Stanford Business School Research Analyzes Summer Gas Price Hikes - Does This Mean They Won't Have Time To Start Dot-Bombs?
Publishers Note: Has anyone done a study detailing how much money was pissed away after being invested in Sand Hill Road's favorite students? Does this initiative mean that Stanford will be returning to a rationale university mentality? The Big Question: will the B school teach that revenue and profits are an important part of a business? Stay tuned to find out.
STANFORD, Calif.--Aug. 12, 2002--Ah, sweet summer
time: Long, balmy evenings, kids playing in the pool, and spikes in
the price of gas. Although such price jumps may have a modest impact
on an overall household budget, they get our attention because we buy
gas on average twice a week, and buy more gas in the summer for
vacation travel. Crude oil, refining, and shipping costs affect the
price of gas. Pump rates also vary by short-term factors such as
refinery and pipeline outages, and state and local regulations on
shipping and zoning.
"Gasoline prices are sharply etched into consumers' minds, more so
than possibly any other consumer product," according to Stanford
Graduate School of Business economist Jeremy Bulow. When gas prices
spiked in the Midwest in the spring of 2000, with the presidential
election in full swing and political fingers pointing at either the
potential for market collusion or the lack of market incentives as the
culprits, Congress demanded an investigation by the Federal Trade
Commission. The FTC report, a compromise between the lawyers and
economists on the commission, did not tell the whole story. "The
economists felt it was an inaccurate portrayal of what had happened,
and so it prompted us to put out a paper," says Bulow, who was Chief
Economist on the FTC during the Clinton administration.
Bulow, the Richard A. Stepp Professor of Economics at the Graduate
School of Business, with Jeffrey H. Fischer, Jay S. Creswell, Jr., and
Christopher T. Taylor, economist colleagues from the FTC, concluded
that the oil companies responded as quickly as was logistically
possible to correct this price spike. This Midwest event was caused by
a combination of complex factors, many of which will inevitably cause
future rate hikes. "Refiners are producing at a very high percentage
of capacity these days. When there is a supply disruption, we will
have a price spike," Bulow says. There is no excess fuel production
from which to draw. Complicating the supply side are the "boutique
fuel" regulations concerning fuel additives, which vary by region. The
gasoline in Chicago is different from the gasoline in Detroit, and
even from the gasoline in the suburbs of Chicago. It takes two weeks
to refine a specific formulation of gasoline, and several more weeks
to ship it to a specific market. If the entire country were using the
same kind of gasoline, it would speed the availability of fuel to any
area facing a shortage and keep prices more level.
In a recent interview, Bulow pointed out that last year the
American Petroleum Institute and the American Lung Association made a
joint proposal to change the reformulated gas rules in the United
States. "They made the point that with the changes in gasoline
technology, we could produce an environmentally superior gasoline
without any additives like ethanol. The ethanol lobby managed to
quickly defeat this proposal." Ethanol is made from corn; but Bulow
does not think the price of corn is much affected by the production of
ethanol. "The people who have ethanol processing facilities, like
Archer Daniels Midland, are the primary beneficiaries of these rules;
Congress has recently exacerbated this by passing rules to triple the
amount of ethanol in gasoline," Bulow said.
Another factor in gasoline pricing is local and regional
regulations. For example, in California, which has its own specific
gas formulation, when there is a refinery outage, gasoline can be
shipped in from another U.S. location only in something called a
"Jones Act Vessel," a boat built in, crewed by, and flying under the
flag of the United States. This means it costs as much to ship fuel
from Louisiana to California as from Norway to California. The price
of gas in the San Francisco area is significantly higher than in Los
Angeles because of the price of real estate and limits on certain
local permits. Bulow says, "In LA, gas stations are attached to
profitable convenience stores, so gasoline can become a loss leader.
In San Francisco, you can only get a permit for having a service
station, so in order to sell gasoline you also need to have a mechanic
on duty during all business hours and some service facilities."
Bulow notes that the consequence of such regulations almost always
will be higher gasoline prices. "It's a reasonable choice to make, but
we have to understand we are making that choice. The thing that
aggravates me more is this business about the boutique fuels. If it is
environmentally better to adopt something like the API/ALA proposal,
the fact that the political process is preventing that bothers me."