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The math at the pump

A gas price display is changed at a Chevron gasoline to display a record high.

TEXT OF INTERVIEW

Tess Vigeland: Premium's going for $4.99 a gallon at the station up the street from us here at Marketplace. No doubt we will cross that $5 barrier before Independence Day. Mass transit systems are reporting record ridership as drivers flee their cars.

But how exactly did we reach this point? And what exactly goes into that per-gallon price tag?

Here to explain is Severin Borenstein, Director of the University of California Energy Institute.

Welcome back to the program.

Severin Borenstein: Thanks for having me back.

Vigeland: You have watched oil prices for years. You've studied this. Can you make heads or tails of why we have seen a doubling in the price of a barrel of oil just in the last six, eight months?

Borenstein: Yeah, I think there is actually a pretty straightforward market story about what's happened, not just in the last year but over the last five years. Five years ago, we had prices down in the $20-30 a barrel range and demand was growing pretty strong and supply was keeping up with it. But supply stopped growing nearly as quickly and what we have seen over the last five years is demand has continued to move forward on a worldwide basis and supply hasn't. And so the only way you can make that market clear with a limited supply is for price to go way up. So we've got people buying slightly more oil than they were buying a year ago and paying twice as much. But if the price were still $60 or $40 a barrel, there'd be way too much demand and the market wouldn't be able to supply it.

Vigeland: I guess I can understand that on a months and years basis, but let me ask you about what happened a couple of weeks ago. We had a two day spike of $16, $17 dollars a barrel where we went up to $140 a barrel. How does that happen in two days, because there's no way you can argue that all of a sudden, over those two days demand went up and supply went down?

Borenstein: No, that clearly isn't a supply and demand story in the typical sense, but the market is constantly trying to catch up with what's really going on and sometimes the market figures out demand is stronger than they thought or there's less supply than they thought. Often these sorts of spikes occur around either announcements of changes in inventories or political events that are going to change the available supply and those are the sorts of things that have always rattled the market a little bit, but when you're in a very tight market to begin with then suddenly if you have a little more demand relative to supply, you're likely to see a big price spike.

Vigeland: Why is it that gasoline prices seem to go up automatically when the price of a barrel of oil goes up. When refiners are buying that oil, isn't that for three months out from now?

Borenstein: Well, the refiners are buying oil for a month or two in advance, but when they sell gasoline, they have to replace that by refining more oil, so the real value of that gasoline, the real cost of selling that gasoline is what it's going to cost to replace it. It's no different than if you buy a house. When you go to sell it, what you bought that house for is not relevant; what matters is the supply/demand balance for housing when you go into the market to sell your house and the oil companies do the same thing when they are selling the refined products.

Vigeland: Is it possible to calculate what we all could potentially have to pay per gallon if oil prices stay the way they are?

Borenstein: The way you translate it is every time the price of oil goes up by $1 a barrel, that shows up at the pump as about 2.5 cents a gallon. So at $130 a barrel, the price of just the oil going into the gasoline is over $3 a gallon. So you're just starting from there; you add on the taxes, you add on a little for the retail dealer and you're quickly up and over $4 a gallon. As long as oil prices stay in the $130 range, we're going to see gas prices over $4 a gallon nationwide.

Vigeland: And if you look into your crystal ball, is that going to stick with us?

Borenstein: The best predictor that I know of is the futures market for oil and what its saying is that these prices are likely to stay at this level for a long time to come. Now that's not a great predictor, they're often wrong too, but these are traders that have their own money on the line and it's probably a better guess than any one pundit. $130, $140 oil is likely to be a real price for a long time to come.

Vigeland: Severin Borenstein is director of the University of California Energy Institute at Berkeley. Thanks so much.

Borenstein: Thanks a lot.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.
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Another disappointing analysis of why gas prices have skyrocketed. I have heard every excuse in the book as to why prices are rising and none of them include market trader greed and their relationship to the oil industry.

