Consumer Confidence and Gasoline Prices
Well, it looks like the high gasoline prices are not upsetting consumers all that much.
Consumers shrugged off higher gasoline prices in April and sent a widely watched barometer of consumer confidence to its highest level in almost four years, a private research group said Tuesday.
Why? Probably because we have seen prices go even higher in the past and our economy is more fuel efficient now. In short, oil prices would have to go higher than they did in 1980 to have a similar impact. Back in 1980, when gasoline prices were $38/barrel, the equivalent price would be a little over $92/barrel. While our consumption of oil gasoline has gone up by about 28% since 1981 (using 2005 as the final full year for comparison), the U.S. GDP has more than doubled over the same time period. The implication is that we use less oil than we did before per dollar of GDP.
Still, this doesn’t mean that gasoline prices are irrelevant. After all, a price increase in any good entails both an income effect (part of the price increase has a similar effect to lowering income) as well as a substitution effect. Too bad Lou Dobbs just doesn’t seem to understand any of this though.
Update (4/26/2006): I edited the part about consumption of oil to gasoline and changed the final sentence to include the “per dollar of GDP” portion. That is our economy is more fuel efficient.
I also looked at crude oil data from 1991 and 2005 and there is a similar relationship between oil and GDP as well. Oil consumption went up 27%, but GDP increased by 57%. That is we use less oil per dollar of GDP now than we did in 1991.
How unbelievably disingenuous.
The name of that “private research group” that put out the study that you cite is The Conference Board – a BUSINESS ADVOCACY GROUP – hardly an independant or unbiased source.
These bogus figures crowing that $38 a gallon was “really” $92 a gallon when you adjust for inflation have, like most urban myths gone viral and are all over the Internet.
All you need to do is a quick google to find out what an absolute load of BUNK the math behind it is.
It’s amazing to me than a normally educated and intelligent guy like you Steve can’t get their mind around the very, very simple fact that :
Because Big Oil controls the capacity to refine, they control the “SUPPLY” side of the “SUPPLY AND DEMAND” equation. Like an obnoxious little fat twerp with their hands around the backyard garden hose – they can crimp that hose and shut off the supply any time they feel like it – driving down availability, destabilizing the market, and blowing profits through the roof.
It’s really just that simple.
Every night I THANK GOD FOR LOU DOBBS because he gets on one of the highest rated financial shows and calls out the Randian Wing of the Libertarian party. He’s not afraid to call people like you what you really are.
Free Market Extremists.
Free Market At ANY COST.
Americans are losing their jobs at a frightening rate to off-shoring and corporate misbehavior. TOO BAD – FREE MARKET!
American Business are financing regimes that almost certainly don’t have America’s best interest at heart. TOO BAD – FREE MARKET!
Big Oil is hurting the consumer at the gas pump and lowering income across the board. TOO BAD – FREE MARKET! $5.00 a gallon gasoline is a GOOD THING!!
And THAT’S why you hate him.
And that’s why I admire him.
Atta Boy Lou.
Per gallon prices:
Chanel No. 5 Parfum: $45, 056
Revlon Nail Enamel: $983.04
Visine Advanced Eye Drops: $741.12
Vicks 44D Cough Syrup: $96.67
Coppertone SPF 45 sun-block lotion: $90.11
Pepto-Bismol: $58.52
Evian bottled water: $21.19
Get a grip!
The Conference Board has a pretty fine track record at putting out economic indicators. So unless you have anything other than this type of ad hominem, you are just blowing hot air.
This is just outright stupidity Mac. Get a clue, when comparing dollars over time you adjust for inflation. Even your pal Lou Dobbs would have to admit this…either that or he is a bigger idiot than I initially thought.
Sure refineries have market power. But their profits are not “through the roof”. Scroll down to Jame’s post that shows the profits for oil companies averages about 8%.
Yeah, it sure is extremism to let people enter into transactions as they see fit. So much better to have somebody else tell people what to do. Sheesh.
