Borenstein and Bushnell still insist that the market works for electric
power! Everything, for them, comes down to supply and demand.
Remarkably, in 2004 (below) they seem to have discovered that
withholding capacity can prop up high gasoline prices. This is a real
breakthrough for the UC Energy Institute! Wow, I have to phone a few
friends to celebrate this dawning! Gene Coyle Devine, James wrote: here's Hal Varian from yesterday's (7/1/04's) NY TIMES:The economics of the California gasoline market are described in arecent 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 aspecial 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 closelymatched 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 forgasoline 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 ofCaRFG can lead to large price swings.The market forces of supply and demand offer a reasonably convincingexplanation 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 sevenlarge 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 noevidence 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 iscertainly 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? ------------------------ Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine |
- why CA gas prices fluctuate so much? Devine, James
- Re: why CA gas prices fluctuate so much? michael
- Eugene Coyle