When gasoline prices rise in the U.S. media sources depict the increased price as a “tax”. When gasoline prices decrease in the U.S. media sources depict the decreased price as a “tail wind”. The basic concept depicted is that as gasoline prices increase consumers have less to spend on other consumption items and as gasoline prices decrease consumers have more money to spend on other consumption items. A nice neat package of price sensitivity and allocation of resources…. or is it? Obviously price is a signal. However, price is a relative signal. That is, consumer A might be very sensitive to certain price increases where as consumer B is not. Also, what is the exact price level that creates sensitivity? And what ever sensitivity exists, the result is somehow purely demand driven consumer consumption of goods and services? If one assumes consumer A has a household budget then one would assume that consumer A makes an assumption regarding gasoline prices. Lets assume consumer A decides $3.00 per gallon of gasoline will be the average. Hence if gasoline goes to $4 per gallon then consumer A must reallocate the budget. One could say the price increase is a tax upon consumer A’s budget. However, if prices retreat to $3.50 per gallon from $4 per gallon has a “tail wind” been created -or- is the tax on consumer A’s budget merely been reduced but not eliminated. In this example a “tail wind” would only occur if gasoline prices fell below the $3 per gallon assumption in the original budget. However, media sources depict any decrease in gasoline prices as a “tail wind” when in fact it all depends on the base assumption of average gasoline prices used by all the James and Jane Goodfellow(s). The reverse is true. If consumer B made a bold assumption of $5 per gallon for gasoline and prices only rose to $4, then a “tail wind” existed through out the price changes and a “tax” never occurred. Moreover, if James and Jane Goodfellow set a price for gasoline within a budget, do swings in price change behavior significantly or do we have more of the-boy-who-cried-wolf phenomena? Tax or tail wind, do constant price swings cause the consumer to create a sinking fund of sorts to deal with the price swings? That is, does the consumer apply risk management to the tax and tail wind price swings and hence neutralize the tax and tail wind phenomena through risk management of gasoline prices? Finally, the tax or tail wind mantra makes an explicit and implicit assumption: any price change only affects consumption of goods and services. What about savings and investment? What if gasoline price changes only affect savings and investment for certain consumers? Why is gasoline price changes only equated with demand side items? The next time one hears media sources making sweeping statements regarding gasoline price changes and the supposed tax or tail wind, one needs to consider sweeping macro economic statements of such types need considered on more micro economic grounds.
“U.S. gasoline prices jumped 6% in February, and market experts predict they will climb higher because critical refining operations in the Northeast are shutting down.
From New York to Philadelphia, refineries that turn oil into gasoline have been idled or shut permanently because their owners are losing money on them. Sunoco Inc. is expected to close the region's largest refinery in July, taking another 335,000 barrels per day in production capacity off the market.
The East Coast refineries are getting squeezed by the soaring cost of crude oil, the major component in gasoline. The cost of oil has jumped in the past year due to global economic growth and rising tensions between Western nations and Iran, a major producer. Refineries haven't been able to increase their own prices enough to compensate.”
“Refineries in the Northeast are under financial pressure for two reasons. They have limited access to cheaper, high-grade crude oil produced in the middle of the U.S. because there are not enough pipelines, which is forcing them to pay more for oil from elsewhere, most of it from overseas.
And many of their facilities aren't set up to process lower-grade crude that is cheaper.
As Northeastern refining capacity declines, it will force distributors in the region to buy gasoline from elsewhere, pushing up prices across the country and increasing the likelihood of price spikes, government officials and analysts warn.
"There's now going to be a question if we can get enough gasoline into the East Coast for summer," said David Greely, an energy analyst at Goldman Sachs Group Inc. The U.S. Energy Department has warned a shortfall could develop as early as July.” (1) (2)
“Originally published Sept. 7, 2011:
Sunoco Inc., an iconic Philadelphia company and a manufacturing mainstay along the Delaware River for more than a century, is getting out of the refining business.
