Supply and Demand? - The Hull Truth

jstout1 · 09-26-2005, 07:31 PM

With all of the discussion going on about the price of gas, I've heard a lot talk contesting price gouging and claiming it's just supply and demand.

If supply and demand influences prices so much, can someone answer this question?

We demand gas, the price goes up. The refineries close down, reduced demand on oil by a huge initial consumer of oil, why does the price of oil not go down. Is there not a glut of oil starting. How much oil was refined everyday before shutting down and how much oil is now backing up. These refineries were supposedly operating at 100% so even when they come back online, they won't produce a larger demand then before the shut down.

Does supply and demand only apply to the lowest level of consumerism. Isn't the refineries a consumer of oil, or are they owned. Why haven't the speculators recognized this lack of demand, because it dosen't line their pockets or is it that there is no free market when it comes to oil/energy.

I know people with PHD's in economics will say it's more complicated. Even a compicated issue needs to be able to be addressed logically. Logic is what seems to be missing from our energy comodities trading. Always a reason to increase the price to the end customer but never a reason for a break but a lot of talking out of both sides of the spokepersons faces..

Supply and demand, right.

broncobirdy · 09-26-2005, 07:46 PM

I would say that has something to do with it. There are really tons of equations that play into it as well as gimmicks. The guy that brings our 8600 gallons daily said the stations he goes to don't have the room for the gas. So S+D plays a large role. If they haven't switched to the winter formula yet just wait for that one. They use it every year. The stock channel..."And gas prices surging this morning based on the fact that the refineries are switching over to the winter formula".... Yeah the switch plays a part of it....but really that media causes most of the chaos. There is a new angle every day.

welder · 09-26-2005, 09:19 PM

put the lead in $, take the lead out$, the sun was in my eye's, the wind was in my hair,blah blah blah.

forget the lube just stick it in.

Joe · 09-26-2005, 09:28 PM

Around here, gas never budged off of the $3.00/gallon it got up to right after Katrina. It's been 2.89 at the local Amoco since last week before Rita, and then it rose to 2.95. Last night I passed by it and saw it was back down to 2.89. This morning I heard that oil and gas prices went down in trading, and rode by the Amoco today, and it was 2.92/gallon. Just doesn't make any sense to me. I can understand that gas goes up immediately because of what they are buying it at, but shouldn't it fall just as fast?

Garett · 09-26-2005, 11:19 PM

Of course it doesn't make any sense at all, but the big wheel is in motion and us the little guy doesn't feel like we have the power to stop it and therefore we don't.

We are treated like retards and worse yet we act like retards - we just plain except being raped on a daily bases.

Joe · 09-27-2005, 09:25 PM

Hey..it dipped back down to 2.89 here today.

jstout1 · 09-27-2005, 10:20 PM

How the heck can that happen when the supply is shut down? Must be mirrors.

mbenzing · 09-27-2005, 10:42 PM

Quote:

jstout1 - 9/26/2005 7:31 PM

With all of the discussion going on about the price of gas, I've heard a lot talk contesting price gouging and claiming it's just supply and demand.

If supply and demand influences prices so much, can someone answer this question?

We demand gas, the price goes up. The refineries close down, reduced demand on oil by a huge initial consumer of oil, why does the price of oil not go down. Is there not a glut of oil starting. How much oil was refined everyday before shutting down and how much oil is now backing up. These refineries were supposedly operating at 100% so even when they come back online, they won't produce a larger demand then before the shut down.

Does supply and demand only apply to the lowest level of consumerism. Isn't the refineries a consumer of oil, or are they owned. Why haven't the speculators recognized this lack of demand, because it dosen't line their pockets or is it that there is no free market when it comes to oil/energy.

I know people with PHD's in economics will say it's more complicated. Even a compicated issue needs to be able to be addressed logically. Logic is what seems to be missing from our energy comodities trading. Always a reason to increase the price to the end customer but never a reason for a break but a lot of talking out of both sides of the spokepersons faces..

Supply and demand, right.

