and India is around 1 billion.  They are rapidly growing.  then you have all the Europeans, South Americans, and every other swinging dick.

With a tight supply, just a small percentage increase in demand will drive the price up.

I know there are people who so desperately want to find the Great Conspiracy Boogeyman and blame his for all their troubles, but there isn't such a guy or government.  It is just the everyday demands of people all over the world.

It seems that people with an overdeveloped sense of self-importance have the greatest problem with the suppy/demand concept.  

I want the oil companies to make a great deal of money.  They will hire many people, pay good wages, and pass the profits on to their stockholders who live on practically ever residential block in the USA.  Oil companies do not hide their money in a salt dome in Louisiana.  That money keeps moving through the economy just as ALL money moves through the economy.

If you bought some massive SUV or big-assed dually pickup and diriving it is killing you at the pump, that is the price for assuming that someone was always going to supply you with gasoline at the price you liked.  It's a bitch, but everyone, from the teenaged girl who bakes and sells cookies around Christmastime to make some money for presents to the largest oil company (owned by tens if not hundreds of thousands of small investors) has the right to sell their product as the best and highest price they can.

You didn't have to buy a gas guzzler and they never promised you cheap gas.

It is as simple as all that.

Quoted: If supply fell, or demand went up, and prices changed accordingly, wouldn't the industry's profit stay relatively the same??

it costs money to get each barrel of oil out of the ground.  Let's hypothetically say that getting each barrel out of the ground costs $30 because of expenses like labor costs, drilling equipment, possibly leases on the field itself or taxes/royalties to the government, etc.  if demand falls, and the price falls from $70 to $40, then each barrel that the oil companies pump earns them only $10 instead of $40.

in reality, however, oil from different sources doesn't all cost the same amount of money to be produced.  Some oil reserves are more costly to get at than other oil reserves.  So, if demand falls, then the first production that will be shut in will be the production which is the most expensive, because the profit margin on each barrel from this expensive source will have decreased the most, or even become negative.

Right now, with oil at $60+ a barrel, many sources of oil which were previously not economical have become profitable to produce.  Certain sources such as the tar sands require oil to be at $40+ to be profitible, and sources such as these would be the first production to be shut down in the event of a price decrease.

So yes, there is some flexibility in that the oil companies can choose which sources to produce from in the event of a price drop in order to maximize their profit, but it's not going to compensate for a big drop in price.

No Flames here (and hopefully NO LOCK) ,
so what is the explanation of a double in gas prices in 2 years?


Our demand has surely not doubled.

Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled.

Did you even bother to try reading the link about inelastic demand?

Some people just glory in their own willful nescience.

I'm gleaning more here... there defnitely IS a cost of production, and I do understand some sources are harder (more expensive) to tap than others.

But cost of production was already considered when profit was declared.  

Again, wouldn't profit margins stay about the same if end prices were inflated according to actual increases in cost of production?  


Say I make a widget, and I sell it for $10, and it costs me $8 to make.  Then my cost of production goes up, so that it costs me, say $12 to produce.  If I kept my margin the same (dollar, not percentage), I'd have to charge $14 for the widget now.  My profit should then stay level.  

In this scenario, if I pulled an 'oil industry', I'd be raising my price to $16 or $18, and making more profit.  

Sure it's capitalism, and I dig capitalism.  I'm thinking if gas prices keep going up and oil company profits stay high, I'm gonna buy some stock!   But I'm still feeling the pinch at the pump.

I still believe that raising the price much more than the passed-on cost of production is milking the system.  

Quoted: I'm gleaning more here... there defnitely IS a cost of production, and I do understand some sources are harder (more expensive) to tap than others. But cost of production was already considered when profit was declared.   Again, wouldn't profit margins stay about the same if end prices were inflated according to actual increases in cost of production?   Say I make a widget, and I sell it for $10, and it costs me $8 to make.  Then my cost of production goes up, so that it costs me, say $12 to produce.  If I kept my margin the same (dollar, not percentage), I'd have to charge $14 for the widget now.  My profit should then stay level.   In this scenario, if I pulled an 'oil industry', I'd be raising my price to $16 or $18, and making more profit.   Sure it's capitalism, and I dig capitalism.  I'm thinking if gas prices keep going up and oil company profits stay high, I'm gonna buy some stock!   But I'm still feeling the pinch at the pump. I still believe that raising the price much more than the passed-on cost of production is milking the system.

