MarketIntellibits
TM                  
April 30,  2006
Volume II   Issue 8

Did Someone say “Supply and Demand”?
by Jack Miller

This morning  on Meet the Press, Tim Russert had a panel discussion with  
Senator  Dick Durbin of Illinois, Red Cavaney of the American Petroleum
Institute, Jim Cramer of CNBC’s Mad Money, and Energy Secretary  Samuel
Bodman, among others ( for a transcript, see
http://www.msnbc.msn.
com/id/12518683/).

Earlier this week, Miles O’Brien of CNN also interviewed Red Cavaney  (for a
transcript, see
http://edition.cnn.com/TRANSCRIPTS/0511/09/ltm.05.html  -  
scroll down more than halfway  to find it).

The topic, of course, was gasoline prices, and the discussions were
interesting.  

Seems that we have problems getting enough ethanol, which would reduce
our dependence on oil, but there are duties on imported ethanol from Brazil.
Cramer suggested we eliminate those duties, but Durbin, from Illinois where
a lot of ethanol is produced, disagreed.

And, Miles O’Brien wondered  why  Exxon Mobil profits are up if higher oil
prices are the reason for higher gas prices. Don’t they just pass along the
higher oil prices?  So shouldn’t profits remain constant? Or are the oil
companies exploiting the situation?

Of course, O’Brien missed the point that if costs are up 20%, and prices are
up 20%, profits will also be up 20%.  Still, profits are doing better than that,  
and this is attributed to other cost reductions and efficiencies.

But, at the bottom of it all, and you’ve read it here before, supply and
demand determine prices for any commodity. The problem is that to those
who are paying higher prices, this seems unfair and opportunistic.  

Could it be… gouging?

Well, no, actually. There is no federal definition of price gouging, though
some states have laws that define it.  A Florida statute, and this is typical,  
says…

It is unlawful during a state of emergency to sell, lease, offer to sell, or offer
for lease commodities…for an amount that grossly exceed the average price
for the commodity the thirty days before the declaration of the state of
emergency...

An Alabama statute defines excessive as 25% higher than before the
emergency.

But these laws are to prevent exploitation during disasters like hurricanes
and earthquakes, and not to regulate prices driven by supply and demand.

Remember: businesses exist  to make a profit. I’m not trying to defend the
oil companies here, or defend the high price of gasoline, but rather to
reiterate the basic principle of economics: supply and demand determine
prices. Generally, we prefer that the government stay out of it and let the
free market work.

And one more thing, and this is the real point of this issue.  For paper
manufacturers, and perhaps printers and merchants as well, some of your
customers may be asking some of the same kinds of questions that Tim
Russert and Miles O’Brien were asking, and I’m sure that quoting the Florida
statute on price gouging won’t be very helpful.

So, consider this.

Gas prices are up more than 100% from 1990 while paper prices (e.g. copy
paper) are actually down.

Paper prices are up 15% from two years ago, but gasoline is up more than
60%.

You’ve read abut Exxon Mobil’s profits, but even with higher prices Domtar
and Weyerhaeuser posted losses in the first quarter of 2006 (note: IP
subsequently reproted a huge loss in Q1). So while gas prices are up, and
paper prices are up, it’s like comparing the proverbial apples and oranges.

Need more help explaining paper prices to your customers?    Call Jack
Miller at 203 925 0326 or email
jack.miller@market-intell.com   


About Jack Miller                                       Email Jack Miller

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