burkphoto Loc: High Point, NC

As usual in economics, there is a very complicated mix of forces in play. Blaming it on politicians of either party is fruitless and a mistake.

How many companies have raised prices to cover the cost of $15 an hour wages that used to be $7 an hour?

How many companies have lost employees to other companies because they didn't want to raise wages, and now have to hire new people who still won't work at the low wages they were offering? That causes their output to shrink, putting upward pressure on prices because fewer people make fewer goods that are in higher demand by people with money saved up during Covid lockdowns.

Do we expect oil companies to build new refineries after they just shut down the worst of them during the pandemic, with no intention of needing them again, because we are headed towards cleaner energy solutions?

Does the Fed put the brakes on slowly or all at once? Wall Street is fickle. There are traders who have never been in a market where rates were above 5%! They would freak out. Yet we endured ridiculous stagflation in the early 1980s and rates soared. It took two generations to get rates down below 5% again.

Oil is a commodity that requires several distinct stages of production and distribution:

Prospecting
Drilling
Piping/trucking/shipping crude oil
Refining crude into multiple products in a constantly changing demand mix
Piping/trucking/storing and distribution of gasoline, diesel, jet fuel, heating fuel, etc.
Retailing

No one realistically wants to build new refineries when the industry is trying to milk every last dime out of what is left of their heydays. It takes enormous investment, lots of time, lots of regulatory approval, lots of "NIMBY" arguments to overcome, and by the time a new refinery comes on line, we'll have other sources of energy reducing the demand for that product.

burkphoto Loc: High Point, NC

Roughly TEN percent of the WORLD'S oil comes from Russia. Taking most of that away causes the WORLD price of oil to rise sharply.

Price elasticity is basically a measure of how much a rise in price causes the demand for a product to fall. Price elasticity of gasoline is essentially near zero. That means consumers have to have it to drive to work, school, shopping, and vacations. They might cut back a little, but there is a point where they cannot cut back usage.

During the pandemic, several large, old refineries were shut down, a few of them for good, and others for refurbishment and maintenance. Now, demand at $2.50 a gallon exceeds supply by a HUGE margin. Heck, demand at $4.50 a gallon is still way up there (prices are local to The Piedmont Triad region of NC). People have more money now that most have gone back to work and they ARE spending it.

Prices rise to what the market will bear. Good microeconomic practice is to set prices where marginal cost of additional production equals marginal revenue from the sale of it AND where the demand for the product will maximize sales and revenue.

GovCo has very little to do with the price of oil. Even the dumping of oil from the Strategic Petroleum Reserve is mostly a symbolic gesture, since it represents a teeny tiny fraction of overall demand. It just sounds impressive.

Moondoggie Loc: Southern California

Ain't that the truth

ILFarmer

I hear you.

PAR4DCR Loc: A Sunny Place

Don

srg

Two very intelligent posts Mr. Burk. Of course I was exaggerating about the 1 percent, but your 10% figure is a surprise to me. I had no idea it was that high.

burkphoto Loc: High Point, NC

That's probably because the figure of 1-2% is for USA consumption of Russian oil prior to the Ukraine invasion.

If we take away the Russian oil, demand spikes considerably in other nations, and some of that oil comes from us.

Pedro vazquez Loc: Ca

It doesn’t work for California
A full tank it costs you about 140.00

DirtFarmer Loc: Escaped from the NYC area, back to MA

It might cost YOU $140.
My tank only holds 10 gallons.

The solution is to drive less. Yes, a tank of gas will still cost a lot, but if you reduce the amount you use your car (switch to public transportation or chill at home) your tank of gas will last longer.

burkphoto Loc: High Point, NC

For what vehicle? Obviously not a hybrid sedan!

Fredrick Loc: Former NYC, now San Francisco Bay Area

Interesting. I look at just the opposite (i.e. in his example in order to fill it the cost would be $80).

BboH Loc: s of 2/21, Ellicott City, MD

Glad I didn't have a mouthful of coffee...

burkphoto Loc: High Point, NC

I put ten gallons in my Prius last week. It gets roughly 40 MPG combined. It cost me about $47 to go 400 miles...

I bought my first Prius in 2008. (We now have seven hybrids in our extended family...) When I need a van, or a pickup truck, I rent one. Otherwise, I don't whine about gas prices. I don't whine about repairs, either, because they are cheap to maintain.

DirtFarmer Loc: Escaped from the NYC area, back to MA

I note that the business mileage rate is increasing to 62.5 cents per mile (July 1). That presumably covers the cost of capital, maintenance, insurance, and fuel. Of those items only the fuel is directly related to driving.

At 18 mpg for your truck, the $5/gallon gas is costing you 28 cents per mile. Less than half of the mileage rate. Capital, maintenance and insurance apply even if you don't drive much.

My Prius gets 55-65 mpg, around 8 cents per mile. I generally drive it less than 25 miles/day so I can make my 10 gallon tank last about 3 weeks.

I should thank all those who drive gas guzzlers for contributing to the tax that is supposed to be maintaining our highways.

burkphoto Loc: High Point, NC

Ha! Same here! When the switch to alternative fuels gets going in a big way, states will have to find another way to fund highways.