This is not a defense of the industry.........just a lesson on supply and demand in general. The end user makes demand, not the refinery. They are a cog in the supply chain, so demand was not quenched because a "consumer" of oil (the refinery) is offline. The only reason oil refineries exist is to produce us a product that we use to produce something else. We are speaking about gasoline here.
As for oil, technically the price of oil should not go up, at least at the source, due to interruptions in the supply chain unless that disruption is at the source,i.e. the platform.
If demand remains constant, and the wells are pumping the same amounts, the price would theoretically remain the same. However, a large part of the price of oil or any other commodity, is made up from its distribution costs. If their is a distruption in the flow of oil due to a pipe that breaks or whatever, the supply of "product to the consumer" is diminished and the price rises. Once the price rises above what people are willing to pay for it, the price will fall to the level where supply equals demand. In a market based economy, the supply side will usually have market control in the short term, and the demand side (the end consumer) will have control of the price in the long run.
In the 1980's the price of oil and gasoline dropped dramatically in large part due to economical cars that people were driving. The seventies saw us driving cars that got 8 to 10 miles per gallon and the 1980's vehicles saw us driving cars that got 20 to 35 miles per gallon. The pendulum swung again in the 1990's. Gas was cheap and auto makers produced large SUV's- what the consumer wanted. Now demand is so great that any disruption in oil causes spastic rises in gasoline prices. If the price of gasoine is so painful to the American public that we start buying "new technology" smaller vehicles that get 40 to 50 miles per gallon, over the next 5 years we will see gasoline fall again if left open to the market and not taxed to the point that won't let it fall. Then consumers will start demanding the larger vehicles again and the process will repeat itself. So if you want the prices of oil to drop, sell your truck or your SUV and get a Honda Civic. I am being a smart ass and I drive a Navigator that I will not sell unless I absolutely have too, but that is the long term solution.
This oil pricing is a cumulative effect in my opinion. There are certainly market forces in play that are making the price of our gasoline rise dramatically. However, these same forces combined with consumer fears make it ripe for the oil industry to price gouge at the same time. I don't have any evidence one way or another if in fact they are doing this, but it wouldn't surprise me- and there is a fine line between maximizing profit in an unregulated market and price gouging. The recent mergers of large oil conglomerates has not helped our plight, and in my 20/20 hindsight opinion should have never been allowed.
Note: It IS complicated because oil is not a true supply and demand commodity. OPEC controls a great deal of the supply side. They can artificially set their production levels in a manner that manipulates the price to levels that make them as profitable as possible. This is one reason that the government wants to drill in Anwar and expand oil production in the gulf. Even if we develop all of those resources it will still be cheaper to buy our oil from the Saudis, but it give OPEC less power over our oil prices in times like these.

My .02 and I hope I was of some help.

welder · 09-27-2005, 11:46 PM

So is what your saying is their a bunch of greedy , price gouging bastards.

mbenzing · 09-28-2005, 12:22 AM

Quote:

welder - 9/27/2005 11:46 PM

So is what your saying is their a bunch of greedy , price gouging bastards.

They probably are- but you can't tell that from the fuel prices alone. I just think the guy should know WHY they are price gouging bastards. The demand has not fallen- there is certainly REAL pressure on the price of gasoline. His conclusion might be spot on, but not his method of getting there. The guy above posted an argument equivalent to:

Al Gore is an a$$hole.
Al Gore is a Democrat.
All Democrats are A$$holes!!!!!

Now the third sentence is probably true, but you can't devise it from just the fact that Al Gore is an A$$HOLE and the that Al Gore is a democrat!!

IF they are colluding and conspiring to bilk the American people by artificially shortening supply, they should be strung up in town squares. But everybody jumps on the bandwagon- especially the politicians. It is a cheap and easy way for them to look like they are not asleep at the wheel. I mean, who is going to argue against them when Americans can see the "evidence" at the fuel pumps? They will call for investigations and rally the press, but after the elections are over you will see them quietly slip away into the night.

WRK2HRD · 09-28-2005, 02:35 AM

I am not worried about it at all. Bottom line, pretty soon, people won't be able to afford the inflation in gas and not in their check. Other day to day items, events, etc.. will start to feel it. We have made ourselfs dependant on this stuff...who knows, maybe it will work out for us little men in the end?

jstout1 · 09-28-2005, 11:20 AM

mbenzing:

I don't believe you when you say a cog in the supply chain is not a consumer.

If I run a chinchilla farm, and today there is just 1 coat maker in business, my chinchillas will go for $5 apiece. If all of a sudden 5 more coat makers go into business I can now probably get $6-$8 apiece. Due to an increased demand by more cogs. The reverse would happen when the coat manufactures found out that the chinchilla market was not as large as they anticipated and 4 of them went under. Less cogs, less demand, lower price for the comodity in question.

If this logic is wrong, then the whole system is corrupt and without logic. The cog must be a consumer of sorts or there is NO competition in any industry.

You say that it is supply and demand. Well are you saying that we all of a sudden started a massive increase in demand over the last year or so? If not then and it's just the disasters, please explain why the prices have skyrocketed over the reduced supply of oil (chinchillas) for the first hurricane but are remaining stable with the closure of the actual refineries (coats).

mbenzing · 09-28-2005, 12:51 PM

Where your thinking is flawed is that the coat maker never created the demand for chinchilla coats. The people buying the chinchilla coats created the demand. If people wanted alot of chinchilla coats, then you could still charge your high prices. In your example, they did not-and the coat maker and you fall prey to the consumer (demand).
Assuming you are the only chinchilla supplier around, you would have a monopoly and could charge what you wanted.

Assume there are 2 of you, four coat makers, and 100 people a year that buy chinchilla coats. Say each coat maker can make 25 coats per year and you have the capacity to supply enough chinchilla for 50 coats (or 2 of the coatmakers):

Scenario 1: People now only want 50 coats per year. Now 4 coat makers are trying to sell half of what they sold the year before. Prices fall. There are too many sellers trying to sell 2 few goods. If this condition persists there will only be 2 coatmakers and one of you (chinchilla suppliers).

