Thursday, June 16, 2022

Supply And Demand Upended

As we drive around in our cars these days, one cannot avoid seeing the large gasoline station signs that tell us – usually in large, bold, brightly-colored numbers – what today’s gas price is per gallon. Inevitably, it is a bigger number than the day or so before. We drive past, likely shaking our heads in disbelief, discouragement, and a host of other thoughts and emotions at yet another thing taking control away from our daily life.

Yet you know what we do not see? Plastic shopping bags wrapped around the nozzles of the fuel hoses, accompanied by a cardboard sign that proclaims “No Gas.” We are used to this scene because on various occasions (e.g. hurricane destruction of refineries, Russian hackers blocking a major gasoline distribution line), demand for gas temporarily exceeds supply. The typical results are long lines at filling stations, different strategies for locating which stations have gas available, refilling the car at every opportunity, all while paying increases in price, And then, seemingly miraculously, everything goes back to “normal” within a couple of weeks. The refineries are back in production, the delivery trucks are making their rounds, and truck and automobile drivers are back to their old driving patterns. All is well.

This time it is inexplicably different. We have plenty of gas for everyone. Big Oil says these double-digit price increases are due to breaks in the gas supply because of the war in Ukraine and sanctions levied against buying Russian oil. But the amount of our imports from Ukraine and Russia is near-negligible, and we are drawing down significant quantities from our Strategic Oil Reserves to help offset those losses. And the backdrop to our story is that the U.S. has been a net exporter of oil the past two years, and over half of our imports come from Canada – not Russia.

Do I over-simplify our current situation? Admittedly, yes. But it seems that one must over-simplify to begin to understand the current rules of the road we are driving under. We all understand the principle of “supply and demand” in a free marketplace environment. When demand exceeds supply, something is deemed “more valuable” and the price is raised to take advantage of that scarcity. (I am not exactly sure why scarcity should drive price, but I accept that that has been accepted marketplace practice for near-eons.) Yet some societies have made exceptions to this principle by passing anti-gouging and/or price control laws effective in times of crisis, thereby not allowing profiteers to take undue advantage of the citizenry during short-term disasters. Problematically, price gouging creates a “bandwagon” effect: one store, one vendor, starts raising prices when there is panic in the streets, and so another sees an opening to increase his/her profits, and so on and so on. Pretty soon prices are exploding everywhere.

In the case of Big Oil, we have an extended supply chain of links engaged in bringing gasoline to the pump. The original driller; ongoing pumping at the wellhead; transport to the refinery; refining of the oil into its varying products; transport of gasoline to a regional distributor; distributor transport to the local filling station; sale of the gas to the ultimate consumer – the automobile drivers. That is a lot of links in the chain of transactions, starting from under the ground and ending in a car’s gas tank. EACH link in that chain has its own cost and profit demands to meet. Each link raises its prices on top of the prior link’s raise, thereby creating a compounding effect on prices. Add up all these increases, throw in price manipulations by commodities brokers and other financial hangers-on, layer the cake with the demands of national economies who are dependent on oil revenue (e.g. OPEC countries such as Saudi Arabia, Russia, Venezuela), and you have a marketplace that has little to do with the actual oil on hand. The current record-breaking revenues for the oil giants, and all these other integrated inks, confirm that their hunger is being fed quite well.

Against this formidable, multi-pronged and ravenous beast, the individual car owner has little chance in affecting a resolution to this current inflation crisis. Ditto the farmer, the school system, the emergency responders, the truckers, the American family, etc. – all trying to survive these new economic demands affecting their personal and professional lives. Lives built upon a foundation of gasoline. But let us be clear. There is plenty of gasoline in barrels to meet our fuel needs. Whether we are paying $2.50 or $6.50, there is gasoline available to keep us moving. But if we are not careful, fulfilling the price gouging pump will be at the bigger cost of losing our potential to bring our economy back to a more normal, post-pandemic time. We do not have a supply problem. We do not have a demand problem. We have a price and profit problem. 

©  2022   Randy Bell              https://ThoughtsFromTheMountain.blogspot.com

 

4 comments:

Anonymous said...

$60.00 to fill the tank yesterday. Unbelievable!!! And it wasn’t all the way empty.

Anonymous said...

Yes I am paying $200-250 a month for gas but I need to get to [my job]. I buy at Costco and it was $6.10/gallon this week.

Anonymous said...

very thoughtful article. I have some mixed feelings about the current price situation being or not being a supply problem. In the short term, yes, capitalism is driven by profits and price gouging, In the longer-term, however, the earth will run low on fossil fuel, either because we've used up the resources OR because it will cost refiners too much to dig and get to new fossil fuels, hence, fewer will do so. so Supply will become a serious issue.

Unknown said...

I believe we have a greed problem as well.