Sunoco said Tuesday that if it cannot find a buyer for its oil refineries in Marcus Hook and on the Schuylkill in South Philadelphia it will close the plants in July.
About 1,500 of Sunoco's 10,000 employees work in refining, according to the company.”
“Elsenhans said the refineries had lost money for eight of the last 10 quarters - $772 million since 2009. Sunoco can no longer justify the investment required to maintain the plants, much less to improve their competitiveness in a world where refining profits are increasingly elusive, a spokesman said.”
“Sunoco opened the Marcus Hook refinery in 1902 to refine crude oil brought up by ship from Texas. In South Philadelphia, it acquired the Atlantic Petroleum Corp. refinery in 1988 and Chevron Corp. refinery in 1994 and merged the two Schuylkill plants into one of the nation's largest refineries.
Together the Marcus Hook and Philadelphia refineries can process more than 500,000 barrels of crude a day, making them one of the largest refining centers in the country.
The U.S. refining industry has suffered in recent years from reduced demand caused by the economic downturn, improved fuel mileage of vehicles, and the introduction of ethanol into motor fuels.
Domestic refiners say they are also at a competitive disadvantage with imported fuels from overseas refiners who face less rigid environmental controls.
Sunoco's refineries in Southeastern Pennsylvania have the added disadvantage of relying on more expensive low-sulfur crude as their raw material, which has depressed their profitability relative to other refineries.” (3)
“A New York billionaire appears to be interested in buying the Sunoco refinery in Philadelphia.
John Catsimatidis, who formed United Refining Energy, said that in an interview with Bloomberg News.
The refinery is set to close on July 1st if a buyer isn't found.
Catsimatidis told Bloomberg News that he will decide this month if he will make an offer on the plant.
One analyst said the refinery may be a bargain at $400 million since Sunoco was planning on shutting down the refinery.
Sunoco, which owns three plants on the U.S. East Coast and announced plans to exit refining in September, lost $1.68 billion in 2011 as the profit margin for turning oil into fuel shrunk to the lowest point since 2009, according to data compiled by Bloomberg. The Philadelphia plant is Sunoco's only operating refinery.
United Refining operates a 70,000 barrel-a-day refinery in Pennsylvania.” (4)
Domestic gasoline demand is down. Domestic gasoline supplies are up. Uncertainty as always (as in forever) in the Mideast. Speculators as always a favorite politico scapegoat. Meanwhile gasoline prices continue to rise. Would it be that the price of oil is denominated in US dollars?
' "Gas Prices Explained," from the same group that produced "Quantitative Easing
Explained" (which now has more than 5 million views on YouTube).' - Carpe Deim, 03/10/2012
Each and every time energy prices increase to the point that consumers are upset about the price of energy (generally gasoline prices) the mantra is repeated of “why don’t we have a national energy policy!”. As the argument goes, we have had 40 some years to come up with policy yet we have no policy. Nay, nay! The US does have a national energy policy. Better stated, the US does have a national energy politico policy.
The US energy politico policy is based upon the vision of do-gooders combined with artificial pricing that purposefully, through politicos through the mechanism of government, suffers from just about every phenomena pointed out by public choice theory. Or more succinctly:
I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse. - Milton Friedman
US energy policy is foremost driven by go-gooders also known as environmentalists. Their intentions are worthy but they suffer from the idea that categorical risk management trumps real world, real-time, real flesh and blood people that face trade-offs resulting in real world incremental risk management.
The next part of the US energy policy is artificial pricing. Alternative energy programs are uncompetitive at price point (P) hence taxpayer subsidy (s) is introduced to make the make prices more competitive resulting in price P(s) which is artificial. Artificial to the tune of billions of taxpayer dollars every year, year in and year out.
