Election Gas Price Challenge--Back to the good old days?
The months leading up this election have been interesting to say the least. Financial collapse of banks and lending institutions around the world, one of the most "compelling" and "interesting" elections in history, fires, floods, earthquakes. I'm wondering when frogs will start raining from the skies and plagues of locusts will sweep through Los Angeles. To me this is all normal and expected, but there is something that is less so--gas prices.
If you want to take a really long, really fast road trip or buy an old muscle car and go down to the local 7-11 to do donuts in the parking lot all day long, now is the time to do it. If you've been thinking about experimenting with that 1,000-horsepower gas turbine lawn mower, weed whacker, or wood chipper, now's the time to do it. Now is the time to buy a dozen Escalades and drive them non-stop from Anchorage to Tijuana. Want to equip your tailpipe with a flame-thrower. ...
I'm not a conspiracy theorist, and in the sacred and decidedly
non-political Swiss-like-neutral pages of Car Lust I would never be so
impudent as to assert any speculative reasons behind this peculiar
downturn in the price of gasoline at the pump. But let's just stop for
a minute to consider the situation.
A few short months ago we were all expecting the price of gas to hit $5 per gallon and shoot past that. Gas prices were jumping on the order of $0.15 overnight. But now when the economic conditions of the country and the world are in about as bad a place as they've been in a long time, the price of gas keeps falling. In fact, it's dropping as quickly as it rose a few months ago. Prices in some parts of the country are below $2.30 per gallon. This a week after Iceland asked the IMF to bail out the collapse of their banking system to the order of a $2 billion over two years. This is an incongruity. Honestly, we are pretty lucky that the prices are falling--if they were higher the country would be even worse off. The world would be much harder hit if the price of a barrel of oil was not as low as it is right now.
Some in the industry and financial world have ascribed this to prices
maxing out and causing gas consumers to reduce consumption, thereby
lowering demand, and forcing prices to drop. Others state that dire
financial conditions alone have caused prices to fall.
I'm not completely convinced by these explanations. While they have some validity, is the reduction in consumption and demand so dramatic as to have pushed prices at the gas pump down over to $2.50 per gallon? We are looking at prices that are heading toward the $2.00 per gallon mark. Gas prices were on an upward trend. It seemed logical that the current price of gas would be at or near the maximum. I would have guessed that prices would hover near a maximum allowable level and reduce slightly. I never would have anticipated a precipitous drop in excess of 50%.
We could look at the high prices that were near $5 per gallon as the real anomaly. If that were the case then the $5 was a mistake and there was a correction in the market that reduced prices to a now-appropriate level. Perhaps the $5/gallon price was all the result of speculation or some other freak market occurrence. But everything we were hearing just a few short months ago was that gas prices would keep on rising ... we were seeing the future. I've looked at gas price graphs; the past year's upsurge in price was unprecedented and part of an trend of exponential growth. Reduced supply and increased demand were a given. Could the recent drop in prices be a purely market-driven correction? It could be, and I'm no expert, but I don't buy it. I don't think this is entirely market driven.
Here's why. I have been keeping an informal record of gas price
drops. In the last eight years prices at the pump have dropped a number
of times. In my informal tally, major price drops have occurred in the
months leading up to major or very important national elections.
Following each of those elections, prices of gas at the pump have shot
back up sharply. If you want to play around with this, Google Labs has
an interesting little tool. Unfortunately, you will have to do the
correlation to election cycles. Do I have any well documented data? No,
of course not!
My conclusion from this is sketchy at best. The perceived relationship between gas prices and election cycles could be a complete coincidence. It could also be an indication that market forces are not the only thing that influences prices at the pump, and that there is some kind of secondary effect which overrides the market and sets prices of gas at artificially low levels during election cycles. The common assumption has been that lower gas prices work to the advantage of an incumbent. To appease the mobs of Rome, Ceasar gave them bread and spectacle, the Circus Maximus. Ceasar knew the electorate. Lowered prices of key commodities always plays well with the crowd.
What I want to do with this post is to put a stake in the ground and ask you to chime in. What's your prediction about gas prices? What do you think is going to happen after the election in early November? Will gas prices continue to fall? Will they rise? What's your best guess about where prices will be two weeks after the election, one month after the election, and six months after the election? It may be, as is generally being reported, that prices are falling due to decreased demand because of a very bad hit to the economy.
My belief has
been that prices are artificially pushed down prior to elections and
rise afterwards. This could be completely bogus or it could be dead on.
If it is true then we come to the question of what the mechanism is
that controls this pricing behavior.
On the other hand, if current gas prices are solely the result of a
bad economy forcing reduced consumption, then was the fact that their
fall matched the trajectory of the election a pure coincidence? What
about all those other pre-election price drops... also coincidences? If
this is all purely market-driven then we should see prices for gas at
reduced levels even well after the election--any changes should map to
an overall economic trend that pushes consumption one way or the other.
