Grumbling 7: California Prices: You Didn’t Have to Be So Crude

Welcome to Rightwood, so named because everyone in the village thinks they are right, including me. 

It was a beautiful, maybe early spring day. Maybe because we never know; we have had snow in May, so we always cross our fingers when the weather warms up in March, thinking that, just maybe, this is the end of winter. Spring was bursting, daffodils and tulips were breaking through the formerly ice crusted earth. Fruit trees were blossoming, especially the apple trees which means we could have apples all over town and not know what to do with them or a late snow could mean curtains. We always hope. While attitudes were warming, surging gas prices were offsetting the early hopes of spring. 

I was in the library looking for a great guide to baking Baklava when Marian (our librarian…seriously) accosted me. 

“Dr. Charkins…” (Now I’ve known Marian for close to 50 years and she has never called me Dr. Charkins. I coached her daughter in Little League, and she called me coach, I volunteered with her at the Forest Information Center and she called me Jim, and we have had some disagreements, and I won’t tell you what she called me, but she never called me Dr. Charkins so I knew I was in trouble.) 

“Dr. Charkins, aren’t these gas prices just a ripoff by California gas stations? The mini mart is charging an outrageous price. I just returned from a trip to North Carolina and gas prices there were much lower.  Why?”

Well, I always have to be careful with Marian to avoid making her appear ill-informed because she does get a bit testy at times. But, as with so many Economics issues, facts are facts. 

“Marian, the gas stations really have little control over their prices. There are three major reasons why California gas prices are higher than prices in other parts of the country.

1. By law, California gasoline includes expensive additives which provide cleaner gasoline with lower emissions than in other parts of the country. This is a tradeoff…cleaner air, higher prices. 

2. Different local areas in California have different local taxes so, even within the State, prices differ dramatically.

3. Much of the country gets its crude oil from Texas and the Midwest. Unfortunately, there is no pipeline to send that oil over the Rockies, so we rely on foreign sources with obviously greater transportation costs. This table that I made for just such conversations shows where our oil originates. Alaska production has declined due, partially to regulation… another tradeoff. California is a virtual crude oil island!"

Source	Percentage of California Crude Oil
Imports	56.2
California	28.9
Alaska	14.9

“Well, what about the Iran war? How is that hitting us?"

(OK, this was a little trickier. I didn’t want to get into a political discussion, but the facts are obvious. I have often said that one of the great things about being an Economist is that you can alienate all sides of the political spectrum with some basic truths.) 

“Marian, some effects rely on simple supply and demand analysis. The closing of the Strait of Hormuz affects oil markets worldwide. Supply has decreased (pretty clear) and demand has increased. The increase in demand is largely due to a “risk premium”, expectations of further price hikes which create a “buy now” environment. 

“Many of the other effects are not so obvious. One-third of the world’s seaborne fertilizer comes through the Strait of Hormuz. The resulting combination of higher insurance and transportation costs, along with other supply shocks, will affect California agricultural prices, which are likely to be passed on as higher food prices, depending on price elasticity of demand. Prices of other consumer goods will also rise, causing increased inflationary pressure which could cause the Federal Reserve to raise interest rates. The price pressures will also revive the “work from home” discussions. And the higher prices will have a major impact on the poor and middle class, exacerbating the struggle to pay for food, housing, health care, childcare, and other basics."

“So it’s not a simple answer."

“Well, actually, it is a simple answer. It’s all a matter of supply and demand, tradeoffs, and distributive effects."

“Like I said, it’s not a simple answer!” 

I replied sort of grumpily, “Marian, it should be simple to anyone who has taken a basic Economics course.”

She didn’t like that answer so she sort of stomped off.  I’m guessing Marian has not taken an Economics course!