Can you describe how prices of gasoline &other oil products like diesel&heating oil are set by *free markets*?

Question

This is a Q in microeconomics and it relates to understanding how and why we are paying about 3.00$/gallon across America.

NC I know and thats all I need to say because I also know "they" are ghosting the internet.
TWH 08182006

Don't believe the textbook studys which may apply in the long run, the truth is ugly and it is because it is not pricing on honest and truthful communications between the industry and consumers. BP's recent restatement of proven reserves and the existence and function of an oil cartel called OPEC which meets regularly, like the interest-fixing FOMC does. Formed in 1974 , the cartel immediately terminated the sale of crudes by long term oil supply contacts at stable prices and replaced it with a posting systems. These are some of the facts that people aren't told which explain what is what these days.
TWH 08182006

mickeyboy, think deeper and examine your assumptions about the players. Market-value theory only works in an efficient market where the suppliers and consumers tell the truth about needs and scarcities and the settlement prices are not fixed but are freely and willingly agreed to. Conditions which do not exist in the oil market controlled by a commercial oligopoly and a cartel with governments at the price-fixing meetings reported by the "free press" from the press releases they get when the meetings end.
TWH 08182006

I am sorry about the length of the last sentence, I tend to string run-ons when I'm tired lest my ideas float off into oblivion.

I asked this Q before the Q above :"Do you know, or if you don't know, how do you think the price of the gasoline you buy is determined?";
and the comments I posted there bear repeating here:

Additional Details

6 days ago
True, China has become an importer of petroleum, and it is a factor in the price but not in the way you think. The volumes they are import are small compared to what the Big 7 nations import. See my other Q's on the subjects revolving around this one at my webpage. You will begin to see the big picture based on real knowledge and yes, real experience. TWH 08182006

57 minutes ago
lovely, the gov''t under Chenet/Bush43 and other militaristic neocons is the problem because they want to get control of oil and they are letting OPEC, the oil cartel clean our clock. TWH 08242006

29 minutes ago
Mickey, thanks for sharing your job function monitoring prices in an area, but that is not how gasoline prices are determined. The bulk of the price/cost of gasoline made from crude oil is the price/cost of crude oil which has become a geopolitical commodity, which no longer follows free market pricing rules since the supplies and prices of crude are fixed by OPEC, an oil cartel formed back in 1974. This international cartel consists of 13 National Oil Companies under the control of governments who politically don't like US government policies for a whole host of reasons. They meet regularly taking advantage of the Middle East situation to determine prices arbitrarily because they control 60-70% of the planet's proven oil reserves. They also set production quotas and at current prices for oil, they are filthy rich and they have no need or desire to increase their production rates to bring prices down.

11 minutes ago
About the speculators who trade futures on the Nymex, they know this and they are having a field day playing at the fringes of the the market. That is not the way most crude oil are obtained. The real oil market is based on term contracts with the oil producers-OPEC and non-OPEC.

The Non-OPEC producers are the major multinational oil companies (Exxon, Shell, BP,etc) and other National Oil Companies(PEMEX and the National Oil companies of Russia and Great Britain). These players have come online in response to rising demand for petroleum products in part because of the dramatic economic developments in Asian and Eastern European countries. The prices they charge for their crudes are based on the oil cartel's prices and in that sense they are all conveniently going along with the price fixing & getting a piece of the action.

While pricing of crudes in the long run will be determined by Supply & Demand forces and realities, in the short run it's not the way prices are actually determined and the US government knows this and the corporate-controlled press is either overpopulated with blind ignorant journalists or the owners of the press can't or won't tell you the truth.
TWH 08242006

Answer 1

low supply, increasing demand --> high price

but im not so sure that a cartel is a functioning "free market" since supply can be aritificially controled

Answer 2

Simply put, the price of gasoline is the exact point where consumer demand coincides with supply. In other words, the price of gasoline will never rise above what consumers are willing to pay. If an Oil company has 50 gallons of gasoline, and at a price of $2/gal, 60 gallons are demanded, the company will raise prices. Say they raise it to $3/gal and only 40 gallons are sold. The equilibrium price is therefore somewhere between $2 and $3. That is how price is set, and it is wise to remember that before you complain about "gouging". No one is forcing you to purchase that gasoline; you have therefore decided that paying $2.90 for a gallon of gas is better than the alternative- having no gas at all. That is the free market at work.

Answer 3

You're kidding, right? Understanding pricing of oil and oil products is way beyond the scope of an undergraduate Econ program. Oil and oil products have two features that set them apart from most other goods: (1) they require substantial (and irreversible) investments into development and refining, and (2) they are storable (i.e., not perishable).

The former means two things: (1) the short-run elasticity of supply depends on capacity utilization (the lower the utilization, the higher the elasticity), and (2) at high capacity utilization, the long-run elasticity of supply is likely to be drastically different from the short-run elasticity.

The latter means that to understand the behavior of oil prices, understanding consumer behavior and producer behavior is not enough; you have to also understand (and explicitly model) speculator behavior (stockpiling during perionds of rising prices and drawing on stockpiles during periods of falling prices).

For a comprehensive treatment of the problem, see Fridrik M. Baldursson, "Modelling the price of industrial commodities," Economic Modelling, Volume 16, Issue 3, 3 August 1999, Pages 331-353.

Answer 4

Supply in demand. The demand goes up and the supply goes down the price goes up.

Answer 5

A "free market" means that whoever controls the market is free to do whatever he wants. A true free market would be chaos, which naturally ends in dictatorship, which is what we have if we listen to the preachers glorifying what they pretend is a free market. Status quo, "whatever is, is right," is what these whores are really trying to push by claiming that whoever is on top must have gotten there through fair competition.

Answer 6

They cut back production demand goes up as well as prices.

Answer 7

Tey are not set by the market...

The Oil companies have turned in record PROFITS for the last year.
They don't get that from the market they get that from your pocket.

Answer 8

its all about the laws of supply and demand my little student friend