We won't know for a few weeks.
So now is the time for making a prediction. Idle speculation is always good. The winner gets to feel really smart. In the meantime, I'm wondering where i can stash some cheap gas that I'm about to start hoarding. While gas prices are still low, I'm also looking at some new rides ... what do you think?
--Mochi Mochi
Cookie the Dog's Owner on November 04, 2008 at 06:39 AM
In order to believe that there's a vast conspiracy setting gas prices, you have to believe that thousands--literally, tens of thousands, of people are all agreeing secretly to do something which disadvantages their individual business enterprises, and no one succumbs to the temptation to cheat, and not one of them decides to become an instant celebrity by exposing the whole program.
That's a lot to take on faith. It's much easier for me to believe--much more consistent with human nature--that all we see is an example of price signals in action. Remember when gas was pushing $4 per gallon last summer? The newspapers and the web were full of stories about how gas prices were changing the world around us:
-- Business-section items about Toyota dealers charging premiums for Priussses (Prii?) while the Buick-Pontiac-GMC dealer down the block couldn't give SUVs away.
-- Heartwarming profiles of the enterprising 17-year old science geek converting his mom's Buick to a plug-in hybrid using 2,800 laptop batteries.
-- Chevy Volt press releases--oops, excuse me, I mean completely objective news stories about the coming Chevy Volt, which is simply going to be the greatest car ever!
-- The feature section series on summer vacation trips you could take on less than $20 of gas.
Fuel consumption and auto use declined as the price went up, and people started looking for substitutes. Demand fell, and the price declined to the new equilibrium.
Price signals work. Classical economics gets it right. Imagine that!
Steaming Pile on November 04, 2008 at 06:41 AM
Well, $5 was seriously too damn high. $2 is too low, IMO. It encourages people to go out and buy ridiculously big trucks for no other reason than that they can. And there are plenty of trucks out there on used car lots everywhere; we don't need to buy new if we can't handle the payments. My preference is that the ones that aren't actually needed for truck stuff remain on these used car lots to rust.
Ironically, the main reason we can now have $2 gas is the same reason gas was so cheap toward the end of the 80s - people downsized, either by choice or by being forced to. Sorry, we simply can't waste as much gas in our new Priuses as we could in the Ford Exploders we traded for them. I took the missus to Blue Mountain Lake for a nonexistent antique fair in my Scion xA - about a 200-mile round trip - and paid a little over twelve bucks to fill the tank back up with gas. Twelve bucks, dudes. In July, that trip would have cost me at least $25. Does this mean I get to go out and buy a retired school bus to drive to work? No. I like paying $12 for a long weekend trip a lot better than I would driving something bigger than I need, want, or am accustomed to. The whole truck thing never grabbed me.
I hope the polls are right and we're about to experience a major realignment in Washington. It's overdue, and I'm sure President Obama won't be bending to pressure from Detroit to let them keep classifying station wagons as trucks. At least, I hope not.
Steaming Pile on November 04, 2008 at 06:45 AM
@cookie - while classical economics does tend to work, it takes awhile sometimes for the bubbles to pop. I'm glad the oil bubble did, and I hope the people responsible are broke enough to put them on the bread line. It would serve them right.
Nathan of Brainfertilizer Fame on November 04, 2008 at 08:39 AM
I personally think that there was a confluence of factors combining to drive the price up, and then the reverse that combined to drive the price down.
Factors:
- Oil was seen as a good market to earn money on speculation. More speculation = more price volatility, which means higher highs, and corresponding lower lows.
- China was stockpiling fuel for most of 2008. Partly in case the Taiwan elections caused a crisis, partly to make sure there were absolutely no shortages for the Olympics, partly to build a strategic reserve. That's all over with now.
- We had 3 pretty big hurricanes hit the gulf right in a row, within 4 weeks, IIRC. Maybe it was only 2. But that drove up prices significantly
- Panic. There was a run on gas (much like a run on banks) and parts of the country ran out of gas, which pushed prices higher in those regions, and other regions increased sympathetically.
- Media. Media not only fueled (pun intended) the panic mentioned previously, they really hammered the idea of permanent high prices, of bad economic results, Lousy Days are Here Again!, etc. When you expect prices to be higher, there is less consumer pressure to lower prices
- It was summer. Prices are usually higher in summer due to increased vacation driving, especially heading into labor day. Once all the kids were back in school and no one was going on vacation, it just further decreased demand for fuel
- I don't doubt lots of companies that were paying higher shipping prices due to high fuel costs found ways to streamline.
All of the factors that drove the high price of gasoline all combined, and all those 1%s added up into a significantly decreased demand for fuel.
