Thursday, May 25, 2006

Gasoline prices

By the gods, I can't believe I have to write about this.

Gasoline prices are set on a continent-wide open market. Oil companies have no control over the wholesale price for gasoline, so while they do make huge profits when the price of gas goes up, they had nothing to do with that.

Why does the price of gas go up? These days, it's usually caused by shortages. When Katrina hit last year, it damaged the ability of the US to produce oil (off-shore platforms in the Gulf of Mexico), refine oil (refineries damaged or shutdown for safety reasons in Louisiana and Texas), and import oil (tanker docks in Louisiana). As such, there was a lot less gasoline available for sale in North America. When shortages happen, you get rationing. Not everyone gets as much as he wants. You can ration goods several different ways, but on an open market rationing is done through higher prices. If you really need gas, but there isn't enough for everyone, you'll pay more to make sure you get yours. That drives up the price. Without the higher price, everyone would use as much gas as they normally do and we'd run out. That's rationing through waiting lists. This is how the Canadian healthcare system works, but that's a topic for another day.

Some people will claim that prices didn't used to go up when hurricanes hit. I'd need to see some data before I'd accept that assertion. I suspect people simply don't remember because prices were generally lower. Or perhaps that there used to be more excess refining capacity in North America. Sadly, it's quite difficult to get envorinmental approval to site a new refinery these days.

So that's why the price of gasoline fluctuates. The oil companies have very little to do with it. Production, transportation, and refining costs are mostly fixed. The only flexibility is on the government side. The government can relax or harmonise regulations governing gasoline (there are different blends required by law across North America) or by lowering the taxes on gasoline (which in Canada have historically been about half of the retail price - a bit lower than that now since the prices went up).

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