I agree with other listeners - Borenstein is either uninformed or lying. His equation for calculating gas price by multiplying the barrel price by 2.5 is ridiculus. Barrels of oil that cost $143 are not more expensive to refine than barrels of oil that cost $100. Want proof? Check out oil company profits.

Mr. Borenstein's analysis agrees with my own reading - the supply can't keep up with the demand. The world wide flow reached about 85 million barrels per day about 3 years ago and hasn't increased much since then. Demand from China and India keeps going up, so the gap between supply and demand makes for higher prices. It's time we confronted the reality of the end of cheap oil and made plans to reduce our usage to account for the reduced supply flow.

http://marketplace.publicradio.org/display/web/2008/06/20/oil_prices/

Dear Marketplace:

I listened to your Saturday program with an interview of Severin Borenstein about the price of gas. The host, Mrs. Tess Viegland asked some interesting and valid questions but I found Borestein’s answers to be somewhat lacking and mis-informative in certain areas. Please consider the following:

When Mrs. Viegland inquired about the quick price hikes in gas, Borestein likened it to the rising cost of used housing. But his analogy was faulty as it assumes a large and competitive market. This simply does not exist in the “Gasoline” industry where “big oil” is able to control prices. Using “spot marketing” the gas companies intentionally establish specific price structures and price target neighborhoods based upon what they can get away with without relation to their production costs.

Over the past years there have been significant mergers of “gasoline” companies and the number of independent outlets has been substantially reduced. There is no true competition and thus no incentive to produce more product. In fact, because gasoline has become a “near necessity” with large barriers to competition, the American refineries have been able to stifle production. And, lets not delude ourselves into believing that we could all get along fine without it. When the absence of a specific product or service would reek havoc on our society, it has become as much a necessity as food, water, and good health care. While market analysts my subscribe to a brutish water, air, and food definition of absolute necessity, returning to stone age hardships is not an objective that listeners want to consider.

In America, Oil producers have found it highly profitable to reduce production. Using the pressure of a high price per gallon squeeze to plunder every American’s pocket book, domestic “big oil” is merely using fear and intimidation to establish an even greater capture of our natural resources. They are financing Republicans to legislate for more oil well drilling leases but they haven’t developed the ones they already have. Once they get more of these give away leases, they will have locked out what ever small competition that still exists in the oil business and cemented shut all doors to competition. Their strangle hold on America will be complete and these Barons of Industry will gladly usher in another Gilded Age of avarice and despotism.

Anyone who doubts that we are nearing such a precipice need only consider that in 2007, the chief executive of the world's largest publicly traded company, took home a pay package that included $1.75 million in salary, a $3.36 million bonus, and $16.1 million in stock and option awards. These are not the actions of business struggling against the whims and vagaries of a competitive market place. They are the actions of business that notoriously exercise a monopolistic presence with the tacit assurance of impunity.

I would hope that you interview US Congressman Peter DeFasio on this subject. He is very well informed and will give us a side of the story that our corporate media eschews.

YOUR INTERVIEW WITH IDIOT REPUBLICAN Severin Borenstein should have instead been titled "THE BULLSHIT FALSE FUZZY MATH at THE PUMP, AS PER IDIOT BORENSTEIN"

Your interview with "Expert: (Ha! what a laugh!!) Severin Borenstein was thee worst piece of Economic analysis I've ever heard! This baffoon Borenstein is CLEARLY did nothing more than walk in lock-step with the also just released Dubya Bush supply BS concerning gasoline prices. Baffoon Borenstein should immediately be stripped of any educational credentials for his BLATENTLY FALSE analysis of why Gas prices skyrocketed. He knows FULL WELL that the plummetting of the US dollar is the big reason why gasoline went up; but he will never speak the truth, becuase he loves that weak dollar, becuase it's due to the US sending our blood and treasure to Israel, fighting THEIR WAR by proxy, and destroying the US as a result. Mr. Borenstein should keep his Bush/Pro War fake analyses off the air, as is what should be done with your Pro-War NPR pile of trash show!!

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