More background https://www.bloomberg.com/opinion/articles/2022-05-09/crude-..."From 1985 to 2021, the crack spread averaged about $10.50 a barrel. Even between 2004 and 2008, during the so-called golden age of refining, the crack spread never surpassed $30. It rarely spent more than a few weeks above $20. Last week, however, the margin jumped to a record high of nearly $55. Crack margins for diesel and other petroleum products surged much higher. "
That is with the coordinated SPR release. But sure, believe it's the invisible hand and the Jones Act!
(This is a clarifying question, not an oppositional one) -- would a potential response to a gap between crude and pump prices be lack of refinery supply? How are we able to rule that out? Or is it completely obvious?
Maybe because nobody is going to invest megabucks longterm to create capacity only needed in the short term? (and may not even be needed)
In the chart linked here [0], section "Gasoline stocks (million barrels) and days of supply" each Petroleum Administration for Defense District has had flat supplies, indicating no especial need for additional refining capacity. In "US Regular All Formulations Gas Price/Consumer Price Index for All Urban Consumers: All Items in U.S. City Average" [1] the CPI adjusted cost of gasoline is somewhat high but still below where it was 2011-2015.
The newest large refinery built in the US was completed in 1976 in Garyville, Louisiana. Since then, while some existing refineries have expanded, new refinery construction has faced significant barriers in environmental regulation, permitting, and local political opposition.
Any company that could refine oil faster would be able to make a ton of money by doing so. Do you have evidence for this grand conspiracy? How do you suppose it avoids the usual free-rider problem?
Competition is the mechanism that lowers prices. No one can afford to pocket the difference. That's why despite airplanes becoming extremely fuel efficient over the last 50 years, ticket prices keep dropping.
> Why don't airlines simply pocket the difference??
I think they did, AA has a market cap of $8B and they spent $12B on stock buybacks from '14 - '20. Looks like all other domestic airlines did similar.
> That's why despite airplanes becoming extremely fuel efficient over the last 50 years, ticket prices keep dropping.
I think they just rearranged their profit centers. Having good prices, flight coverage, loyalty program & interchange agreements are the core product offering but they'll happily use them as a loss leader for the revenue from their agreements like branded credit cards via Citi & Barclay.
A large market cap and significant profits don't imply large profit margins. Look at Walmart for example: their market cap is over $300B but their net profit margins are in the 2-3% range.
> AA has a market cap of $8B and they spent $12B on stock buybacks from '14 - '20.
In 2014 their market cap was $35B [0]. Pandemic aside, it looks like they are steadily winding down their business. That makes sense if the company doesn't see any opportunities for growth--shareholders can migrate to investments with upside. Despite market cap shrinking by 2/3 they kept earnings per share relatively flat.
Without necessarily agreeing with the GP, flights are an elastic good and have a notion of an optimum price - airlines may have continued to make greater profits by making tickets more accessible. Fuel is relatively inelastic, and may have less pressure to lower prices to increase profitability.
It's possible to explain price fluctuations without competition, and large parts of the public don't have a lot of faith in competition as a market force.
Airlines certainly don’t make more profit with reduced ticket prices. If the oligopoly wanted to force consumers to pay premiums for tickets, they could, but the industry is largely competitive. The privatized airline industry is often a money pit. Even OTAs make a small fraction of their revenue from air travel.
The oil companies are price-takers, not price-makers. That is: the market for oil is competitive enough that no oil seller can unilaterally have much effect on the market price, and collusion between multiple sellers (most notably OPEC) hasn't had significant effects on price since the 1980s due to rampant defection among the member countries.
Oil prices are determined by the reality of how much oil is produced and how much is used. This is exactly what you would expect in theory from a global commodity market with many sellers and easy shipping, and it's what you see in practice. I'm not sure what gave you the opposite idea.
(Minor caveat: this argument applies to oil but not natural gas, since the latter is much harder to ship in a dense liquid form, and the markets for it are correspondingly smaller and more geographically local.)
You imagine that there's someone out there pumping oil who isn't doing it for greed? Greed is the one constant in the system. If fuel prices are going up, it's not because humans are suddenly more greedy than before.
> Fuel prices have no tie to reality, they are tied to greed.
Absolutely, greed is the only factor worth considering. But of course, greedy people can't just charge $300/gallon so no one would buy it. They do at least have to consider how much people are willing to pay.
