Where's The Shortage?

As I mentioned yesterday, the reason the oil companies claim that they were forced to raise prices is because there is a temporary shortage, and they need to raise the price to reduce demand. But does that really work? Has anyone really cut back on driving as a result of those suddenly higher gas prices?

I know my driving patterns haven’t changed. I haven’t heard any of my co-workers or friends talk about changes in their habits. The roads still seem just as crowded where I live, and the daily traffic jams are unchanged. The airlines are still flying. Trucks are still delivering goods all over the country. My observations are certainly not scientific, but it really appears to me that there’s been no real change in demand. In the long term, that might change, as people could switch to smaller cars, hybrids, and and so on…but the price changes aren’t long term, they’re an immediate response to a temporary shortage, and only make sense if they produce an immediate effect.

So if demand hasn’t changed, but there’s a shortage, we should be seeing signs of that shortage. Where are those signs? I haven’t seen a single station shut down. I’ve heard about a few, but they seem to be scattered individual stations – I haven’t heard about any cities shut down because no one can get gas. As best as I can determine, the solution to the shortage in those few places that are experiencing it is to drive an extra block or two to the next gas station – or at worst, buy mid-grade because the station is out of regular…which of course increases your costs and the oil company’s profits.

So, once again, tell me where I’m going wrong. The prices have been raised as a solution that doesn’t work to a problem we don’t have, caused by the people who profit most from the price increase. And they wonder why people are upset and asking Congress to intervene. Unfortunately, Congress is much more likely to make a lot of noise about the issue than to actually put a crimp in the profits of their biggest financial contributors.

Planning To Fail

As we’ve all noticed, gas prices are up again. Follow this logic with me and help me see where I’m going wrong.

The reason prices are up is, again, the Law of Supply and Demand. There’s a crimp in the production line, dropping supply. In order to keep demand down and prevent widespread shortages, the industry raises prices. As a result of this selfless action to prevent panic, the oil companies also bring in massive profits, but that’s just an unavoidable side effect, not at all the intent.

But the press has also reported the reason for the shortage – a delay at the refineries in switching over to a “summer formulation.” The refineries change the formula for the summer months in order to reduce pollution – largely in response to government regulation, which explains why some states are not experiencing shortages.

Here’s where I start to have a problem, though. This changeover happens every year. The companies know ahead of time that summer is coming, and certainly have ample time to prepare for it. In fact, they’ve been doing it for years. By now, they really ought to have a handle on it.

So, if I’m understanding this correctly, the oil companies are forced to raise prices because of a shortage that they created by their own incompetence. A cynical and suspicious person might wonder if this annual delay in making the switch is intentional. Certainly, there doesn’t seem to be any real incentive for them to hurry.

It appears that in this case, contrary to the old adage, a failure to plan is planning to…profit.

Gas Prices - Who's Making The Profit?

Okay, I understand the Law of Supply and Demand. Supply goes down, prices go up. I also understand that Katrina has knocked out big chunks of our refining capacity, as well as closing many of the pipelines that we use to bring in imported oil. So the supply has dropped, and prices are going up as a result. All clear. But...

The price of crude oil hasn't gone up all that much this week. The cost of actually refining it is unchanged. The cost of transporting it is pretty much the same, ditto the various other costs associated with selling it. All the costs of production are the same, but the price went up 50 cents or more per gallon, all over, immediately. Somewhere along the line, someone is getting a lot of extra money for no extra work. That's a pretty big profit. Is this any better than the people who charged $10 for a bag of ice after Hurricane Charlie? Or the hotel that tripled its prices for travellers stranded after 9/11?

So who's profiting, and how well do they sleep at night? Of course, that much money will buy plenty of sleeping pills...