A market determined price has precious little to do with cost of production. Essentially, the market does not care about production costs. Supply and demand, and the relative elasticity of demand has far more to do with price. The price is NOT set by the producers, but by the market. That is the essence of a market economy.

Incidentally, what is "milking the system?" Trying to maximize returns is capitalism.

Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. Did you even bother to try reading the link about inelastic demand? Some people just glory in their own willful nescience.

thats not an explanation and you are as evasive as you were on the last few threads.

Do you, or anyone else, know of any another product with this type of price gouging fixing?  And that doubles in 2 years?

Instead of explaining yourself you are refering folks to go read the Magna Carta.

Quoted: I'm gleaning more here... there defnitely IS a cost of production, and I do understand some sources are harder (more expensive) to tap than others. But cost of production was already considered when profit was declared.   Again, wouldn't profit margins stay about the same if end prices were inflated according to actual increases in cost of production?   Say I make a widget, and I sell it for $10, and it costs me $8 to make.  Then my cost of production goes up, so that it costs me, say $12 to produce.  If I kept my margin the same (dollar, not percentage), I'd have to charge $14 for the widget now.  My profit should then stay level.   In this scenario, if I pulled an 'oil industry', I'd be raising my price to $16 or $18, and making more profit.   Sure it's capitalism, and I dig capitalism.  I'm thinking if gas prices keep going up and oil company profits stay high, I'm gonna buy some stock!   But I'm still feeling the pinch at the pump. I still believe that raising the price much more than the passed-on cost of production is milking the system.

oil companies do not "set" the price of oil and gas.  that price is set by traders at the worldwide commodity exchanges, such as the new york mercantile exchange.

end prices are not inflated according to actual costs of production.  the group of companies that americans usually think of when they hear "the big oil companies" (shell, exxon, BP, etc) do not have this power, because there are so many other producers, many of them state-owned (such as saudi aramco), all of which have different costs of production because the reserves which they produce oil from are different.

Quoted: Quoted: Inelasticity of demand. It means that an item has a very steep demand curve. In other words, small changes in demand can drive very large swings in price. Inelastic Demand bingo inelastic demand is where price fluctuations have no impact on demand.

Plus, the supply chain is not necessarily market-drive, since a cartel controls most production - and thus a simple supply-damand analysis really doesn't apply to the petroleum markets.

Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled.

That's the crucial part.  No, our demand hasn't doubled.  But global demand has.  And petroleum is a global product.

Plus there's a lot of production bottlenecks in gasoline production here, taxes and regulations of course, and real supply disruptions caused by the hurricanes in 2004 and 2005.

Another factor is the real impact of hedge funds that speculate and buy up commodities, seeking profits anywhere they can find them.  And they chase after the things whose prices are moving in clear trends.  Energy is one of those trends.

But dont worry, because rising prices creates incentive to go out and find new sources to cash in on the high prices of these commodities.  It all moves in cycles and waves.  Prices wont be high forever.

Incidentally, what is "milking the system?"  Trying to maximize returns is   capitalism.

+1


They charge this much for gasoline simply becasue they can, meaning YOU will pay it.  

In a couple of years when the pendulum swings and more people buy small cars that get 30+ MPG, look for gas prices to drop some.  The lower prices will again encourage people to use more gas.


Like the man said, you don't have a "right" to cheap gas.  You do have the right to buy a Geo Metro or a scooter that gets 40+ MPG.

CMOS

Quoted: Inelasticity of demand. It means that an item has a very steep demand curve. In other words, small changes in demand or supply can drive very large swings in price. Inelastic Demand

He wins... kind of.

