ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Thursday, September 01, 2005

Had Enough? Supply and Demand Rears Its Ugly Head

One hurricane, devastating though it was, has brought the petroleum industry to its knees. Now is a good time to ask why. How could such a thing come to pass?

I should say by way of preface that I am no expert in these matters. I am merely a reasonably informed citizen. I understand something of economic reality and possess a modicum of ability to apply that knowledge. I also grew up in a family involved in the oil business.

Let's start with the fact that we have been living on the edge from the supply side for years. The supply in this case is refined product, gasoline and other distallites. We do not have the refining capacity to meet our needs. We import a significant portion of the finished product. What refining capacity we have has a major portion located on or near the Gulf of Mexico in such places as Houston and New Orleans. The storm on Monday took out the refining capacity of New Orleans and environs. All this refining capacity has been operating at or near capacity for years. There was no redundancy. We have seen price spikes for years when so much as one refinery goes down for one reason or another. No new refineries have been built since the 1970s.

So, with the loss of the capacity in New Orleans there is a shortage of supply. Either demand has to drop voluntarily or be reduced by increased prices. There is no sign of the former occurring, so the immutable laws of supply and demand are taking hold, ergo $6/gallon gas in Atlanta. (That would sure discourage me!)

What sort of answers are we getting from some in Washington?

From the usual suspects we are hearing call for price controls. How on earth does that improve supply? If price stays the same, the product continues to be bought at the same level, i.e. 100% of demand. There is not enough product to meet that demand. What will happen at that point? The supply will be exhausted. That will bring on rationing, panic buying, a return to the gas lines of the 1970s and economic disruption which is difficult to assess at this point.

We have a supply crisis and have had for quite some time. We have been living on the edge of this crisis. One hurricane forced the issue.

Congress can bleat and legislate all it likes. They can try to repeal the law of supply and demand all they like. That makes no more sense than trying to repeal the third law of thermo-dynamics.

If we do not face the facts, and face them soon, the situation is going to get worse, a lot worse.

**** ARC: Brian adds ****

You're correct John, Congress cannot repeal the law of supply and demand. I was heartened to hear that the clean air act that mandated different "formula's" of gasoline for specific areas has been repealed for the duration of the crisis. That was done by the administration under their emergency powers.

The $6/gal gasoline you see in Atlanta is due to the dynamics of information flow. Rumor's of gas running out, etc. From my sources, Atlanta gasoline is about the same as here in St. Louis $3-3.50 a gallon.

I believe the answer you are looking for is that we need to build more refining capacity. The problem with that is that one of the best regions for that refining capacity happens to be in the gulf region. Thats why there was so much refining capacity there already. It's close to major bodies of waters, the land is cheap. We will rebuild our capacity, or repair what capacity can be repaired there, in hopefully relatively short order.

People around the country need to not panic. That would be worse than the problem we are actually facing.

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Your Co-Conspirator,
ARC: MontereyJohn