Oh and hey Mac, how did I know it was you from the first sentence? Maybe it is because your come across as a lick spittle sycophant of Dobbs. Sheesh.
Maggie: The only one of these that makes any sense is the water. When sunscreen becomes so important that the price of it affects the economy, it will be an apt comparison. Until then, it makes no sense to compare gasoline to something that you might use one bottle of the entire summer.
I don’t know. With things going the way they have been the per gallon price of Pepto Bismol may be important to me by the end of the summer.
Steve, I completely agree with your conclusion but not entirely with the implications of the way you get there. I think, as previous commenters have implied and as I take the real significance of your post, that gas is relatively cheap. However, the real question of the day is why, if the price increase is of little concern, are pols leaping into the breach? I think that one of the reasons that consumer behavior isn’t changing (as it should and must) is that pols are giving the wrong signals. We aren’t going to increase the supply of oil quickly enough for it to have much impact on prices; tinkering with the SOR is exactly the wrong thing to do as is reducing the federal gas tax (the president’s and the Democrats’ trial balloons, respectively).
Let’s consider whether the increasing price of oil (which isn’t that phenomenal as you note) or our increasing dependence on oil imported from unstable parts of the world is of greater concern. If the latter then we should let the prices rise (and even increase gas taxes). If the former we’re going to need to stabilize these areas quickly.
steve ; you can argue whether it’s justified, but their profits are quite aptly described as “through the roof”. at xom the margins are the highest in history.the profits alone for the past year were the highest of any corporation in history [even adjusted for inflation],their words , not mine. their profits were greater than the gdp of 118 of the countries that report figures. the profit from the 250,000bpd refinery where i work averages $2,000,000.00 per day.
Floyd, do you know what the phrase “profit margin” actually means?
From this article in the ECONOMIST (a BIG friend of Ayn Rand Libertarians)
Alan Greenspan calling out the Conference Board for what they are, and calling their Leading Economic Indicators exactly what they are. USELESS. There’s your ‘ad hominem’.
Of course you adjust for inflation, I never once claimed you don’t, and you know that. But you do it properly. In 1966 a gallon of gasoline was 32 cents. Today it’s $2.78 a gallon. You don’t have to be FELLINI to figure out that the math behind the “it’s cheaper NOW” whine is BOGUS.
Dude… if you can look at Captain Neck Waddle’s 400 MILLION dollar bonus, and the other stories circulating from most of the major news outlets (some cited by your readers here) and actually let the words “their profits are not ‘through the roof'” come outta your mouth… then… you’re beyond reach. Truly.
That’s a fair cop. I love the little bully. You can call him an “idiot” all you want, other’s have called him a “terrorist”, a “liberal”, a “xenophobe” and even “Fat Bastard”.
He’s a critical voice speaking out against corporatism, Free Market Extremism, and our broken borders.
I never miss a show.
I saw Slim Pickens, oops, Boone Pickens on CNBC today where he was saying $5/gallon for gas was a good estimate, and he didn’t know how high oil prices will go. Maybe $80-100/barrel. His oil predictions have been correct, but his Kyoto greenhouse futures have been a loss.
I watched President Bush’s speech today, and his Hydrogen economy stuff does not pass simple thermodynamics. Hydrogen is NOT an energy source, it is an energy conduit (like electricity, something has to make the hydrogen).
Mac, I know it’s your style, and makes you who you are, but your pejorative-laced ad hominem comments undermine your points.
Such as: It would appear that The Conference Board may not be the best at making economic predictions. But let’s call it a wash, since it can really only devolve into finger pointing and you and Steve calling each other ugly. Or something like that.
32¢ in 1966, adjusted for inflation based on the CPI, would be $1.87 in 2005. It would have been nice if you’d substantiated your debunking of the “gas is cheaper” claim rather than insulting those of us who really didn’t know what the calculation would yield.
