Gas Prices, Speculation, and the Price of Tea in China
With gasoline in the United States moving toward (and in some places, above) $4 a gallon and motorists understandably unhappy, there is a growing desire to blame someone for the high prices.
Previous gas price spikes in 2006 and 2008 brought blame on ”Big Oil” (meaning firms like Exxon-Mobil, BP, Royal Dutch/Shell, et al., which really are just mid-sized oil — but whatever), the Bush administration and Republicans, environmentalists, and the federal government. But 2011 offers a new leader in the blame game: speculators. From Capitol Hill lawmakers, to business columnists, to activist websites, to letters to the editor and hyper-forwarded emails, people are calling out trading in the oil and gasoline futures markets, aka ”speculation,” and demanding that government do something about it.
The problem is, I haven’t seen any of these folks offer a coherent explanation for how speculation drives up the price at the pump. And I doubt any is forthcoming.
The speculation-blamers’ story is simple enough: Investors sign futures contracts in oil and gasoline — traditionally, agreeing to a price today for oil or gas that will be delivered weeks or months in the future (and that probably has yet to be pumped out of the ground or refined). But, speculation-blamers say, the investors are running amok, paying outrageous prices for the futures. Those prices then affect oil and gasoline sales today, driving up prices at the pump.
Worse, they say, many of the futures are just paper transactions: the traders don’t have oil or gas to sell, nor do they intend to take delivery of it. Instead, when the future closes (that is, reaches its end-date), then one of the two counterparties will simply pay the other the difference between the agreement’s price and the actual market price on the closing day. For instance, if Smith Investments and Jones Investments signed a six-month future for one barrel of oil at $100, with Smith taking the “short” position (believing that oil’s price will be less than $100 six months from now) and Jones taking the “long” position (believing the price will be above $100), and six months from now oil is selling for $80, then Jones will pay Smith $20. Vice-versa if oil’s price is $120. (In fact, most futures today are settled in cash, even if one of the counterparties is somehow involved in oil production or use.)
On first blush, the speculation-blamers’ story makes sense: Surely, the price for future delivery of oil or gasoline will affect the price for present-day delivery. And all the paper-transaction stuff just seems devious and dangerous — shrewd Wall Street investors are hosing Main Street again!
But think more carefully about the story, and it begins to unravel.
New Paper: Why Sustainability Standards for Biofuel Production Make Little Economic Sense
The U.S. sustainability standard currently requires ethanol production to emit at least 20% less CO2 than the gasoline it is assumed to replace. In a new study, authors Harry de Gorter and David R. Just argue that sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, say de Gorter and Just, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether ethanol is sustainable or not.
Remembering the Good Old Days
Actress and former Miss America Vanessa Williams reminisces on NPR about the long car trips her family used to take “when gas was like 30 cents a gallon, and my parents would complain that it was going up to 35 cents.” No wonder families could take car trips then.
But wait a minute. Williams was born in 1963. So let’s say she’s remembering family trips from about 1970-75. This chart from the Department of Energy does show that retail gasoline prices were around 35 cents a gallon at the beginning of that period, going above 50 cents by 1975. But adjusted for inflation, that was more like $1.50 in 2000 dollars.
And as Jerry Taylor and Peter Van Doren show (click on the chart to enlarge), the price then was about $3.00 adjusted for inflation and changes in disposable per capita income — just about what it is now. So Williams’s memory was correct — gas was about 35 cents when her family went on trips. But the implication that those were the good old days of cheap gas isn’t quite right. In terms of the family budget, gas costs about the same now as it did then.
Julian Simon used to write about how people have been deploring the lost ”good old days” since ancient times. Sometimes he quoted the columnist and Algonquin Round Table regular Franklin Pierce Adams: “Nothing is more responsible for the good old days than a bad memory.”
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