Friday, January 19, 2007

Dropping oil prices provide economics lesson

Usually, the Houston Chronicle's Brett Clanton is a better business writer than this. However, he appears to have bent under the pressure of those hell bent on bashing "Big Oil". Here are some key grafts from this article:
Crude prices continued their downward slide Thursday, ending near $50 a barrel, in a move that should bring drivers more relief at the fuel pump. But they shouldn't expect the savings to come overnight.

Gas-station owners — many of whom were quick to raise prices when crude shot up to nearly $80 a barrel last July — have been taking longer than usual on the way down, industry analysts said.

Gas-station owners, many of whom are independent business people, are the ones who ultimately set the retail price of gasoline.

As with any business that bases rates on the ebb and flow of wholesale prices, gas-station owners are slow to lower pump prices because they want to hold on to the highest profits for as long as they can, said Steve Boyd, senior managing director of Houston-based Sun Coast Resources, one of the largest gasoline wholesalers in U.S.

"If you were an independent businessman, you'd probably do the same thing a little bit," he said.

Gas-station owners also may be keeping extra padding in prices, because there's always the chance wholesale prices will suddenly turn upward, analysts said.

Shoukat Dhanani, who owns more than 50 gas stations in the Houston area, disagrees with both of those ideas. The biggest factor in determining pump prices, he said, is what rivals nearby are offering. There is no competitive advantage in keeping prices high, he said, because lower prices bring in customers.

"When (crude) prices are coming down, everyone wants to be the first on the block to lower prices," Dhanani said.
And then the obligatory quoted from clueless Americans:
Several drivers interviewed Thursday said they would be happy if falling crude prices pushed pump prices lower.

"When you got a car that sucks gas like mine, it's nice to have gas prices go down," said Chad Evans, a Houston gym owner who was filling up his Chevrolet pickup for $2.18 a gallon at a Chevron on Kirby.

Maria Rojas, a dentist who commutes everyday from Sugar Land to Houston, said she doubts falling crude prices have anything to do with what she sees at the pump.

"It's never going to affect the gas prices because the oil companies are going to keep their revenue and we will always have to pay higher prices," she said.
Two points:
1) The retail gasoline market is one of the most perfectly competitive markets in the world.
2) The cost of most products in the market place are completely disconnected from the cost to make them. Prices are set upon the value they bring and the competitive environment.

This is why I think economic and business education is so lacking in this country. This is why we will end up serfs to government who will "make everything OK" instead of learning to think for ourselves.

Sorry Brett, you have done us a disservice with this article.

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