Publications: Notes at the Margin

A Screwy Debate over a Gasoline Pipeline, An Even Less Understandable Way to Manage the World Oil Market (June 11, 2018)


We address two issues in this report. The first focuses on the role of futures markets in determining US retail gasoline prices. These prices matter in the United States and other countries. Politicians point fingers at oil companies and presidents at oil-exporting nations when prices rise. The topic has even caught the attention of President Trump, who called on OPEC to boost production.


However, the prices consumers pay depend as much on market structure as crude prices. For example, a consortium of three independent refiners seems able to boost retail prices significantly in certain US markets abandoned by the large US multinationals. Consumers do better in markets where those firms are still a significant force. This finding would likely surprise economists at the Federal Trade Commission, who believe the big companies are the enemy.


Our focus on gasoline price formation stems from the efforts of majors to push into a market in western Pennsylvania. The data make it clear this action will bring lower prices. However, the entrenched suppliers are doing everything possible to ensure Pennsylvania consumers do not benefit from free markets. As explained here, markets determine prices where allowed. Consumers in western Pennsylvania deserve the opportunity to enjoy lower prices.


The second, shorter part of the report discusses the mismanagement of the global crude market. Production in Venezuela is collapsing rapidly. This should not be news for readers. For months, we have been predicting this outcome.


However, the countries that are managing, theoretically, the oil market are doing nothing. Some writers have suggested that one nation, unnamed here, is the central bank of oil. The assertion has always been wrong. Recent events have emphasized the fact. There is no central bank of oil, just a large group of profit-maximizing producers.


Sadly, the title of a book we are trying to sell, Three Hundred Dollar Crude and the Economic Collapse of 2020, is starting to sound prescient. We want to be wrong.


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