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An Economic Education Newsletter from the Federal Reserve Bank of St. Louis Volume 12, Issue 2 Fall 07
50
new, higher wholesale prices. The station owners made a tidy,
40 150
unexpected profit that week—$1.02 per gallon.
30
100
20 Are the Gas Stations Gouging Us?
10
50 Did the stations’ simultaneous price changes the week before
wholesale prices actually went up prove that Conch Gas and
0 0
1988 1991 1994 1997 2000 2003 2006 Pegasus Gas were colluding to gouge consumers? No. These
competing station owners did not have much choice if they
The figure above shows that while gasoline prices can diverge wanted to remain as profitable as their competitors and stay in
from oil prices for short periods because of seasonal demand, tax business over the long haul.
changes or other reasons, the two prices are closely linked over Suppose first that only Conch Gas had held its price at $1.999,
longer periods. while Pegasus Gas had raised its price to $2.999. Conch Gas
Because oil can be transported anywhere, trading on global spot obviously would have captured all of the traffic that day, but its
and futures markets determines the global price of a given grade of storage tank would have run dry much sooner than expected.
oil, aside from local taxes and transportation costs. Oil can either By the first or second day after the overseas disruption in the
continued on back cover
A futures market is one in which a com- crude oils to Asia. In the United States,
modity is traded for delivery on a speci- the benchmark is West Texas Intermedi-
fied future date, which could be months ate (WTI). This means that crude oil
or years away. Major fuel users, such as imports into the United States are usually
airlines and trucking companies, often priced in relation to WTI. The Organiza-
buy oil in futures markets to guarantee tion of Petroleum Exporting Countries
the cost of the fuel they will use. (OPEC), a cartel of some of the world’s
leading producers, has its own reference,
Q. What are the benchmark crude oils? known as the OPEC basket, which is an
A. Grades of crude oil are determined average of seven crude oils. Six of the
Q. What is a commodity? by their specific gravity and sulphur crude oils included in the OPEC basket
are pumped by member countries, and
A. A commodity is a food, metal or content. There are so many different
varieties and grades of crude oil that buy- the seventh is from Mexico. In practice,
other fixed physical substance that inves- ers and sellers refer to a limited number, however, price differences are not large.
tors buy or sell, usually through futures which are called reference or benchmark
contracts. Agricultural products, metals, crude oils. Other varieties are then
petroleum, foreign currencies, and finan- priced at a discount or premium relative
cial instruments such as Treasury bills to the benchmark. Brent blend crude oil
and bonds are commodities. Petroleum pumped from the North Sea is generally
(crude oil) is the world’s most actively accepted to be the world benchmark.
traded commodity. According to the International Petro-
Q. What are spot and futures markets? leum Exchange, Brent is used to price
two-thirds of the world’s internationally
The Q&A segment was largely adapted from: the
A. A spot market is one in which traded crude oil supplies. In the Persian
FAQ on Chicago Board of Trade web site, www.
cbot.com/cbot/pub/page/0,3181,1065,00.html, and
commodities are traded for near-term Gulf, Dubai crude is used as a bench- BBC News online, Oil Markets Explained, http://
delivery—within a month for oil markets. mark to price sales of other regional news.bbc.co.uk/2/hi/business/904748.stm.
Economic Snapshot
20
10
0
1973 1976 1979 1982 1985 1989 1991 1994 1997 2000 2003 2006
SOURCE: The Federal Reserve Bank of St. Louis
Bulletin Board
Real-World Economics
A re you looking for ways to bring real-world
economics into your classroom? Consider
these opportunities for fun and prizes by entering
your high school students in one or both of these
two programs:
• You can enter a team of five students in the
Fed Challenge, a monetary policy competition in
which students take part in a mock Federal Open
New! Great Depression Curriculum Market Committee forum. A workshop for teachers,
T he Federal Reserve Bank of St. Louis has developed a new curriculum for teaching
about the Great Depression. The curriculum includes six stand-alone lessons that
allow teachers to pick and choose those lessons most appropriate for their students.
teams and coaches will be held from 9:30 a.m. to
1:30 p.m. at each of these Eighth District cities.
The lessons include simulations, group work, role play and other active strategies to • Oct. 16, 2007 – Little Rock, Ark.
engage students. • Oct. 17, 2007 – Fayetteville, Ark.
If you teach history, economics or government, this curriculum is perfect for you.
• Nov. 14, 2007 – St. Louis
We are offering workshops throughout the District.
• Dec. 5, 2007 – Memphis, Tenn.
Oct. 25, 2007 Jan. 17, 2008 (Louisville workshops will be arranged
Regional Professional Development Center Memphis Branch
Rolla, Mo. Memphis, Tenn. at high school sites upon request.)
