Monday, June 27, 2005

Gas Prices on the Rise.

This weekend while at a party we got into a discussion on the rising price of gasoline.

As is usual, the usual economically ignorant statements were being made. One fellow held an amazing number of contradictory views on the subject. First off rising gas prices are bad and there is no explanation for a rise in the price of gas but oil company gouging. Evidence: oil futures rise and before that oil is turned into gas and delivered to our pumps, the price of gas goes up.

Product pricing is not as straight forward as one thinks. Let us say you go your hardware store. You buy some big lag-bolts for 25 cents each. Do you think the hardware shop paid the same for each and every lag? Perhaps they did but maybe they didn't. What happens when they buy the bolts again and the price goes up? Does the shop then individually price each lag? My experience with retailing shows me that cost averaging is used. The vendor buys 100 lags at 20 cents apiece, then their next order is 100 lags at .25 each. So the hardware store has 200 lags and paid a total of $45.00 for those 200 or 22.5 cents per lag. They do not consider the price of each and every lag individually. Remember here in WI we have a minimum markup law, so the change in the average price of a commodity item like gasoline will be transmitted very quickly to the consumer.

Also, this market is influenced by futures buying. If I buy a commodity at the exact time I need it , I will be held to a more volatile and unpredictable situation. So, most traders and buyers (probably all) use future buying. This does a few things, this helps to keep their supply steady and helps them be ready for future price increases. Yes, the gas they are buying nowadays is not actually going to be delivered until some future date, (speculation on how futures are dealt with) but that future delivery goes into inventory and affects the average cost now.

This fellow then decried the large car American mindset. He darned near stumbles onto the truth and remembered during the 70s how the Japanese took advantage of the gas market to bring fuel efficient vehicles to the market place and how slow Detroit was to respond. He also recalled the gas lines and had very little problem accepting the notion gas price controls were to blame for the long lines and rationing that went on.

Yes, I too think it silly a guy who never (or rarely) leaves the city environs is driving a Ford Excursion. I also think it wasteful (not just gas-wise either). I also think those spinning hubcabs are beyond silly and stupid, but we have this notion here in America. It is called ", liberty, and the pursuit of happiness" I may think someone's idea of happiness is actually slavery and stupidity but we have to at least tolerate it. Mind you, this last point is speaking on economic matters.