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By Robert Rapier on Nov 20, 2006 with no responses

Gas Prices, Gouging, and Food versus Fuel

A few newsworthy items to cover: Gas prices, gas gouging legislation, and food versus fuel.

Gas Prices on the Rise

Surprise! It seems that gas prices are rising:

Gas prices on the rise again, analyst reports

Gas prices are on the rise again, just as Americans hit the highways for Thanksgiving.

Gas prices rose about 5 cents per gallon nationwide compared to two weeks ago, industry analyst Trilby Lundberg said Sunday.

Of course if you read this blog, you knew this was coming. I have made this case in two recent essays, and I have been saying this at The Oil Drum for about a month:

A Case Study in Cluelessness

This Week in Petroleum 11-15-06

Gasoline inventories are being sharply pulled down for three primary reasons. First, demand has picked up as prices have fallen. Second, gasoline imports fell off as prices dropped and European refiners saw profit margins fall on exports to the U.S. Third, we are in the middle of fall turnaround season, when refineries shut down for maintenance. All of these factors are causing gasoline inventories to free fall, and that situation can’t continue, regardless of how the elections turned out, unless 1). Imports make up the difference; 2). Prices rise to slow demand; 3). We start rationing product; or 4). We just keep going like this until stations start to run out of gas.

Keep a close eye on the inventory report this week for a hint of which direction prices are headed in the short term.

Price Gouging and Fuel Supplies

A couple of days ago the following article was highlighted at The Oil Drum:

Congress seen passing price-gouging law

Some excerpts:

WASHINGTON – The head of the Federal Trade Commission predicted Thursday that Congress would pass a gasoline price-gouging law despite her warnings that the country doesn’t need one and it might cause fuel shortages.

FTC Chairwoman Deborah Platt Majoras said she has warned Congress publicly and privately about the dangers of such a law.

Majoras said she understood the public’s frustration and concern but said an upcoming FTC report on the price spikes found that consumer demand was up at the time.

“There is a distinction between a market determination you don’t like and a market failure,” she said.

Testifying in May before the Senate Commerce Committee, Majoras said retailers might let the gas run out rather than raise prices and risk facing prosecution. She noted the price spikes after Hurricane Katrina last year resulted in more fuel getting to market.

I commented on the story:

I think this is likely with the new political climate, but this is very short-sighted. What they don’t seem to realize is that if prices are frozen during a Katrina-like crisis, then rationing is the only other option. I think most people would prefer to pay more for their gas (rationing by price) than for everyone to be told they are only getting 75% of the gas they would like.

I generally get some negative feedback any time I write anything in defense of the oil industry (like this example), but one poster provided the following feedback:

Several years ago the Canadian province of Prince Edward Island implemented a similar scheme to set fixed gas prices for specific periods in an attempt to prevent price “gouging.”

The outcome was as described in the RR blockquote. Gas prices did not rise; there was also no gas available anywhere on the island and no plans to import any.

The legislation was repealed.

Anyone who understands the first thing about economics knows that this has to be the outcome. If you can’t raise prices when demand is high, then we have gas lines, rationing, and ultimately no gas. I don’t know if this is the solution they want, but it’s what they will get.

Food versus Fuel

Many ethanol advocates argue that increasing the amount of corn that is going toward ethanol production is not an issue. However, it is certainly an issue for the people who have relied on those corn imports, and are now watching the price rise. Today, Tyson Foods weighed in on the subject:

Tyson Foods Sees Higher Meat Prices

“The best thing I can say about fiscal 2006 is, it’s over,” Richard L. Bond, president and chief executive officer, said in a statement.

Bond said the price of corn, which is used as animal feed, is going up because of demand from ethanol plants that are springing up to provide alternative fuel sources to oil.

Corn prices recently reached 10-year highs.

“I believe the American consumer is going to have to pay more for protein. We are at new levels on corn that are not likely going to be retrenching back to ’06 levels,” Bond said in a conference call with analysts.

Bond said meat producers, processors and retailers will have to pass the higher grain price on to consumers because they cannot absorb it in their profit margins.

“Quite frankly the American consumer is making a choice here. This is either corn for feed or corn for fuel, that’s what’s causing this,” Bond said.

Of course food versus fuel is a serious issue going forward. How could it not be? Some people will pay more for food so we can put inefficiently produced ethanol in our vehicles, and some people will have to start making some tough choices as budgets are stretched.