Commodity Markets and Retail Prices are Often More Rational than They Might Seem

Economists often speak of the rationality of markets, but investors sometimes find it hard to agree. While markets sometimes track broader economic conditions and specific developments relatively closely, they can also be prone to fits of basically inexplicable behavior. This is probably most true of the various equities markets, where entire fortunes have been made and lost on the basis of what most would consider irrationality. While such effects are generally less pronounced, even markets for various commodities can exhibit this style of basically senseless-seeming behavior.

On the other hand, some such perceptions turn out to be mistaken themselves. In certain cases, what looks like a bout of irrationality on a market for a given commodity will be revealed, upon closer inspection, to be something else entirely. While collective hysteria can sometimes drive commodity pricing significantly, it is probably more often the collective effect of a number of relatively hidden factors that contribute to that appearance.

On my webpage, for example, visitors will find a discussion of why gasoline prices sometimes fail to track the pricing of the fuel’s principle component. As with other forms of refined petroleum, gas is generally derived not directly from raw crude, but from an intermediate form that is sold on to those who wish to do the processing. As a result of this structural indirection, refineries are often dealing with pricing realities very different from those that might be suggested by a look at the world markets for crude oil.

That alone can be enough to steer the prices that consumers pay for gasoline away from what they might expect based on the latest financial news. On top of this basic influence, however, are often layered a number of others that can heighten the effect. From concerns about how political instability might affect shipping prices to difficulties at particularly important refineries, quite a bit more often goes into the pricing of gasoline than most would expect.

As a result, what can look like simple irrationality often turns out to be nothing but dispassionate, cold-hearted calculation. Investors who keep this possibility in mind will generally be less likely to succumb to the kinds of misapprehension that often lead others astray.