Friday, April 29, 2011

Compare & Contrast

President Obama, April 21, 2011:
Last month I asked my Attorney General to look into any cases of price gouging so we can make sure nobody is being taken advantage of at the pump. Today, I’m going to go a step further. The Attorney General is putting together a team whose job it is to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators. We’re going to make sure that nobody is taking advantage of American consumers for their own short-term gain.
President Obama's Department of Energy, Energy Information Administration, April 12, 2011:
Because taxes and retail distribution costs are generally stable, movements in gasoline and diesel prices are driven primarily by changes in crude oil prices and wholesale margins. Crude oil prices that differ from our forecast would be reflected in the price of motor fuels. Each dollar per barrel of sustained change in crude oil prices relative to the forecast translates into approximately a 2.4 cent-per-gallon change in product prices, absent the consideration of factors specific to the gasoline and diesel fuel markets.

Retail price projections reflect higher prices for the refiner acquisition cost of crude oil, expected to average $112.50 per barrel this summer compared with last summer's average of $74.70 per barrel. EIA expects wholesale gasoline margins (the difference between the wholesale price of gasoline and the refiner acquisition cost of crude oil) to average 53 cents per gallon this summer compared to 36 cents per gallon last summer, largely brought about by continuing strength in world-wide liquid fuels consumption.
Powerline's John Hinderaker:
[T]he price increase since last year breaks down like this: one barrel of oil produces around 20 gallons [19.36 gallons actually] of gasoline, so the increase in the price of crude oil from $74.70 per barrel to $112.50 per barrel corresponds to $1.89 per gallon. The increase in wholesale gasoline margins (which includes the oil refiner's profit as well as the cost of refining) is only 17 cents per gallon. So Obama's beating up on the oil companies is pointless.
Gregory Millman, Concise Encyclopedia of Economics, Futures and Options Markets:
[F]utures market speculation provides an important social good, namely liquidity. If it were not for the presence of speculators in the market, farmers, bankers, and business executives would have no easy and economical way to eliminate the risk of volatile prices, interest rates, and exchange rates from their business plans. Speculators, however, provide a ready and liquid market for these risks--at a price. Speculators who are willing to assume risks for a price make it possible for others to reduce their risks. Competition among speculators also makes hedging less expensive and ensures that the effect of all available information is swiftly calculated into the market price. Weather reports, actions of central banks, political developments, and anything else that can affect supply or demand in the future affect futures prices almost immediately. This is how the futures market performs its function of "price discovery."
Conclusion: President Obama still doesn't read his own Administration's footnotes. And he doesn't understand economics.

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