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September 22, 2005
Price gouging: The beat goes on
Lynne Kiesling finds that this issue just will not go away.
Many thanks to jeffrey.d for alerting me to the letter signed by eight governors asking for a federal gasoline pricing probe, and possible refunds of "excess profits" (remind me to add that to the list of economic non-concepts, right behind "price gouging" and "windfall profits").
The WaPo article mentions a study by Don Nichols at the University of Wisconsin, but because I could not find any such study online I cannot comment on it. I can comment on what the WaPo article says, though:
Historically, Nichols said, the markup between the price of a gallon of crude and a gallon of gasoline is about 85 to 90 cents a gallon, including refining, distribution and taxes.
The study estimated that for pump prices to reach $3 a gallon, the price of crude oil would have to be about $95 a barrel, but crude prices have been holding around $65 a barrel, and Katrina has not caused a surge in crude oil prices.
"The disconnect between gasoline and crude oil prices is quite remarkable," Nichols said.
On its face I find this statement naive. People who study this industry have known for the past seven or so years that increasingly the refining capacity in the US is a bottleneck. If you are analyzing price effects along a vertical supply chain, and you have a capacity bottleneck in the middle of that chain, how can you expect historic relationships between the price of the initial input and the price of the final product to persist? That is incredibly naive and reflects a lack of understanding of how vertical supply chains work.
Shall we review? Stephen Karlson said this about three weeks ago.
There are conditions on the elasticities of supply, demand and resource supplies sufficient to ensure that the equilibrium retail price maintains a constant ratio to the wholesale price of a single input. Those sufficient conditions are unlikely to hold in the presence of at the moment inelastic supplies of gasoline, particularly summer grades in ozone-impact areas, and relatively inelastic demands for gasoline.
Keep that quote at the top of the pile. I have a feeling we'll be able to re-use it often.
Posted by William Polley at September 22, 2005 3:35 PM
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