"Inelasticity" is exactly what it means. Meaning that the no matter the supply, we will want to purchase the same amount of oil... and that's why prices skyrocket... this happens with most goods for which there are very few alternatives. That's why Windows can charge so much for their shitty OS and Diamond companies for their (well marketed) products. The demand for oil is very inelastic because our economy is based on it. Every industry is tied to the oil industry somehow, from something as direct as refined petroleum (gas, etc.) to making cake (you need a truck to ship it) everyone needs oil.

As such, Oil companies can make lots of money all the time.

Quoted: Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. Did you even bother to try reading the link about inelastic demand? Some people just glory in their own willful nescience. thats not an explanation and you are as evasive as you were on the last few threads. Do you, or anyone else, know of any another product with this type of price gouging fixing?  And that doubles in 2 years? Instead of explaining yourself you are refering folks to go read the Magna Carta.

The link I gave gives a fairly good explanation of elasticity of demand. It is 6 pages long, and barely scratches the surface. If you really want to learn about the topic, you need to read a little, or take a class or three. You could start with this:



Not all of life's answers will fit on a bumper sticker.

Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. That's the crucial part.  No, our demand hasn't doubled.  But global demand has.  And petroleum is a global product.

Are you saying that global demand for petroleum has DOUBLED in the last two years?

Do you even know how much extra oil that is?

Quoted: oil companies do not "set" the price of oil and gas.  that price is set by traders at the worldwide commodity exchanges, such as the new york mercantile exchange. end prices are not inflated according to actual costs of production.  the group of companies that americans usually think of when they hear "the big oil companies" (shell, exxon, BP, etc) do not have this power, because there are so many other producers, many of them state-owned (such as saudi aramco), all of which have different costs of production because the reserves which they produce oil from are different.

Alright, so it's an outside force, and the oil companies really don't control the price at the pump.  I can buy that, the way things work in this country.  

That makes me believe more that some group of people decided to drive up the cost at the pump, to inflate their earnings.  

I really doubt our demand increased 60% in the course of a year or two to justify a 60% increase in price ( $1.50 up to $2.50, approximately).  

I remember when I got out of highschool (1994), gas prices were at or just above a dollar a gallon.  They slowly floated to about $1.39 or so in 2004, then up to near $3 in 05.   I still just don't see how a 60-100% increase in price in the course of about a year is really rational, what with profits being so high.  

Anyway, I kinda do hope gas  prices keep going up... America is a little stupid in our dependancy on oil based energy.  If gas got upward or $3, 4 even 5 a gallon... I think it will be interesting to see the change in driving and consuming attitude.  

Cause they can. Because markets are more than just supply and demand. Fear or a lack there of can have huge impact in volatility. And there is a significant amount of fear in the market right now.

Quoted: Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. That's the crucial part.  No, our demand hasn't doubled.  But global demand has.  And petroleum is a global product. Are you saying that global demand for petroleum has DOUBLED in the last two years? Do you even know how much extra oil that is?

indeed, demand has not doubled in the past couple of years.  it has increased rapidly in many places, especially in china and india, but it has not doubled.

however, the fact that oil demand is quite inelastic, small changes in the supply/demand balance can cause large changes in the price.

sorry, but one again everybody oversimplifies it. Market forces are only sensible when the government is not intervening. Outside of inelastic demand, you have the government taxing the living shit out of gas...



that image compares government taxs/fees to oil company profits...now you can see who is really screwing you.

Like I said in the other thread that got locked, if you take out all of the oil fees/taxes you get to about 1.50 a gallow when it is 3.00 a gallon now after all the taxes/fees, once you adjust for inflation at 1.50 gas has not really changed price since 1969.

here is a GREAT article on the oil company profits.

Quoted: Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. That's the crucial part.  No, our demand hasn't doubled.  But global demand has.  And petroleum is a global product. Are you saying that global demand for petroleum has DOUBLED in the last two years? Do you even know how much extra oil that is?

Ok, I can believe global demand went up, what with China and India increasing their consumption...

But that would mean that the global cost of oil went up, and everyone was affected... thus the cost of production should have gone up, which would have accounted for an increase in the price of petroleum products, and profit would not have drastically increased.  