Back in May, I had a co-worker who was taking some time off to be a welder on several refineries in Louisiana. Since apparently some of the shortage was not oil shortage as much as refinery shortage, having 2-3 (or maybe more, I'm not sure) new refineries come on line mid/late-summer probably helped increase the supply significantly.
I sincerely doubt the government could do that much to affect prices that they didn't already try back in April and May, when those efforts had no effect. The only direct way the govt can reduce prices is to reduce taxes, and while that was proposed, I didn't see it enacted anywhere.
racer-y on November 04, 2008 at 08:43 AM
"to believe that there's a vast conspiracy setting gas prices, you have to believe that thousands..."
You don't have to think that there's a vast conspiracy to believe that the price at the pump is not completely related to demand. I still see SUVs everywhere. People still drive them to work everyday.
It's pretty easy to think that the overall price of gas may rise and fall due to demand and the market, but there's no reason to believe that the companies in control of said gasoline don't pump up the price to extract every last cent from the consumer. All you have to do is drive around and look at the range of gas prices. In a one mile radius the price of gas can change by fifty cents depending on which station you go to. The price at the pump is not purely fixed by the market.
So it's not a big leap to think that if prices at the pump can be so inconsistent, then it must be possible to underprice gas too. ExxonMobil keeps raking in record profits. All they have to do is cut a small amount of that profit to start a ripple effect in their distribution chain. Notching the price up or down slightly does make a difference and your competition has to do the same. That's not a conspiracy that's just how business controls prices outside of pure demand. When you get to control the flow and the prices then a corporation can create demand or shift prices. Do that over a long enough period of time and you get a price drop.
I'm betting that prices at the pump stay the same for the next two weeks. In one month they will be up by 15 cents. Prices will be up 50-75 cents per gallon in six months. The price trends will go in a positive direction from today onward.
Rob the SVX guy on November 04, 2008 at 08:50 AM
OMG GAS PRICES GO DOWN AROUND ELECTIONS! NO WAI!
:P
Seriously... guess what else? They go UP around labor day, 4th of July, and the holidays. Personally, I hope they go back up again just so less people drive obnoxious SUVs, more people climb into smaller, more efficient cars, and manufacturers start delivering reliable, fun to drive cars that can achieve over 30mpg. You know, like Honda did about 20 freaking years ago. High gas prices lead to less weight. Less weight leads to smaller engines, better handling, and more fun behind the wheel. What kind of fun is a 400hp V8 RWD musclecar if filling it up every few days costs you almost $100?
racer-y on November 04, 2008 at 08:59 AM
There are caps on how much a corporation can contribute directly to a candidate or party. There are no caps on how corporations can try to help the people they want get into office if those businesses go outside the system. Big oil has a huge interest in drilling in Alaska... anyone remember who keeps saying "drill baby drill"? It ain't Obama. If big oil wants to make an "off the books" contribution to the election and support their candidate that's freaking obvious and easy. The government does not control gas prices but the oil companies do. Near as I can tell oil men ain't your joe-blow baker or pharmacist. Read a little Upton Sinclair sometime, these guys are smart, ruthless, and freakin powerful. They always have been and then plan to stay that way.
Steaming Pile on November 04, 2008 at 09:01 AM
@Nate - if memory serves, the peak price of gas was in mid-summer, before hurricane season. While hurricane damage might be blamed for prolonging the bubble by a month or so, it couldn't possibly be blamed for causing it. Idiot President Bush buying $120 oil with our money for the Strategic Oil Reserve, on the other hand....
Nathan of Brainfertilizer Fame on November 04, 2008 at 12:45 PM
Nope, the highest gast prices were from Labor Day Friday through about the 15th of September, at least in Illinois, Tennessee, Alablama. That was right before and after Ike hit, and there was a run on the pump, with the highest prices hitting $4.99/gallon. I experienced firsthand that because I was went on 2 long road-trips during those 2 weeks, and had to spend way too much on gas. One from West Texas to Houston and back right after labor day (when Gustav hit), and then one about 10 days later from West Texas up to Kansas City, then down to Alabama by the 14th. It was very distressing to see gas go up each time I had to travel, and the Hurricanes had quite a bit to do with that.
