25.9.06

LOOKING FOR THE SIMPLEST EXPLANATION. Marquette Warrior located a macroeconomic outlook composed by Wisconsin's Donald Nichols, a James Tobin student who was a bit perplexed by some movements in gasoline prices.
Yet, recently we have seen $3.00 gasoline. This is way above what one would expect to find if crude oil costs $65 per barrel. Historically, $3.00 gasoline would be expected if crudewere to cost $2.15 per gallon. But $2.15 per gallon of crude x 44 gallons to the barrel means that crude would then cost about $95 per barrel!
The joys of putting together a macroeconomic forecast on short notice! "Historically" refers to a price path along which shocks are discounted accurately and expected gains from trade are identified and acted upon. As Professor Nichols noted elsewhere in his paper, Hurricane Katrina affected the supply in the short run, and in the presence of inelastic demands and supplies in the short run, large price movements in response to small supply shocks are no surprise. But the Nichols Outlook anticipates a return of gasoline prices to the low $2 per gallon range.
For the future, if crude prices remain near $65 per barrel and taxes remain near 50 cents on the gallon, I would expect gasoline prices to be about $2.35 nationally, and $2.43 in Wisconsin. Gasoline prices of $2.35 per gallon will not disturb the ongoing economic recovery.
Econobrowser (via Knowledge Problem) is thinking along similar lines.

Using that 60 cents benchmark, a retail gasoline price below $2.20 a gallon appears to be quite reasonable to anticipate.

So why are gasoline prices coming down so dramatically? There are important seasonal factors in U.S. gasoline prices, which are higher in the summer due to summer fuel requirements and greater gasoline demand. Everyone always seems as shocked when prices go up in the spring as when they come down in the fall, even though to some extent that same pattern is repeated every year.

But the simplest explanation for the price fluctuations appears to be equilibrating properties of competitive markets, not some kind of political business cycle at work. And in the Marquette Warrior post, a testable hypothesis.

[Conspiracy buffs] claim it’s just the fact that an election is coming up. Supposedly, the oil companies want the Republicans to win, and are holding down the price to help them.

Of course, since prices are low right now, we would not be surprised to see them go up after the election. But then, likely, they will go down again.

That's if the oil companies are part of a vast right wing conspiracy to tweak a political business cycle. But if Professor Nichols and the energy economists are correct, absent any undiscounted supply or demand shocks, there will be no noticeable movements in crude oil or gas prices immediately before or immediately after the election, although there will be a noticeable movement up as refiners adjust production to the summer gasoline blends and attempt to anticipate the travel season equilibrium price.

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