I’ll take issue with your focus on raw dollars (and your pointless ad hominem about the former ExxonMobile boss), conveniently ignoring factors of scale.
While we can argue until the cows come home about the retirement payout, folks give themselves over to emotion rather than rational thought when they focus only on the dollar amount of “Big Oil” profits and ignore their profit margin. Why should an industry be forced into an artificially low profit margin? Don’t you think that would tend to push investors out of that industry and into others with higher margins?
You’d have a hard time convincing me that that’s anything short of government-sanctioned theft, Mac.
I agree with Mac. The Big Oil Companies completely control the supply of oil and gasoline and therefore they control the price.
All of you big time economist can shout about free market enterprise, supply and demand and whatever excuse you think of, but the fact remains that there is an ample supply of oil on hand now and the price of oil and gasoline today is not justified.
The consumer confidence report is at least a month old and does not reflect the true consumer feelings. When Mr and Mrs Average American purchases a loaf of bread or a gallon of milk and the transportation cost associated with the price has its effect on these products, then let’s see where that confidence goes.
If you start thinking about the “last bastion of freedom the American people enjoy”, is being taken from them by the outrageous price of gasoline, then we will see what the American people do. I’m betting they will demonstrate their anger at the election booth. I said on OTB several months ago, that the future of the Republican Party will be decided on the price of a gallon of gas, and that is turning out to be true.
No matter how you look at it or how you explain all the theory’s about the economy or defend the consumer confidence or the Free Market enterprise system, the price of the average Americans freedom is the price of a gallon of gasoline.
Americans have a very long history of their love for the Automobile and when that is threatened by anyone, then there will be hell to pay.
Regarding the notion that the oil companies completely control the gasoline prices, this is quite simply false. The oil companies at best have some control over the supply part of the market. They have virtually no control over the demand side. When prices go up, people consume less and prices come down. We can see it here in this post. Demand dropped off after Katrina precisely because people forsaw the increase in prices if they didn’t cut back.
As for the profits and profit margins of the oil industry, the problem many commenters seem to be having is that it is a huge industry. Think about 100,000,000 people driving virtually everyday the numbers start to get large really quick. Sure in just dollars the numbers look ginormous, but so is our economy. This is why we try to compare things like profits to revenues, to the size of the econommy, gasoline expenditures to overall consumer expenditures, etc. Looking at just one variable can give a misleading result.
First off, yes you did strongly imply that we shouldn’t adjust for inflation. You quite clearly stated that such comparisons are in your words an urban myth that has gone viral. As for your $0.32/gallon in 1996 in today’s dollars that is $1.97/gallon. So yes, today gasoline is more expensive relative to 1966, but the difference is $0.81/gallon.
As for being cheaper now, are you being purposefully dishonest here? I didn’t say gasoline today was cheaper than in 1966, but that it was still cheaper than in 1981 when we had some the highest gasoline prices in our countries history. We haven’t passed the historical maximum price, yet. That is what I was quite clearly talking about. Picking some other date and then saying I’m wrong is simply dishonest.
This is your evidence? This is the best you got? I’m sorry, but comparing executive compensation to profits is not exactly a good measure. For example, if the critics are right that executive compensation is out-of-line, then it is a piss poor measure. Further, there could be reasons other for the high compensation. For example, the national average for oil companies is around 8%, and ExxonMobil seems to be around 10%. Perhaps that extra 2% (which is worth billions) is justification for the enormous bonus.
And you can’t run away from the 10k data. It paints a picture of where oil companies, on average, have a lower profit margin than quite a few other industries.
Dave,
I think the reason politicians are jumping on board is due to the following explanation.
1. Gasoline prices are going up.
2. Consumers feel the pinch and don’t like it.
This creates an opening for opportunistic politicians to come out with messages of what they plan to do about the gas prices. Basically it is an “I care” strategy that James outlined in his post down below. Generally, it does damn little (e.g. Nixon’s price controls).