Mochi Mochi on November 04, 2008 at 01:44 PM
hey nate: all the data i'm seeing for national average prices shows the highest prices being reached in early june and flattening off with a few peaks and dips through july. there was a downward trend at the pumps that was well established by end of july to august. prices nation-wide had dropped significantly by september, but there was a small surge around labor day. you may have seen a local increase in prices in the south after the storms, but nationally the averages reflect a different story.
here's a link to data provided by the US gov:
http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp
if we want a statistically meaningful answer to the question we'd need to really take a deeper look at events and prices and align a variety of factors, including season, holidays, catastrophes etc.
the conversation happening here points out how in just a few weeks our perception of the recent past can get kind of fuzzy. and that fuzziness makes it hard to keep track of things. that's why i wanted to put a stake in the ground, here on election day, so if we want to we can look back and see how accurate or inaccurate our understand of gas pricing is.
today on election day the price of regular at the corner of hollywood and vermont in los angeles was $2.75/gal.
prices of gas were rising steadily through the primary election cycle and peaked at the beginning of june, when the primaries ended, then leveled off and began to fall at roughly the same time the candidate field was decided - and the real election campaign began. the prices have been dropping ever since - well in advance of the financial crises. we are now at price levels that are equivalent to 2006 prices.
that price drop trend has become increasingly rapid. it's going to have to stop, level off, and adjust again upward at some point. the question is WHEN. will it be next week, a month, or 3 months from now? it is not possible for it to continue at this rate indefinitely.
i would speculate that if this price decent is market driven then it would continue to fall a little more, roll off, and national prices would stabilize at some relatively low price somewhere not far from where they currently are.
if they don't - if they stop falling suddenly and bounce up into an increasing price trend, that is going to cause me to ask "why"? only time will tell. i'm going to be watching... not because i suspect a conspiracy, but because i am curious and want to know how these things work.
i'm watching the shell station prices. that's my meter. but tonto.eia.doe.gov should be an interesting place to key an eye out too. clearly there are very real regional effects. prices in CA are higher than most places in the nation. prices in San Francisco seem to be higher than anywhere else in the nation - i'm exaggerating, but not by much.
Nathan of Brainfertilizer Fame on November 04, 2008 at 02:09 PM
@Mochi and SP,
Okay, I stand corrected. My apologies for confusing the actual facts with my own anecdotal data. I just figured I saw a large enough sample set (gas stations from West Texas, Dallas, through Oklahoma, Kansas, Missouri (both KC and StL), Illinois, Tennessee, and Alabama) to have some statistic validity. And projected that out nationally.
Then again, I was driving through the areas served by Gulf wells and refineries. It is quite possible that Ike/Gustav didn't hurt the East and West coasts anywhere near as much, and with the increased coastal population numbers, there may have been a spike in South-Middle USA that was higher than June (when I didn't travel, incidentally...but my view was obviously influenced by local gas prices that were still steadily rising right up until the post-Labor Day hurricanes).
And I'm making run-on sentences. But you get my point. And I still acknowledge my error, and apologize for confusing the issue.
From here, I expect gas prices will rise about $.30/gallon pretty quickly, and then go up with normal inflation from there (with spikes and dips, of course).
Owen on November 04, 2008 at 05:40 PM
We peaked in KS in mid-July. It's been under $2.00 for five days.
The peak was a speculative bubble, $2.00 is a recovery. It'll go back up before too long, but not to anywhere near the peak.
Brian on November 05, 2008 at 03:48 PM
Uh, isn't there a possibility that commodities traders are intentionally not bidding up oil, thus keeping the price down in an effort to not strangle the struggling economy? Anyway, now's possibly a good time to buy... stocks in car companies which were recently at an all time low. Take that cash you were going to use to buy an old rusty beater, and buy a portion of an old rusty beater manufacturer?
Mochi Mochi on November 07, 2008 at 02:02 PM
the price of gas at the shell station dropped from 2.73 to 2.63 during the day on election day. for three days running the price has stayed stationary at $2.63. just watching...
alex on November 10, 2008 at 02:30 PM
Well I went ahead and hedged my gas for next year at petrofix.com. Gas is $2.15 here so I am pretty happy that I won't be paying any higher than that for the next year.
Mochi Mochi on November 12, 2008 at 04:18 PM
one week update: prices have continued to fall at the shell station on vermont ave. the price of regular was $2.45 last night. it's been stable at that rate for a few days.
Mochi Mochi on November 20, 2008 at 11:10 AM
two week update: prices have continued to fall and are now at $2.25 for regular at the shell station on vermont. that's a $0.20 drop per week since the election.
Mochi Mochi on November 21, 2008 at 12:30 AM
oh and then by thursday evening the price dropped to 2.17.
Mochi Mochi on December 05, 2008 at 02:28 PM
one month has passed since the election. the price of gas fell to 1.87 at the Shell station. The cost of a barrel of oil fell to it's lowest point since 1985... some thing close to $40 per barrel. clearly any expectation that the falling prices were anything other than market driven in the period leading up to the presidential were unfounded.
one month ago i never would have expected a continued drop, about $0.90 in one month.
Mochi Mochi on January 05, 2009 at 08:49 AM
in mid december prices at the shell station hit a low of $1.63 for regular. about a week later they bounced back to $1.71 and have hovering around $1.75. As of the 4th of January the prices crept up to $1.81.