There are a lot of explanations for the increased cost of gasoline, and they DO make sense... but in my mind, they only make sense if the oil company's profits wouldn't have grown astronomically.  

Quoted: Quoted: Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. That's the crucial part.  No, our demand hasn't doubled.  But global demand has.  And petroleum is a global product. Are you saying that global demand for petroleum has DOUBLED in the last two years? Do you even know how much extra oil that is? Ok, I can believe global demand went up, what with China and India increasing their consumption... But that would mean that the global cost of oil went up, and everyone was affected... thus the cost of production should have gone up, which would have accounted for an increase in the price of petroleum products, and profit would not have drastically increased.   There are a lot of explanations for the increased cost of gasoline, and they DO make sense... but in my mind, they only make sense if the oil company's profits wouldn't have grown astronomically.

it could be that the country's they registered high profits in have low taxation on profits.

Short answer:

Supply ad Demand is a model of Competitive Markets.  It does not work as well under less competitive assumptions.

Quoted: sorry, but one again everybody oversimplifies it. Market forces are only sensible when the government is not intervening. Outside of inelastic demand, you have the government taxing the living shit out of gas... taxprof.typepad.com/photos/uncategorized/gas.jpg that image compares government taxs/fees to oil company profits...now you can see who is really screwing you. Like I said in the other thread that got locked, if you take out all of the oil fees/taxes you get to about 1.50 a gallow when it is 3.00 a gallon now after all the taxes/fees, once you adjust for inflation at 1.50 gas has not really changed price since 1969. here is a GREAT article on the oil company profits.

That graph basically shows that taxes on gas haven't really gone up since '93.  The price increase has to be in the product, not the taxation thereof.  

Quoted: Quoted: Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. That's the crucial part.  No, our demand hasn't doubled.  But global demand has.  And petroleum is a global product. Are you saying that global demand for petroleum has DOUBLED in the last two years? Do you even know how much extra oil that is? Ok, I can believe global demand went up, what with China and India increasing their consumption... But that would mean that the global cost of oil went up, and everyone was affected... thus the cost of production should have gone up, which would have accounted for an increase in the price of petroleum products, and profit would not have drastically increased.   There are a lot of explanations for the increased cost of gasoline, and they DO make sense... but in my mind, they only make sense if the oil company's profits wouldn't have grown astronomically.

Another thing to keep in mind is the pterochemical companies are NOT static organizations, but many of them have been reorganizing in the past few years, and becoming more profitable.

For instance, I know an executive at ExxonMobil - and not only are they starting to reap the benefits of the merger now (after several years of adjustments), but they are also agressively cutting costs - moving entire administrative functions to Eastern Europe for instance, to capitalize on cheaper labor.  A number of the petrochemicals are also diversifiying into other industries, in order to spread their risk - and many of those investments may have paid off as well.  Those are all relatively recent developments.

It would be a mistake to assume that the ONLY reason for increased profitabliity in the sector is purely the higher price of crude oil.  It's just one more thing to keep in mind.

Quoted: Ok, I can believe global demand went up, what with China and India increasing their consumption... But that would mean that the global cost of oil went up, and everyone was affected... thus the cost of production should have gone up, which would have accounted for an increase in the price of petroleum products, and profit would not have drastically increased.   There are a lot of explanations for the increased cost of gasoline, and they DO make sense... but in my mind, they only make sense if the oil company's profits wouldn't have grown astronomically.

Once more: Price has next to NOTHING to do with the cost of production for an openly traded commodity like oil. In a few years, when additional supply comes on line (due to increased exploration driven by today's higher prices), the price of oil will drop. Again, that will also bear precious little relation to the cost of production.