Scenario 2: 2 coat makers exit the business (death, retirement, whatever) Their is still demand for 100 coats, yet the coat makers only have the capacity to make 50. Now 100 people are vying for 50 coats. The coat makers are going to be more profitable and in turn you can charge more for your chinchillas. Demand hasn't changed in this scenario.

Scenario 3: Everything remains the same accept that demand rises to 200 coats per year. Prices will rises until there is either a drop in demand, or more coat makers enter the business. You will get paid more for your goods as well.

mbenzing · 09-28-2005, 12:54 PM

Quote:

jstout1 - 9/28/2005 11:20 AM

mbenzing:

I don't believe you when you say a cog in the supply chain is not a consumer.

If I run a chinchilla farm, and today there is just 1 coat maker in business, my chinchillas will go for $5 apiece. If all of a sudden 5 more coat makers go into business I can now probably get $6-$8 apiece. Due to an increased demand by more cogs.

In this scenario, you would be absolutely wrong. Unless people wanted to buy more coats, the addition of more coat makers would drive the price of the coats down;because the coat makers are now getting less for their coats they would look for alternate suppliers, etc. and your pelt prices would not rise to 6 to 8 they would probably drop to 1 to 2.

jstout1 · 09-28-2005, 02:14 PM

All right. All of your reasoning is based on increases and decreases in demand of the end product. Fine. I am questioning the current circumstances driving the price of fuel and the industries and "analysts" point of view of the supply and demand argument.

To use that argument shouldn't the increase in fuel prices be linear and in time with our increased demand? If not, I would assume there would be some type of commodity specuclation driving these prices. That was what prompted my thoughts in the first place and questioning how the logical theory of supply and demand can't even be addressed when it is trumped by corporate greed.

Have we as a country suddenly increased our demand at a pace that would suggest the current pricing? I for one do not believe it.

Have the energy companies buffered our increased demands for so long that they now have to have such dramatic and quick increases in their prices? I don't believe there is a philanthropic bone in their corporate body so I don't believe that.

If the supply is stopped as it is now after Rita, and there is such a huge demand, why are people posting that prices are stable. That is contrary to the supply and demand arguement.

My scenario above was based, in my mind, with little change in end item demand but a change demand for a product needed to manufacture that end item. How can an increas in demand for pelts not increase the price of those pelts? Are you saying that supply and demand only exists at the bottom line consumer level? Dosen't the demand for crude drive the price of crude just like the demand for gasoline drive the price of gasoline?

Hey, I'm just trying figure it out but supply and demand seems like logical argument and my observations of the current stituation seems that they are anything but logical. This leads me to believe there is more to it.

The bottom line is I don't believe it is a supply and demand situation I think it is just corporate greed testing the waters to see how much they can charge before they break our bank. Maybe I'm wrong but I bet there is a quickly growing number of like thinkers out there.

Thanks for the discussion.

mbenzing · 09-28-2005, 08:35 PM

Quote:

jstout1 - 9/28/2005 2:14 PM

My scenario above was based, in my mind, with little change in end item demand but a change demand for a product needed to manufacture that end item. How can an increas in demand for pelts not increase the price of those pelts? Are you saying that supply and demand only exists at the bottom line consumer level? Dosen't the demand for crude drive the price of crude just like the demand for gasoline drive the price of gasoline?

Hey, I'm just trying figure it out but supply and demand seems like logical argument and my observations of the current stituation seems that they are anything but logical. This leads me to believe there is more to it.

The bottom line is I don't believe it is a supply and demand situation I think it is just corporate greed testing the waters to see how much they can charge before they break our bank. Maybe I'm wrong but I bet there is a quickly growing number of like thinkers out there.

Thanks for the discussion.

There would not be an increased or decrease in demand for the pelts unless there was an increase or decrease in the demand for coats. Well, maybe there would be if another use for pelts was discovered or if the coat makers found an adequate substitution for the pelts, but that is besides the point for this discussion, and doesn't apply to what the petroleum market is doing right now.
There is no demand for crude oil accept for its use in another application- gasoline, home heating oil, kerosine diesel, and textile products. It is like saying that demand for insulation could be independent of the demand for construction. People don't buy oil to put in there garage or because they like the smell, etc.

Kamper · 09-28-2005, 08:43 PM

I dont know if there's a legal term for it but think of it as "silent" collusion. The airlines got in trouble for this a few years back but they've developped work-arounds just like the oil companies.

If competitors communicate their pricing strategies to each other that's called "price-fixing" and is illegal. To get around that they just watch each other's market positions and if one company makes a move they all follow suit immediatly. They all know about "supply and demand" and when they can they exagerate the effects by starting rumors of shortages (imo) and then raise prices as demand heats up. They've done this long enough to know in advance when they can slip in "seasonal" and "holiday period" "price fluctuations."

This is called gouging and profiteerring. It's painfully obvious that it's happening but is very difficult to prove in court that natural market forces aren't the only factor.

It doesnt matter if you know the market is being manipulated when it's a product you need. If you arent already stocked up on a staple product you wil buy more before it's gone to make sure you have enough. Advertising works and no one wants to be last in line when the next-to-last customer finishes off the supply.

Anyway, that's my theory on why*prices go high so fast and decrease slowly and seldom get back to the starting point.**