Steve:
when are you going to wake up and forget all your theory’s, charts, graphs and excuses for the oil companies. No matter how you look at it, the oil companies own and control the refinery’s and they control over 60% of the oil we buy here in the US. The plain hard fact is that “The oil companies control supply”
When you control supply, you also control prices. It doesn’t take an atomic scientist to figure that one out.
Steve you should get out of the land of winkin, blinkin and nod in California and get into the heart of America to see how propel really feel.
Herb, 60% is not 100%. That isn’t any kind of fancy schmancy theory it is just simple arithmatic. And yes, controlling the refineries and the current state of our refineries and regulatory environment gives the oil companies quite a bit of market power. However, it does not mean that they can raise the prices to whatever they want. If the above were true why not set gasoline prices to $5 or even $10 a gallon and really rake it in?
Steve, I think you know that I’m generally in agreement with you on this subject. However, I think we need to keep in mind that there are forces other than supply and demand that govern pricing, particularly when dealing with cartels (or even oligopolies).
Fear of regulation (or, in some cases, de-regulation) can be as powerful a force as supply and demand in controlling prices. For example, IMO that (rather than supply and demand) is what prevents physicians and hospitals from raising prices too fast even though there’s an obvious supply bottleneck in health care delivery.
However, in the case of oil the price of oil responds so quickly and so uniformly around the world to various market changes that market forces provide a better explanation for why the price of oil is what it is than collusion or fear of regulation.
Dave,
Even an unrestrained cartel will act just like a monopoly. And guess what, the monopolist isn’t going to charge the highest price possible (this would entail selling a single unit of the good). The monopolist is also constrained by the demand curve. That is the monopolist is going to set the price so that marginal revenue is equal marginal cost. Any higher and profits go down. Any lower and profits go down.
ROTFL… can’t run away from the 10K DATA? You mean… the data that Big Oil collates itself?
I guess it’s time to explain how 10K data works.
10k data is the data that Big Oil presents when talking to Congress during hearings on price gouging and when they are dealing with the angry public in general.
It’s convenient data because it uses an old accounting gimmick that measures net income against the share of total revenues produced. So… in essence… it’s like those Conference Board indicators. Useless.
When Big Oil talks to Wall Street and investors they sing a MUCH different tune.
From ExxonMobile’s 2004 Annual Report :
In short… Even THEY don’t use their OWN 10K data. At least, not when it counts.
If you use their OWN formula they are making a rate of profit that’s over 37% on average capital employed and that’s in the US.
Profits have been rising for years now.
During congressional testimony (all on the record) it was revealed that in the 90’s they were making 22.8 cents per gallon refined. By 2004, they were making 40.8 cents per gallon refined, that’s a 79% jump (index THAT for inflation) and, according to industry analysts, the profit margins in 2005 are well over a $1.00 a gallon.
So much for “10K data”.
So Steve:
Tell me just WHO sets the gasoline price the gasoline distributors charge to their customers, the gasoline stations? The gasoline stations are not making any money on the sale of gas. and who sets the price of gasoline I see on the Bloomburg Report every day?
Mac,
10K forms are filled out for the SEC. Filing a bogus one is very bad news both legally and for business practice as it basically is lying to the public. Now, in your world you can continue to believe the crack pot theory that Big Oil lies on its 10k forms, but the rest of here in the real world think your being more than a bit nutty.
And for pharma companies, software firms, and even fast food companies what is the return using the above approach. You keep forgetting that it is the comparison that is important Mac. If big oil is getting 37%, but big pharma is getting 74% then your argument is just nonsense.
As I’m sure is true for industries like big pharma and software. So what? Is it rising profits that is bad. You are starting to sound like those people who think property is theft.
I don’t believe you. A link/reference would be nice. Considering that in California the refining costs and profits is about $0.69/gallon of gasoline, I just don’t believe you.