Quoted: Alright, so it's an outside force, and the oil companies really don't control the price at the pump.  I can buy that, the way things work in this country.   That makes me believe more that some group of people decided to drive up the cost at the pump, to inflate their earnings.   I really doubt our demand increased 60% in the course of a year or two to justify a 60% increase in price ( $1.50 up to $2.50, approximately).

read up on inelastic demand.  if demand increases 60%, price will increase more than 60%, because oil is REQUIRED for our economy to run.

think of it like this.  say that a parachute normally costs $100.  you get on an airplane with 4 other people.  halfway through the flight, the pilot announces "the plane is going to crash!  we only have 4 parachutes for 5 people, someone isn't going to get one!"  the market value of the parachute, were someone inclinded to pay for one rather than simply fight the others to get one, would have increased to thousands and thousands of dollars, however much money you could spend, because it would be required for survival.  so the supply is only 20% less than the demand, but the value of parachutes has just shot up by 10000%+.  in this situation, parachutes would be an extremely inelastic commodity.

it's the same way with oil.  oil is REQUIRED for modern economies to function.  so if the supply can't quite meet the demand, the price can go way up.  the ones who are currently being "left without a parachute" are third world countries (several countries in africa and southeast asia have had severe fuel shortages recently because they can't afford it, sometimes leading to riots)

Quoted: Quoted: sorry, but one again everybody oversimplifies it. Market forces are only sensible when the government is not intervening. Outside of inelastic demand, you have the government taxing the living shit out of gas... taxprof.typepad.com/photos/uncategorized/gas.jpg that image compares government taxs/fees to oil company profits...now you can see who is really screwing you. Like I said in the other thread that got locked, if you take out all of the oil fees/taxes you get to about 1.50 a gallow when it is 3.00 a gallon now after all the taxes/fees, once you adjust for inflation at 1.50 gas has not really changed price since 1969. here is a GREAT article on the oil company profits. That graph basically shows that taxes on gas haven't really gone up since '93.  The price increase has to be in the product, not the taxation thereof.

like I said before, the taxation of profits can vary greatly year to year and country to country. If the companies are now selling more to countries that tax profits lower, they will make more money. Lots of things can cause the profits to stay high.

taxes on the gas itself and taxes on the profits are two different things.

Quoted: If supply fell, or demand went up, and prices changed accordingly, wouldn't the industry's profit stay relatively the same??

I don't think this is a serious question because the answer is obvious.  Oil companies own oil.  When the price of oil goes up, they make a windfall.  Sort of like a wheat farmer--he owns wheat and when the price of wheat goes up he gets a windfall.  Oil companies also own lots of oil contracts and options at prices below current market oil prices.  In other words they signed contracts years ago with oil field owners to receive oil at fixed prices like $20/bbl.  When the price goes over $20/bbl they get a windfall.  

There are also some accounting issues related to "record profits", and the extent to which those profits will evaporate as they buy more product.  I would suggest than anyone interested in examining oil company profitability look at the 5-year and 10-year averages.  

Finally, big profits for the oil industry are a good thing--it means they have capital to invest in finding and delivering more oil.

GunLvr

Quoted: Quoted: If supply fell, or demand went up, and prices changed accordingly, wouldn't the industry's profit stay relatively the same??   I don't think this is a serious question because the answer is obvious.  Oil companies own oil.  When the price of oil goes up, they make a windfall.  Sort of like a wheat farmer--he owns wheat and when the price of wheat goes up he gets a windfall.  Oil companies also own lots of oil contracts and options at prices below current market oil prices.  In other words they signed contracts years ago with oil field owners to receive oil at fixed prices like $20/bbl.  When the price goes over $20/bbl they get a windfall.   There are also some accounting issues related to "record profits", and the extent to which those profits will evaporate as they buy more product.  I would suggest than anyone interested in examining oil company profitability look at the 5-year and 10-year averages.   Finally, big profits for the oil industry are a good thing--it means they have capital to invest in finding and delivering more oil. GunLvr

thats the point I am trying to make...I am an accounting major with only a few classes left.

It IS making more sense guys.   It's not completely clear to me, but it's much more clear than a couple hours ago.


I STILL want to see the US embrace more alternative energy sources, and use of alternative energy sources for public and private transportation.  

I've even kicked around the idea of building myself an electric car on an old Porsche chassis/roller in a few years.  If gas prices do go up significantly, it might be a good idea!  

Historically, the ROI for oil companies is fairly low.  

