Dale Allen Pfeiffer -- The Mountain Sentinel
Sept. 3, 2006 -- In all of our energy updates since the first issue of The Mountain Sentinel was launched, we have stated that there is no good reason for oil prices to rise as they have.
Demand has been strong, but production has been adequate to meet it. In fact, stockpiles of petroleum and petroleum products have remained at healthy levels. This, in itself, should deflect any tendency toward rising prices. With stockpiles at the levels they have been, the only thing that should affect prices is infrastructure problems -- trouble at refineries or bottlenecks to transport. Although there have been worries, there have been no shortfalls in supply.
However, prices have continued to rise with each impending hurricane, and with every hint of geopolitical trouble in the Middle East, Africa or Latin America. There has been little actual change in production, but prices have marched ever upward. The reason, we are told, is futures speculation. Market speculators are driving up the price of oil at every hint of a possible shortfall. Yet this does not fully explain what is happening, particularly at the pumps.
I have a friend who owns a music store right next to a gas station. Every day, he sits in his store and watches the station owner change the price of gasoline. My friend has observed the price changing sometimes twice in one day, without any new shipments being added to the supply at the station. He has noted that these changes tend to occur about 3 p.m. to 4 p.m., before the rush of drivers heading home from work. Of course, the station operators and the oil industries maintain these price raises are necessary to pay for the increasing price of future shipments. But as my friend has noted, gasoline stations are the only business that will raise prices due to future increases in future supply. As my friend said, "If I get a call from D'Addario telling me they're raising prices, I don't pull down all the strings and reprice them. I wait until I have to reorder, and then I raise the price."
The industry line on these price increases would be easier to swallow if it were matched by price drops when the futures prices decline. However, this is just not the case. When futures prices do drop, the price at the station will go down in time, but is very unlikely to return to the same price it was at before futures speculation drove it up. The tendency over time is for prices to trend upward overall. The pattern is a significant price rise, followed by easing prices declining by only a fraction of the rise, then another rise, and on and on. The graph of gasoline prices resembles a stepwise progression, progressing ever upward.
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