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By Robert Rapier on Nov 13, 2006 with no responses

A Case Study in Cluelessness

I saw a familiar name today in a news article, which I will get to in a bit. I was reading an article from the Sacramento Bee that said that gas prices may have bottomed out. (I won’t link to the article, since it requires registration). I have been saying that gas prices couldn’t fall much further based on weekly EIA inventory numbers, and were poised to rise. Gas pricing is pretty simple, really. You basically have to watch gasoline inventories, which are reported every week at:

This Week in Petroleum

If you want a very reliable indicator of which direction gas prices are headed, watch the gasoline inventories graph. When inventories are plunging, as they were in the first quarter of this year, gasoline prices are headed upward. They have to in order to bring supply and demand back into line. If prices did not rise, then we either run out of gas, or we have to count on European imports to make up the shortfall. But if prices don’t rise, there really isn’t much incentive for European refiners to ship their gasoline to the U.S. So, falling inventories usually mean rising prices, and vice-versa.

Gasoline inventories started to rise sharply in September, and prices fell in response. Conspiracy theorists everywhere started suggesting that oil companies were manipulating prices to influence the election. Ha! They simply don’t have that kind of stroke. ExxonMobil, which we think of as the behemoth of oil companies, controls about 3% of world oil production. They just can’t dictate pricing on global commodities like oil and gas.

So, what happened when prices fell? Demand picked up as personal budgets weren’t quite so constrained by gasoline prices. As demand picked up, gasoline inventories went into free-fall. The inventory draw started near the beginning of October, and up to this point has showed little indication of slowing. This has led me to comment at The Oil Drum (and a number of posters agreed) that gasoline prices would have to rise in response unless this trend reversed itself pretty quickly. This is simple supply and demand.

So, back to the familiar name. I was reading the Sacramento Bee article, and I came across this gem:

Some 42 percent of Americans believe the Bush administration somehow drove gas prices down to help Republicans in the elections, according to a Gallup Poll last month. Democrats were far more likely to believe the theory than Republicans, the poll said.

“There was a political motive to keep gasoline prices low,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “Now that the election’s over, we’re going to see prices going up. … Oil companies are going to go back to artificially shorting the market.”

Court’s cluelessness has been documented before in this blog. Twice:

Another Uninformed Consumer Watchdog

And

Inventory Management

First, we have the fact that Court believes that gasoline should be less than $2 a gallon for everyone. Yes, wouldn’t it be great if we could all use up our gasoline reserves just as quickly as we can, while producing loads of greenhouse gases in the process? Somehow I bet that Court wants cheap gas and a reduction in greenhouse gases.

But as I documented in one of the essays above, I am not alone in thinking Court is out of touch with reality. The California Energy Commission studied the pricing issue in California, and concluded:

The report, by the California Energy Commission, puts down refinery outages leading to a supply squeeze, coupled with a surge in exports, as the key factors behind record high prices in the state this year.

The lengthy report cites a stunning number of planned outage days at California refineries in the first six months of 2006 compared with same period last year – 175 vs. 58. Most of the unplanned outages, comparing the same periods, lasted twice as long this year.

Also, it found port congestion a factor, as well as high additives costs and the introduction of the new ultra-low-sulfur diesel fuel (ULSD).

It dismisses the notion held by some that pump prices dashed to $3.33/gal because refiners practiced price gouging (dubbed goug-onomics by some consumer groups).

The extended refinery outages in 2006 were a result of delayed maintenance in the fall of 2005, as refiners had to keep making gasoline when Hurricane Katrina knocked a lot of production offline. Of course Court wasn’t about to let something like facts get in the way of his preconceived notions:

The Foundation For Taxpayer & Consumer Rights, an industry watchdog, called the CEC’s findings a “whitewash.”

“Oil companies are ripping off Californians in exactly the same way electricity profiteers did by artificially shorting the market,” snapped FTCR President Jamie Court.

All I can say to that is that a basic understanding of economics is clearly not a prerequisite for the presidency of FTCR. If I had a watchdog that displayed such a stunning level on incompetency, I would drop him off at the animal shelter. I don’t know why anyone would ever take this guy seriously.

A closing caveat. I don’t mean to imply that pricing is entirely dictated by inventories. As I have written previously, the transition between summer and winter blends also has an impact, as do gasoline imports and some other assorted factors. But you will find the strongest correlation with gasoline inventories (and the price of oil, which is correlated with crude oil inventories).