Monday, March 18, 2013

Oil Markets and Europe's Education Problem

I had an interesting conversation (well, not much of a conversation than rather I was yelled at) about free markets and how they corrupted Europe. The guy is a co-worker of mine and I won't name him here. He is a Frenchman and perhaps that is part of the problem: A failure of education, but then it's not as if Germans are better educated.

We got into the discussion about the woes of the Euro-Zone and agreed that the violation of small savings deposits is a punch in the face of property rights and the "working man". However, from then on out he has a very different diagnosis of the problem and what to do about it. I asked myself whether I should write this in German or in English. In the end I think English is the better choice, because I want all the world to see this and especially to see Americans what Europeans think about them.

Not only had this particular Franchman a very confusing idea about what certain words and descriptives mean. For example, for him the 1950s - 1980s were not free market and all the woe of freemarkets came in the 1990s onward. He also postulates that nowadays governments are powerless and we are ruled by corporations (that might be partially true - although I wouldn't agree that the state is powerless).

 For him the financial crisis was only a crisis of capitalism and free markets. They were the source, are the problem and cannot be part of the solution. I asked him whether he then prefered socialism, and he said no, of course not. So I asked what then he thinks is the solution. Well, apparently it is partly "social market economy", which at least as far as I see it is what we have now! Well, he then continued down the drain that free markets in everything (goods, people movements etc. - basically the only good stuff about the EU) had nothing to do with the continued peace in Europe we have sustained for the past 70 years.
Actually, the freedoms were part of the demise of the middle class, although he couldn't point to it exactly, except continuing to refer to "1 euro jobs" and more part time workers.

Of course, restrictive labour laws had nothing to do with that, it was all the full blown free market we could observe in the 1990s European Union. I think most educated Americans would laugh at that notion.
And of course, in the end, he added a last line about oil markets and petrol stations variable pricing schemes as an example of the failure of free markets. After that I didn't even much bother with reason any more, since he wouldn't even concede the minimum part of allowing for other's people good will rather than intentional malice. There is no use to discuss stuff rationally, if the other person argues emotionally all the time.
Also it was 8 o'clock so I didn't want to start with Adam & Eve about free markets, so I let it drop for the time being.

I could have pointed out that I discussed this a couple of times already not only with him but also on this blog and here (both in German sadly).

To summarize:
There seems to be a misunderstanding in Europe about how petrol prices are discerned or arrived at. There is a general ignorance to prices and signalling sadly. They understand basic supply and demand, but whenever prices go up they think it is a mistake of the market. Like someone else already said: Europeans have too much faith in the market, instead of not enough. They only want the gains without seeing the risks and losses.

Now oil markets are an entirely different thing than the petrol consumer market. Oil can be highly volatile due to it being a futures market rather than a display of the current situation. There can be a lot of oil being shipped or stored around Europe (mostly on freight ships). However, first these reserves are not as big as anyone believes. Consumption can be high (also in the future) and is hard to predict. On top of that the number of oil stored is actually not known. The problem is missing transparency in the oil market and trading business. But even so, oil prices are mostly a reflection of a future situation, meaning that oil prices today reflect traders believe in the future. This view includes global politic sitreps, OPEC's goals, China's energy consumption, growth rates in the BRIC block and last but not least the global reserves that can be used at the current price level.

The petrol price at a gas station has not much to do with this. This is something that is hard to understand, it seems. Petrol prices are influenced by a set of variables. Most of the price is fixed due to taxes and oil prices including price predictions. This is mostly the mean price you will see over weeks. Oil prices influence the trend in the long run, rarely do they hit local daily prices. There are seasonal oscillations or swings in the petrol price levels due to European summer and winter holidays, but that aside the price level grows around the smoothed out oil market trend. On speculation driving fuel prices, I recommend this post and this one. Both post are by Ezra Klein - A real Progressive at the Washington Post, so that nobody can say that I only cite "Republican" sources. I doubt that you can really crackdown on speculators, but the rest is right on the money.

The daily up and down swings at the gas station however have not much basis in this speculative business. The prices are actually set according to demand. First of, the reserves at a gas station have to last to the next truck shipment. This means that gas companies want to level demand to make it more predictable. They have gathered usage data for a long time and now when they have to raise prices during rush hour and when to lower them again. It has less to do with the absolute level of fuel available at a station, but with managing or controling the flow of fuel until the next shipment arrives. Of course, this might seem arbitary to the average consumer, but it actually serves the purpose of leveling demand and supply for lean supply chain management.

In a future post will put a few diagramms up to illustrate the point, if I find time.
And fyi I will put up the defense of the Oil companies here, too:

BP on Price Levels

Caltex on Variability

Of course, you should take those statements with a bit of scepsis. However, they are not more inane than most statements on the other side. And often they need not movie like villain companies to justify why prices are volatile but rather remain pretty reasonable.

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