Again, the selling price and the cost of production are unrelated....to a certain extent.  As the price of oil rises, the value of difficult to reach oil also increases.  Oil that is not recoverable at $40 because of a very high cost of production suddenly becomes worthwhile at $60 and higher.

But that is merely capital flowing to an efficiency.  The production cost only matters in that it determines the gross trading margin.  As oil becomes more expensive, more oil will be produced.

Guys, short of a world-wide economic collapse, oil prices are going to be high.  

The only scary part is Iran.  Those people might just be nuts enough to start a nuclear war.  If that happens, oil will go through the ever loving roof.

MQ,

"Alternative" energy sources have been around a long time.  We should have been building N-plants for decades.  But we allowed commies diguised as environmentalist to throttle that.  And we allowed the Dems to strangle N-power in Washington.

Quoted: MQ, "Alternative" energy sources have been around a long time.  We should have been building N-plants for decades.  But we allowed commies diguised as environmentalist to throttle that.  And we allowed the Dems to strangle N-power in Washington.

HUGE +1.

having lots of electricity available helps when it comes to mining and processing tar sands, too.  

Quoted: Historically, the ROI for oil companies is fairly low.   Again, the selling price and the cost of production are unrelated....to a certain extent.  As the price of oil rises, the value of difficult to reach oil also increases.  Oil that is not recoverable at $40 because of a very high cost of production suddenly becomes worthwhile at $60 and higher. But that is merely capital flowing to an efficiency.  The production cost only matters in that it determines the gross trading margin.  As oil becomes more expensive, more oil will be produced. Guys, short of a world-wide economic collapse, oil prices are going to be high.   The only scary part is Iran.  Those people might just be nuts enough to start a nuclear war.  If that happens, oil will go through the ever loving roof.

I dont think that will be the major concern if the nucs starting flying.

read up on inelastic demand. if demand increases 60%, price will increase more than 60%, because oil is REQUIRED for our economy to run.

Ug.   This type of answer is why people fail Econ 201.  Elasticity has to do with how Quantity changes when Price chages.  In other words, if the price of oil doubles, if demand is inelastic, quantity will decrease, but not by double.  In other words, consumers are not particularly responsive (in % terms) to price changes.  

The key problem with using S/D to talk about oil/gasoline, is that these markets are not competitive.

Of course the oil markets are competitive.  Right now it is definitely a seller's market, but sellers are always competing with each other.

Elasticity has to do with the effects of prices on demand.  Oil is inelastic until someone comes up with a competitively priced alternative.  The world's economies run on oil.  They must have it at whatever the price.

Quoted: read up on inelastic demand. if demand increases 60%, price will increase more than 60%, because oil is REQUIRED for our economy to run. Ug.   This type of answer is why people fail Econ 201.  Elasticity has to do with how Quantity changes when Price chages.  In other words, if the price of oil doubles, if demand is inelastic, quantity will decrease, but not by double.  In other words, consumers are not particularly responsive (in % terms) to price changes.   The key problem with using S/D to talk about oil/gasoline, is that these markets are not PERFECTLY competitive.

FIXED....now correct, oil industry is an oligopoly.

Quoted: read up on inelastic demand. if demand increases 60%, price will increase more than 60%, because oil is REQUIRED for our economy to run. Ug.   This type of answer is why people fail Econ 201.  Elasticity has to do with how Quantity changes when Price chages.  In other words, if the price of oil doubles, if demand is inelastic, quantity will decrease, but not by double.  In other words, consumers are not particularly responsive (in % terms) to price changes.   The key problem with using S/D to talk about oil/gasoline, is that these markets are not competitive.

i stand corrected.  however, while what i said may not be the technical defition of inelastic demand, it still applies with regard to the oil situation: percentagewise, the price is going to increase by a larger amount than the increase in demand, assuming supply stays constant.

People have trouble understanding oil for some reason. Let me try explaining it with something we all understand… Ammo.

You sign up for a two week carbine course where you will need an incredible 10,000 rounds of ammo. (And probably a new barrel too.) You get there and join your class of one hundred students. Amazingly enough all of you forgot to bring ammo and the school only has a half million rounds for sale and ordering more will be impossible.

