Tuesday, July 23, 2013

The Economics Of Gasoline Prices

This article by an environmental economist makes me wonder about the quality of some of the economists who blog about environmental issues.  He does not understand the difference between the supply of oil and the supply of gasoline.  The price of gasoline is not affected by the supply of oil as much as it is by the supply of gasoline.  The comment following his blog makes it clear that a small number of refineries in the US produce most of our gasoline.  The refineries are most profitable when they operate at 95% capacity.  Any glitch at a refinery will reduce the amount of gasoline on the market because there is little excess refinery capacity available to remedy a problem at one of the refineries.  Prices will rise whenever there is a problem in one of the refineries. Moreover, there will seldom be a problem of excess capacity which would cause prices to fall.  The only thing that would cause gasoline prices to fluctuate,  when refineries operate at 95% capacity, are fluctuations in demand.  Prices tend to rise during summer holiday periods when demand for gasoline peaks.

John Whitehead, the environmental economist who confused the supply of oil with the supply of gasoline, also praised a study which employed a cost/benefit analysis to conclude that drilling for oil in Alaska and the Artic region would be a good idea.  The costs would be high but the additional supply of oil would only result in a modest decline in gasoline prices. Apparently, its a good idea to drill for more oil as long as it does not cause prices to fall too far.  There was no discussion of environmental costs. 

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