Gas Prices Settle

Gas prices have settled a bit around the $3 per gallon level. And, contrary to last week’s confusing post on this question (hey, I’m a newbie on this whole energy economics thing), apparently this enormous price of oil by the barrel means refiners are not making enough money to send their kids to private school and also make the payments on the condo in Vail. From TWIP:

[N]et income and margins for large refiners were lower in the third quarter of 2007 than in the third quarter of 2005 and 2006. In fact, net income for this group of companies during the third quarter (in real terms, adjusted to Q307 dollars) was very similar to net income over the 2000 through 2004 period.


  1. I have heard that the problem is not private schools but supply and demand. When refineries are working at better than 90% capacity, there is very little flexibility in responding to increased demand.

    If you need 100,000 barrels more of oil refined each day, but it takes 10 years to have a 50% chance of building a new refinery, then, by standard economics, prices go up a lot.

    Even if the cost of a barrel of crude drops, the demand side (availability of gasoline from a refinery) does not change until new refineries are built. So gas prices stay high until demand drops.

  2. Eric –

    The two TWIP’s I’ve quoted from, last week and this, suggest that both forces are at work (two independent variables that both influence gas price), at different times and in different ways. Refinery capacity issues drove prices earlier in the year, while the current flattening is a function of crude oil prices.

  3. John and others,

    If part of the energy problem is the lack of modern oil refineries (I am ignoring the rest of the problem for the moment), under what conditions will new refineries be built in the U.S.?

    This strikes me as a question to which journalists would know the answer. 😉

    For instance, what events facilitated the last round of refinery (or nuclear power plant) building in the U.S? Will those conditions occur again? Do citizens have to have a brown out or black out in their town before they will allow a new power plant to be built near them? Is the lack of new oil refineries in the U.S. part of the ‘tragedy of the commons’ or the prisoner’s dilemma?

    The short version is “How bad does it have to get for a particular person before they are willing to change their habits–no power plants near me?”

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