Energy policy — not oil prices — is what matters

The recent declines in the price of crude oil have not been fully matched at local gas stations, but that is in the nature of distribution systems.

In a volatile market, retail prices rise faster than they fall. The bigger the swings in price, the more we notice this.

Part of the reason is in the math of inventory and profit. Profit is the difference between revenue and cost, and for a filling station operator the cost of the gasoline is what he or she paid when the station’s underground tanks were filled. The cost of that inventory doesn’t change with the daily fluctuations in wholesale prices of crude oil or, for that matter, gasoline itself.

It’s already paid for.

When the retail market price of gasoline goes up, of course, the inventory cost isn’t a problem. If somebody is willing to pay, say, 15 cents a gallon over cost instead of 10 cents, no sensible business is going to turn that down — so there is no delay. Upward price changes are made as quickly as possible.

Decreases in price, though, are stickier. If I am an individual station owner, the wholesale price declines in crude oil are passed down the line to me. At the retail level, then, my costs are going down, but only for the newly purchased product. All that fuel I’ve got in my underground tanks was purchased at a higher price, so, if possible, I don’t want to lower my prices until that inventory is sold. If the market allows, I will lower my prices when my inventory cost reflects the lower prices I actually pay.

Declining global prices for crude oil will eventually result in lower prices at the pump for gasoline. Nationwide, regular gasoline is already 25 cents lower than its peak price earlier this year; the price of crude is $30 a barrel below its all-time high and continues to slip. Still, crude oil and gasoline prices remain hard to predict.

What is even more difficult to predict than the gasoline price itself is the price per gallon that will return motorists, voters and the economy to the carefree state of mind of our prior existence — that is, before the crude oil market bullies grabbed us, turned us upside down and shook all the money out of our pockets. Is there a price for gasoline that will erase energy as an economic issue or as a campaign issue? Let’s hope not.

This has been a wrenching time for the U.S. economy, with rising energy costs combining with the housing credit bust to force painful adjustments and shifts at every level, from households to giant corporations. One of the few good things to come from it is that at last we are taking our energy policy discussions seriously … for the most part.

To keep things in perspective we do have Paris Hilton, whose British Thermal Unit content is an integral part of her image, promoting her own energy plan as the basis of her newly announced presidential candidacy.

From an economic standpoint, we have not yet seen the full effect of the increase in energy costs. If oil prices remain high, begin rising or even remain volatile, many energy-dependent firms will undoubtedly experience great difficulties. Airlines and surface transportation firms, for example, not only have to contend with higher costs, but also can lose great sums of money by guessing wrong when they purchase fuel in the futures market in order to stabilize their costs. And it is not beyond imagination that an indispensable, yet energy-dependent organization such as the U.S. Postal Service will either have to test the market’s acceptance of dramatically higher rates or test the patience and the purse of Congress by looking for some sort of government assistance.

The recent improvements in oil prices may give some organizations a chance to catch their breath. But it would be truly unfortunate if the declining prices cause us to lose our passion for creating an energy policy that makes sense. If nothing else, the past year is a painful reminder that relying on a global market whose every hiccup reverberates through our economy is, at best, unwise. And while we import much of our oil from friends, transferring large amounts of money to people who loathe us cannot end well.

Political debates are usually not good places to learn much about any subject, certainly not economics. But in their own way, Sen. McCain’s and Sen. Obama’s statements and disagreements are gradually morphing into two different, more or less coherent, energy policies competing for voter approval. These aren’t real policies, of course, for only the Congress has the power to decide what’s real. But it’s a start, and that’s good.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.