The school could, (and many people think it should) ration the ammo out so that everyone gets 5K of ammo. That might sound “fair” but a quick check indicates it won’t work. Some students absolutely must complete the entire 10K round course for their jobs others are just there for the fun of it, and others fall in the middle.

So the school decides to auction off the ammo….

$200 per thousand, everyone expected to have to buy 10K rounds so everyone will pay this much.

$250 per thousand, A little pricey but again, everyone will pay it.

$300 per thousand, Way too much but again everyone bids this much.

$350 per thousand, OK that’s getting way too steep. Everyone will buy some ammo but many people start bidding on reduced quantities.

$400 per thousand. Crap, that’s too much. Some people bid this much for the whole 10K but most people start bidding on seriously reduced quantities..

$500 per thousand. Now only the people who have to have the full 10K get it. Some people just give up on the class and others decide to drastically reduce their ammo usage. It’s brutal but at $500 per thousand there is no shortage as demand dropped to meet supply and the people who HAVE to have the ammo can get it.

Oil is no different.

Exxon figures it will use “X” amount or oil in a month and it tries to buy that much on the market. But Exxon is competing against other oil companies as well as the plastics and fertilizer industries. And every time we buy gas at the pump we are bidding the prices up too.

Besides you gotta understand that it’s just plain bad business to overprice your product for too long. Go back to ammo for a bit. In my example I artificially restricted the supply of ammo. But, let’s say supply was restricted because only one company sold 5.56mm ammo… If they sold it at the artificially high price of $500 per thousand then other companies would start making 5.56 and sell it for $400 per thousand, then $300 per. Competition would force the cost down to reasonable levels from there.
In the case of oil, there are dozens of oil companies all competing for market share. Imagine if one company was selling gasoline for $1.75 a gallon today. They would have customers lined up around the block and would get nearly 100% of the market share. If they could make a profit selling gasoline at that price they would do so and drive their competition out of business.

As far as Oil/Gas threads, this one seems to be headed (for now) in the right direction.

i stand corrected. however, while what i said may not be the technical defition of inelastic demand, it still applies with regard to the oil situation: percentagewise, the price is going to increase by a larger amount than the increase in demand, assuming supply stays constant.

So, the idea is that as PRICE rises, consumers do not reduce their consumption, at least for the short run.  In competitive markets, this is not a big deal.  Supply will increase and price will return so that costs (average) are minimized in the long-run.

If these markets are less than competitive, this may not happen.  Firms can earn excess profits as long as barriers to entry exist.

Also, the typical S/D model assumes perfect info, so that firms face no uncertainty.  Even if markets were competitive, uncertainty could increase the price of a good, if consumers/firm are uncertain about the future (Iran/Nigeria pipeline concerns, etc.)

Quoted: MQ, "Alternative" energy sources have been around a long time.  We should have been building N-plants for decades.  But we allowed commies diguised as environmentalist to throttle that.  And we allowed the Dems to strangle N-power in Washington.

I believe that!  

I'd love to see a much better, beefier electric grid in place.  More nuke plants, more kilowatts.  

I think the problem in these threads is the all or nothing arguments of the left and right.  People on the (economic) left think that markets are bad.  Capitalism is bad, mmmkay.  People on the (economic) right believe that markets are always good.  Supply and demand they shout!!!

If you read Adam Smith he is very careful to point out that governments should ensure that competitive forces are present in markets.  Otherwise, consumers and society will be hurt.

I am pro-market as long as competition is ensured.  If markets are not competitive, because of corruption or collusion or a variety of other reasons, then market forces are NOT allowed to act.  

If Delta and Continental came to an agreement that they would not compete on routes, would you care?  Would you say, "oh well, that's capitalism."  Or would you say, "Those are anti-competitive behaviors and we ought not allow that explicit collusion."  I know I would.


et correct drunken grammar.

