A
few weeks before the election in the U.S.,
gasoline prices began to drop a bit. Now, everyone knows that voters are more likely to re-elect
the party in power when prices are stable--and less likely to do so if prices,
especially fuel prices, are high and rising. So everyone had a theory as to who was manipulating prices for political purposes. The
right wing pundits suggested that Obama was secretly releasing oil from the
strategic reserve to buy votes. My
own theory was that the oil barons, although they do not particularly like
Obama, realized that the alternative to his being re-elected was to actually
have Mitt Romney as President, a prospect which scared the hell out of
them. And so they were trying to
beat down the gas price to prevent Romney's election.
But
after sober reconsidering, I realize that no person or agency was manipulating
anything at all. What happened is
that in the northern temperate zone, where most of the world's cars are, winter fuel blend is not the same as
summer fuel. About mid-October,
the refineries briefly shut down and re-tool to make winter blend
gasoline. This fuel is lighter and
will vaporize at a lower temperature. Back when we used engines with
carburetors, this lighter fuel was absolutely necessary for cold weather
starting. But in extreme cold weather, even cars with modern fuel injection
systems may require a lighter mix to run well. So about mid-October, we all start buying a different
fuel. The oil companies love
this because this lighter blend of hydrocarbons weighs less per gallon, and
they can get a few more gallons per barrel of crude oil. But by dumping more gallons on the
market, this bids the price down.
And
of course, we consumers are delighted to have a lower price. But nowadays, a lot of cars are equipped with a digital readout on the dashboard with gives an
instantaneous estimate of fuel consumption in miles per gallon. And as soon as you start burning
winter gas, you notice that the gas you paid 10% less for will also give you
10% fewer miles per gallon.
Why? What happens is that fuel
consumption per pound (or per
kilogram) remains exactly the same, but there are fewer pounds per gallon ( grams per liter). If fuel were priced per pound instead
of per gallon, the price and gas millage would have remained unchanged.
This
change in mass density of the fuel would itself have explained a 10% drop in
price. But by today, the total price
decrease in my area has been about 14%.
The additional 4% is due to the fact that in cold weather, people drive
less. If you live in the
"frost belt", there aren't many things to do or places to go in cold
weather that would actually be a pleasant experience, so people stay home as
much as possible. And with fewer
gallons of gas sold, normal supply and demand factors have depressed the price.
When
we feel miserable, we try to put a face on our problem. We look for an "oil executive in
the woodpile". We
like to identify some particular individual or institution to blame for our
misfortune. But sometimes our
fortunes are tied to the impersonal forces of supply and demand. Do not think I am championing the value
of "free markets."
Having watched market forces all my life, I can assure you that except
perhaps for John Maynard Keynes, no man ever lived who had a lower opinion of
"the market." Schumpeter
believed that markets cause "creative destruction." He was partly right. Market forces are almost always
destructive--but not always creative.
When we say we have free market forces, that is merely a polite way of
saying that we have chaos. There was a time when Saudi Arabia could control the price of crude oil. And there was a time when the US, acting as the world's largest consumer, could also dictate the price of crude. In the 90s, the U.S. broke the price of crude oil simply by using less. But with China entering the market, those days are gone. Today, no one controls the market--it's simply chaos. But with chaos, at least no one is in charge of it.
