here's Hal Varian from yesterday's (7/1/04's) NY TIMES:
The economics of the California gasoline market are described in a
recent study by Severin Borenstein, James Bushnell and Matthew Lewis of
the University of California Energy Institute (www.ucei.org/PDF
/csemwp132.pdf).
The basic problem comes down to supply and demand. California uses a
special low-polluting blend of gasoline known as CaRFG (California
reformulated gasoline), which is produced by only 13 in-state
refineries. In 2003 these refineries produced about 15 billion gallons,
a figure almost identical to the 14.8 billion gallons consumed in the
state.
[inelastic supply] California's production capacity is so closely
matched to its demand that even sharp increases in price result in
little additional production of gasoline.
[inelastic demand] On the other side of the market, the demand for
gasoline is also quite insensitive to price: a 10 percent increase in
price typically reduces short-term demand by only 2 to 3 percent.
The result is that even small fluctuations in the demand or supply of
CaRFG can lead to large price swings.
The market forces of supply and demand offer a reasonably convincing
explanation as to why the California gasoline market is so volatile. But
this may not be the entire story.
[possible role for monopoly power] The market is controlled by seven
large suppliers, ranging from ChevronTexaco, with a 27 percent share,
down to Exxon Mobil, which supplies 8 percent of the market. With only
seven suppliers, price manipulation may also be at work.
When demand is insensitive to price and capacity is more or less fixed,
sellers have mixed incentives. When prices rise, a refiner can make an
immediate profit by selling more gasoline; if all suppliers sell more,
the price is pushed back down. But if a few large companies withhold
gasoline supplies, they can keep the price propped up for an extended
period.
The authors of the report are quick to point out that they have no
evidence that this has occurred. Indeed, they argue that the basic
economics of the industry make it difficult to find such evidence in
price and quantity movements alone.
However, they also point out that the temptation to manipulate price is
certainly present, and a prudent response from Sacramento would be to
enact policies that will reduce that temptation as much as possible.<
Does this make sense to the experts?
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Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