And I guess how much it costs to acquire. And also I guess war makes it harder to acquire and more in demand.
And then deal with other greedy oil companies undercutting them. (Oops, wait, we just invented a completely rational market!)
If only they could do what the generous and benevolent US shipping industry did and ban all greedy competitors.
(I'm sorry, but the logic here is kind of hilariously weird to me.)
That’s ridiculous. If shipping prices are higher, production/distribution HAS to be more expensive. It’s not an option.
If transportation costs decrease, a business has an option to lower prices accordingly. If they pocket the difference, a competitor can sell for cheaper.
Your argument implies that transportation costs do not impact consumer price…think about that for a second.
When I was boarding tankers regularly, if you get hungry they are very generous with the food and I liked the US vessels especially well not just because they had a wider variety of familiar items 24/7.
When you think about it the big marine fuel terminals are scattered but concentrated in two different kinds of places.
The producers, and on the other hand the consumers.
>This is especially challenging for residents in Alaska, Hawaii and Puerto Rico, places where imported goods are more expensive because of Jones Act expenses.
The islands like Hawaii and Puerto Rico are consumers and have no option other than ships. Their docks are primarily "import" terminals even when the cargo originates in the US mainland.
And all goods are not gasoline.
On consuming islands every non-native consumer item has always been expensive because it's all "imported" by ship from somewhere. The Bahamas may not be US islands but imported things are high-priced like Hawaii since the Bahamas dollar is exactly tied to the US dollar by design. The Bahamas is not bound by the Jones Act but they always have higher gasoline prices than Hawaii, so there is that. There's no physical reason that shipping fuel from New Jersey to Palm Beach could not be accomplished with the exact same expenditure of labor & equipment compared to shipping from New Jersey to Freeport GBI. Interestingly, when the Bahamian refinery was operating on Freeport (using imported oil of course) they did not even make gasoline then, only other fuels.
Alaska is not quite like the others since it ships out so much crude oil but that is not gasoline. It is not an island either but it is also discontinuous with the US, and still about as remote as the US islands. The vast crude oil resource makes this location a net marine exporter though. But retail gasoline ends up about the same price as Hawaii.
There is a baseline cost to marine shipping and beyond that freight charges are a matter of distance & location.
Florida Man here to remind you the southernmost state's not too nearby either, and the further you go toward Miami, the greater the consumerism.
What would happen is that a constant movement of US-flag fuel tankers from New Jersey refineries would transport the fuel to the Florida ports of Jacksonville, Canaveral, Palm Beach, Everglades, Miami, and sometimes as far as Tampa, and that's not very close to New Jersey. The same major refining companies also supplied fuel shipped from Texas or Louisiana, sometimes to as far as Jacksonville. It still works quite a bit like this.
At the time, there were more Florida power plants burning fuel oil than there are now, and they were the same traditional kind of power plant that there were a lot of in Texas. However the retail price of electricity per KWH was literally twice as much in Texas as it was in Florida. And when you do the math, the power companies in Texas were able to obtain similar long-term bulk supply fuel pricing compared to Florida, but there was no marine shipping cost on top of that for the Texas electricity producers. Regardless, electric companies were making money in either place.
This was before utility deregulation had made as many inroads, and I can only attribute it to a Florida government attitude that had still retained its traditional consumer-protection approach more so than Texas. With 20-20 hindsight both have gradually reversed by now into more of a predatory government approach rather than protective role.
There's also the jet fuel which is B2B too, but the gasoline & motor diesel parcels are the shipboard liters that are intended for "eventual" retail sale, and of course that's ASAP after unloading the vessel.
As we know the retail price of gasoline in Florida has never differed very much from that in Texas. Since fuel can also be brought to Florida by rail or truck, that may have something to do with it, but they sure use lots of US-flag ships and ocean-going barges too so you would have to figure they have all been making money the whole time.
Among things that have swayed the price of gasoline even now, the Jones Act does not seem to have been one of them.
Looks like there's got to be somebody somewhere who would prosper greatly by repeal of the Jones Act, but it's probably not the vast majority of retail gasoline consumers served by US-flag fuel tankers now.
That's not how it works, it's not how any of it works.
Savings are pocketed as profit.
Fuel prices have no tie to reality, they are tied to greed.