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Friday, March 9, 2007

Recurring conspiracy theories

Gasoline prices are rising. Soon customers, reporters and politicians will shout "conspiracy." It happens every year; every year the price rise is explained, and every year conspiracy theorists need another explanation. Here it is:

Environmental law requires different (less volatile) "summer gasoline" to keep emissions down.
That must be the only gasoline in every service station by the end of April, so production, pipelining, tankage and shipping must all contain only that formulation by the deadline.
To shift from winter gasoline, refineries are recalibrated to work differently, and use different combinations of additives, etc; that process begins in March.
By the deadline, all service station tanks hold pure summer gasoline (government tested and certified).
The end of the winter fuel season eases the refinery recalibratons; inventories are sold off as production and prices go down.
When stocks are lower and demand is higher, prices go up (good old supply and demand) for gasoline; they continue to drop for heating fuel as demand drops.
Harder-to-make (more expensive) summer gasoline fills refinery and service station tanks as there is more and more driving in the US.
Gasoline demand rises until late August or September; gasoline prices peak as demand peaks, then both begin to fall (cause and effect).
Then it's time to reverse the cycle; as summer driving wanes, winter heating fuel demand becomes greater and winter gasoline must be made (to avoid freeze-up problems in many areas), and refineries are recalibrated to do all these things.
Gasoline prices go down; winter gasoline is cheaper to make and ship; heating fuel prices, of course, go up to meet demand and ensure that there are no shortages.

There are other reasons for prices that are higher: booming world demand sustains higher prices to attract supply; so OPEC has set a higher price; the war and other international events add some uncertainty about supply; the possibility of international supply interruptions, speculators, etc.

Any refinery glitch, major pipeline damage, or even slower Mississippi or Ohio River navigation due to late ice can create local or widespread supply problems; it happened on a huge scale with Hurricane Katrina. When those things happen, prices rise to attract supply in response to local shortages, and there are no lines at service stations nor shortages of fuel.

It works, because government is not setting prices or dictating supplier-customer relations and quantities to be delivered to which stations. They do that in centrally-planned economies and they did it in this country in the 1970s. Without that interference we had higher prices, but no lines after Katrina nor after other recent pipeline or refinery problems.

We will probably hear calls from Congress about investigations and cries from self-proclaimed consumer advocates who want investigations and price controls. But in the 1970s we were the only nation in the world with gasoline lines. Let's remember Economics 101 and our own history and reject the folly of such government behavior. It does not lead to unexpected consequences; it leads to economic consequences. It's no conspiracy; it's Economics 101.

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