Herb,
Firms can set their price, but if it is too high it wont sell, and too low they’ll lose money. In the end, the market will force firms towards the equilibrium price. It is an interative procedure and the actual equilibrium isn’t something that is likely to be observed with something like gasoline, but overall, the market process is at work.
I know it might be more comforting to think that a simple conspiracy is at work instead of a complicated and hard to predict process like the market, but that is the answer I’m going to go with. This doesn’t mean that oil companies don’t have market power and wont drive up the price to the extent that their market power allows, but this idea that the oil companies are acutally in complete control is just not true.
ROTFL. Nooo… big corporations NEVER manipulate economic data to minimize their tax exposure and to mislead the public. Please… forgive me for suggesting that that happens EVERY DAY. Perish the thought! Nutty indeed.
Excellent point Steve. It is the comparison that’s important – and here is where the rubber really meets the road. The difference between fast food, and software and Big Oil is that I don’t have to buy fast food, and I don’t have to buy software.
They aren’t the life’s blood that fuels the beating heart of America and industry. There is fierce competition in both of those industries, and when it comes to fast food, and software and perfume or Pepto Bismol for that matter, I’m behind you 100%. People are free to never buy another Big Mac or bottle of Chanel No. 5 for the rest of their natural life, and if the companies that manufacture those products are making 500% profit all day long I could care less. Nobody is getting hurt – people have a choice.
Unfortunately, people are forced to buy gasoline every day, and if the price is being artificially manipulated through unfair business practices as many believe that it is, then it hurts everyone. That is a very important distinction because it injects MORALS into the argument, something that the Ayn Rand crowd and Libertarians in general have a hard time with – but which cannot be escaped.
Steve… I’m hurt… truly.
http://www.eia.doe.gov/emeu/aer/pdf/pages/sec5_53.pdf
What year did the government give them anti-trust protection? Hmmmm.
Well, looks like I was right not to trust ya’ Mac. Note footnote number 1. All numbers are in nominal values. So, we take into account inflation we are talking $0.34 in 1988 vs. $0.408 in 2004. Wow, you’re right they are just gouging the bajeebers out of us. That is a whole whopping 20% increase. So you were off by what…a factor of 4. And if we compare it to 2003, in real terms, 1988 was actually higher!
Pardon me but, Bwahahahaha.
By the way, that refiner margin may not be profit margins. Footnote 4 reads,
The way that reads it isn’t clear but the margin may include costs as well as profits. Also, the EIA numbers aren’t too different from the California Energy Commissions numbers on refinery costs and profits for 2004. The CEC numbers are a tad higher on average, but CA does tend to have higher gasoline prices than the national average.
So, Mac, get back to google and see if you can’t dredge something up else.
mcgehee; do you know what “condescension’ actually means. my comment was comprised almost entirely of statements from xom, which i am exposed to ad-nauseum.
Dude… you need a Doctor – with a rubber glove and a FLASHLIGHT to find out where some of your math is coming from. ROTFL.
Still… I get it. Your blog, your rules, I know. I didn’t expect to get the last word on it, or to change your mind.
You’re going to believe what you believe regardless of anything that I point out or say, so, it’s sort of pointless. No matter what data I present from any source, you’ll always “adjust” it to fit your beliefs, and you certainly aren’t going to change my mind about Big Oil.
So…
I’m off to watch Lou Dobbs whoop up on Captain Neck Waddle a little more.
Mac,
No, the problem is that you can’t present data in a forthright an honest manner…either that or you just don’t have a clue about this issue. I’ll go for that latter as it reflects better on you; ignorance isn’t necessarily bad unless revels in it.
Your numbers were not adjusted for inflation. Adjusting for inflation reduces your 79% down to about 20%, about a 4 fold decrease. Reading the page you linked too implies the “margin” isn’t profits, but merely the difference between purchase and sale per unit. This then is actually marginal revenue not profit.
So on two points, you are seen to be clearly wrong, yet you think you are still right. You are coming close to revelling in your own ignorance.