Quoted: read up on inelastic demand. if demand increases 60%, price will increase more than 60%, because oil is REQUIRED for our economy to run. Ug.   This type of answer is why people fail Econ 201.  Elasticity has to do with how Quantity changes when Price chages.  In other words, if the price of oil doubles, if demand is inelastic, quantity will decrease, but not by double.  In other words, consumers are not particularly responsive (in % terms) to price changes.   The key problem with using S/D to talk about oil/gasoline, is that these markets are not competitive.

A lot of the inelasticity has to do with the ability or inability to substitute other goods for oil.  In the short run both demand and supply are quite inelastic but in the longer term economists have found both demand and supply to be elastic.  I am not sure how long the long term is but going back to the 1950s the price cycle seems to last about 7 years.

The markets for oil/gas are competetive in that oil and gas are commodities traded on open exchanges.  The non-competetive aspect comes from oil production being nationalized in many oil-producing nations.  

GunLvr

The markets for oil/gas are competetive in that oil and gas are commodities traded on open exchanges. The non-competetive aspect comes from oil production being nationalized in many oil-producing nations.

Diamonds are traded openly, does this make them a competitive market?  Nope.


ETA: and I guess I do not disagree with previous poster (GunLvr)

.  The market for gas/oil is NOT competitive.

Even if profit margins stay the same, if prices go up, profits go up. And you must also remember that gas stations must raise the price on the gas they already have in anticipation of what the next tank they buy will cost so that they will have enough money to buy the next tank and still make a profit.


And next time someone tries to tell you that the government should put a price cap on gas so "big oil" cant screw the little man while living the high life, tell them that one of the first things you learn in Economics 101 is that for a price cap to be effective it must be set below equilibrium price and this will result in a shortage 10 times out of 10. That is not an opinion it is a simple fact.

I am an Econ major btw.

Quoted: Quoted: Quoted: No Flames here (and hopefully NO LOCK) , so what is the explanation of a double in gas prices in 2 years? Our demand has surely not doubled. Did you even bother to try reading the link about inelastic demand? Some people just glory in their own willful nescience. thats not an explanation and you are as evasive as you were on the last few threads. Do you, or anyone else, know of any another product with this type of price gouging fixing?  And that doubles in 2 years? Instead of explaining yourself you are refering folks to go read the Magna Carta.

Many things have doubled in the last few years, not just oil.

Copper, zinc, silver, natgas, have all more than doubled.

Electricity, housing, insurance, medical care, timber, food, 5.56 ammo, etc. are all substantially more expensive than they were a few years ago.

There are many forces at work in the marketplace, not least of which is that the currency fluctuates on its way down to worthlessness, there are geopolitical concerns which impact prices, etc.

The price is also set as much by the expectation of future supply and demand as the current supply/demand.

The market is worried there will be a supply problem in the future, war, peak oil, increased demand all weigh on the minds of those who buy and sell oil and bear on the price, so the price is higher.

The market is also extremely worried about the dollar, when measured against any hard commodity all the currencies have been falling rapidly lately, but we only really measure them in terms of each other, so the average joe doesn't realize how rapidly the currencies are losing their purchasing power.

This is a very volatile period for the markets, lots of factors wildly outside what would have been considered normal in the past. There are huge deflationary pressures in some sectors of the economy (textiles, electronics, walmart) due to globalization and even larger inflationary pressures caused by the liquidity bubble/boom and the rate of debt accumulation, which is running about 30% of GDP in the US.

Inflation never goes away, it just moves from one sector to another, stocks, bonds, RE, commodities, money runs from one country to another in search of a return, and more pours in behind it when a sector starts to move.

Oil has been substantially underpriced for decades, the supply far exceeded the demand, so no new supply was brought online, and now supply has gotten tight and there's worry the supply might actually begin to decline from existing sources before enough new supply can be brought to production. The peak oil guys will tell you that's a permanent situation, and for all any of us know they may be right. Meanwhile there's 5 billion people trying to bring their living standards, and therefore their oil consumption, up to levels comparable to the other billion living in industrialized nations.

There is nothing simple about the pricing of a global market commodity upon which the human race depends so heavily.

And it's still cheap.