The combination of unrealistic categorical risk management advocated by the do-gooders and P(s) then becomes the multi-billion dollar conduit for:
(1) dependent political consistency building exercises by politicos of a group of go-gooders through taxpayer dollars,
(2) the do-gooders worthy intentions, as always, are hijacked by a set of crony capitalists in search of taxpayer dollars as a substitute for competition [rent seeking],
(3) the rent seeking causing taxpayer dollars to be funneled into a myriad of uncompetitive items represented by P(s). These uncompetitive items act as a mirage for the do-gooders and mainly as dependent political consistency building exercises by politicos of the crony capitalist.
Meanwhile, back in the real world economy of real flesh and blood people, price (P) regarding energy escalates. James and Jane Goodfellow then complain about price (P). The complaint surrounding price (P) is that price should not be so high and hence where is the energy policy that would have stopped such as escalation in price?
The basic problem with the Goodfellow’s complaint is that price (P) is not functioning. In a world of scarce resources with alternate uses, the rationing agent is price. Price, in other words, functions in a world of trade-offs none of which are related to categorical risk management. Hence the result is that price is distorted and we arrive at the Goodfellow’s complaint about price.
One might say that energy prices, specifically gasoline, is not a price phenomena as much as a distorted price phenomena due to national energy politico policy with distortions in price benefiting the policy purveyors, that being the politico.
An item worthy of examination is the political anger factor regarding the gasoline price tipping point. The tipping point being the price per gallon of gasoline that causes consumer expectations to plummet, causes a drastic cut back in driving and consumer purchases.
The Political Anger Factor and the Political Anger Factor Regarding High Persistent Unemployment
The political anger factor is a wide spread resentment by the electorate directed at an incumbent. In political economy a common example of the political anger factor is persistent high unemployment, especially when unemployment approaches 10%, the political anger factor [the summation of the electorate's anger] is exposed and rises exponentially and this exponential level of anger is directed toward the incumbent.
The 10% figure of high persistent unemployment in the traditional political anger factor proposition is merely an observation of averages. That is, future data may point to 8% or 11% as the point that the political anger factor regarding unemployment goes exponential. Further, those unfamiliar with political science or political economy likely have no earthly idea about the political anger factor proposition. They notice more anger but have not studied the trend. That is, the knowledge is not widely disseminated.
The Political Anger Factor Regarding Gasoline Prices
The “tipping point” in gasoline prices, on the other hand, becomes a “chosen” line of demarcation by pundits, media types and talking heads and much less a historical trend or historical average. That is, the chosen number is more notional and much less finding its roots in historical underpinnings. One might say the chosen number has political aspect more than empirical aspects. Hence the average Goodfellow uses the number they see in the media as the actual number or at least the subject number regarding tipping point. One might call it the “headline tipping point”.
This particular point of demarcation aka tipping point is knowledge wide spread albeit the tipping price number may be incorrectly pegged. James and Jane Goodfellow, if interviewed, will many times recite the very “headline tipping point” offered through media. Stated alternatively, headline tipping point becomes a buzz number and the buzz conversation. It may even trump small talk about the weather.
Hence we have a number “chosen”, we have widespread knowledge of the supposed correct number of the tipping point, and now we have “measurement“. One merely looks to the gas station marquee sign for “price” and one watches the price go up on every gas station one passes. One might say immediate feed back is everywhere.
A final point to examine is the number exposure units. Consider the political anger of the 90% employed vs. the 10% unemployed (from the example above). Exactly how politically angry is one if one is part of the 90% employed? Yes, there is the “what if I’m next” factor, and the “business would be better if unemployment where lower” factor, but if one is employed, exactly how outright angry does one get? More like a boiling resentment than outright anger. What about gasoline? Lets try +/- 90% are effected by rising gasoline prices. Boiling resentment becomes outright anger.
Which begs the question: if an incumbent has high persistent unemployment just below the exponential line i.e. 10% and simultaneously experiences rising gasoline prices approaching a tipping point, exactly what level of political anger ensues?