9 a.m. – 2:30 p.m. 9 a.m. – 3 p.m. • Invite your students to enter the Hot Topics in
Register at: http://campus.umr.edu/rpdc/ Register at: the News essay contest and earn prizes and
www.stlouisfed.org/education/conferences.html
Nov. 9, 2007 recognition. Essays are due:
Little Rock Branch Feb. 6, 2008 • Dec. 14, 2007 – St. Louis
Little Rock, Ark. Hilton Garden Hotel • Jan. 11, 2008 – Little Rock, Ark.
9 a.m. – 4 p.m. Chesterfield, Mo.
• Feb. 15, 2008 – Memphis, Tenn.
Register at: 8:30 a.m. – 2:30 p.m.
www.stlouisfed.org/education/conferences.html Register at: • April 4, 2008 – Louisville, Ky.
www.stlouisfed.org/education/conferences.html
Nov. 27, 2007 For more information about either of these
Regional Professional Development Center programs, go to www.stlouisfed.org/education.
Cape Girardeau, Mo.
9 a.m. – 2:30 p.m.
Register at: www4.semo.edu/rpdc/
Economic Summit
for Secondary Teachers
Federal Reserve Resources Nov. 12, 2007
University of Arkansas at Fayetteville
D o you have a great idea for using a Federal Reserve publication in your classroom, educators who want to learn about current
or do you need a great idea for using a Federal Reserve publication in your economic issues and ways to integrate these
classroom? If so, visit www.stlouisfed.org/education/resourcetools. At this issues into classroom instruction.
site, you can add a tip or tool that you want to share, and you can access tips and For more information, contact Julie Kerr at
tools other educators have shared. Julie.A.Kerr@stls.frb.org.
Little Rock – Billy Britt 501-324-8368 St. Louis – Dawn Conner 314-444-8421
Bank Louisville – David Ballard 502-568-9257 St. Louis – Mary Suiter 314-444-4662
Contacts
Memphis – Jeannette Bennett 901-579-4104
continued from front cover a state-wide shortage of gasoline would
oil market, the owner-manager of Conch almost certainly result. Recognizing that Classroom Discussion
Gas might as well have gone on vaca- gas prices were only temporarily low
tion—unpaid, it should be noted. Mean- and were bound to rise soon, all rational 1. How do prices in a market economy
while, the manager of Pegasus Gas—who owners of cars, trucks, tractors, off-road serve as a signal to producers and
took his vacation in the first two days of vehicles, lawn mowers or leaf blowers consumers?
the crisis—returned to sell out his remain- would fill up their tanks as quickly as pos- 2. If prices in a market economy were
ing inventory at $2.999 per gallon. In the sible. That is, any attempt to constrain the not allowed to rise when a com-
end, the Pegasus Gas station made a much retail price of gasoline in the face of higher modity was becoming relatively
larger profit. future prices simply induces a scramble more scarce, how would producers
Now suppose that both Conch Gas among buyers to beat the price increase. and consumers discover that the
and Pegasus Gas decided to show home- Many people would make wasteful extra commodity was in short supply?
town solidarity by keeping their prices at trips to top off half-full tanks, and others 3. If prices are not allowed to rise
$1.999, at least until the new, higher-cost would be genuinely inconvenienced as as a commodity becomes in short
gasoline inventories arrived in a few days. shortages developed. supply, what are some methods
Local residents certainly would have been Thus, the simultaneous price increases that society could use to ration the
appreciative, but so would all of the eager by Conch and Pegasus Gas are not harmful scarce commodity, and how effi-
drivers from neighboring towns who would price gouging at all. Although no one likes cient would these methods be?
have driven in to enjoy “cheap” gas. Both to pay more for gas, market-determined
the Conch and Pegasus stations would have gasoline prices operate to prevent shortages
run dry before their replacement invento- and maximize economic efficiency. St. Louis, and was published in the July issue
ries arrived. Anyone in this town who was of The Regional Economist, a St. Louis Fed
unfortunate enough to need gas on the third This article was adapted from Why Do publication.
day of the crisis would have been out of luck. Gasoline Prices React to Things That
What if all the gasoline stations in the Have Not Happened?, which was written by
state had agreed to keep their prices at William Emmons, a senior economist at the For a lesson plan to accompany this
$1.999 until higher-cost supplies started Federal Reserve Bank of St. Louis, and article, go to www.stlouisfed.org/
arriving? Even if the flow of out-of-state Christopher J. Neely, an assistant vice education/itv_lesson_plan.html.
bargain hunters might turn out to be small, president at the Federal Reserve Bank of
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