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"An appeaser is one who feeds a crocodile, hoping it will eat him last."
Sir Winston Churchill

5.14.2007

If It's Summertime It Must Be Time For Gas Price Buffoonery

Doesn't anyone have a memory longer than 30 days?

Some facts:

IT WOULD BE NICE if the oil companies were charities, giving away their wares for free. But they aren't. They are profit- making ventures. Their goal is to make money, and to do so they charge "what the market will bear," as the saying goes, investing the proceeds to find and produce new sources of energy, also to be sold for a profit.

This shocks some people, who apparently believe that free, or at least cheap, gasoline is a basic human right. Yet attempting to maximize profits by charging people more rather than less is the way most businesses operate. Consider grocery stores, software developers, and book publishers: all cheerfully take advantage of market conditions to make money.

It gets even worse, however. Auto dealerships and airline companies engage in blatant "price discrimination" -- charging different prices to different people based on their willingness to pay. Thus, passengers sitting side by side on the same flight may pay wildly different amounts. Unfair!

Then there are people who exploit rising prices. Most homeowners prefer to pocket their real estate gains instead of sharing the profits with buyers. Why are sellers entitled to keep money they did nothing to earn?

Yet the oil companies have long been particular targets of political ire, subject to demonization by activists, journalists, and politicians. During the "energy crisis" of the 1970s, Uncle Sam controlled prices, regulated supplies, subsidized alternatives, taxed profit "windfalls," and otherwise meddled in the energy market.

The energy crisis essentially ended when President Ronald Reagan deregulated oil prices. Prices actually fell, gas lines became a distant memory, and America prospered.

Low prices in the 1990s left industry critics at the sidelines. But now international demand is climbing, as China and India rapidly industrialize. Amazingly, the Mideast has become even more unstable (a botched occupation will do that). Other major oil producers, such as Nigeria and Venezuela, have been roiled by political strife.

It has been years since construction of a new refinery. Moreover, environmental rules segment the domestic gasoline market. A shortage in one area cannot be remedied with supplies from another. The Environmental Protection Agency requires different blends for summer, which are more expensive to produce. Lucian Pugliaresi of the Energy Policy Research Foundation points to "[r]ising gasoline demand in the U.S., combined with unscheduled refinery closings, looming strikes, limited spare replacement capacity, longer turnaround times for scheduled maintenance, and refining factors."


AFTER HURRICANE KATRINA the Federal Trade Commission investigated the oil industry and found no price gouging. Indeed, the FTC and Department of Energy have repeatedly reviewed gasoline prices and discovered nothing amiss. Reports W. David Montgomery, author of a new study for the American Council for Capital Formation: "Their conclusions in every case have been that gasoline price increases were due to the operation of supply and demand in light of an interruption of supply, and that the magnitutde of price increases was consistent with the magnitude of the loss in supply. There has never been a finding that gasoline price increases were caused by any manipulation of the markets."

Crude oil prices are set in distant, impersonal, global markets. The most important local price determinant is station competition, but city and county zoning departments have more influence than international oil companies over who sells gasoline where. Moreover, unusual crises, such as a natural disaster destroying infrastructure and disrupting supplies, have enormous price impacts.

The contrary theory that energy behemoths run the world raises the interesting question, why have gas prices been relatively low so often? If Big Oil could run prices up at the click of a gas pump, then why did prices fall so dramatically in 1981? No self-respecting profiteer would have left money in consumers' pockets during the 1990s if domestic companies could manipulate the market. Surely the sneaky monopolists wouldn't have chosen Hurricane Katrina as the moment to start mulcting the public, since they could predict heightened public scrutiny. In short, if the price-gouging story is true, the energy concerns are remarkably stupid, incompetent, or both, utterly incapable of taking advantage of their supposedly unique ability to enrich themselves.


Here's the deal:

1. Gas and other petroleum products are commodities. This means they are highly susceptible to supply and demand forces in setting prices.

2. Only about 20% of our petroleum comes from the Middle East. We get most of ours from Canada. Blaming the Arabs only gets you so far these days.

3. Refinery capacity is a bigger driver of gas prices in the U.S. than the price of crude oil. This is because it is the bottleneck in our system. This is due to the fact that the politicians who whine about gas prices won't let us build the refineries we need. Refineries produce gas part of the year and natural gas part of the year. They do necessary maintenance and upgrades in between. If you want more refinery capacity to produce more gasoline, thus lowering the price of gasoline, you automatically jack up the price of heating oil and natural gas. Then reporters get to write those sob stories.

4. Gasoline is a commodity which we've heavily customized by requiring a large number of different formulations, mainly to satisfy those environmental experts in state legislatures who brought us the water-polluting MTBE and similar abominations. These things ADD to the cost of gasoline and reduce capacity because steps must be added to the process.

5. In their infinite wisdom, local, state, and federal governments INCREASE gasoline taxes. It's not Sunoco which makes the most profit on a gallon of gas but GovCo. As with state lotteries, gas taxes are a tax on the poor. The poor may not be driving SUVs, but they typically are driving older, less fuel-efficient vehicles, and they typically drive them more miles. Wonder why those politicians so "concerned" about gas prices never eliminate gas taxes? I don't---they're greedier than any oil company exec you'll find.

6. Gasoline and other petroleum products are heavily-regulated. Compliance costs money. All that environmental cleanup, all that inspection, all that litigation has to go into the price of a gallon of fuel, because that's the only product they're selling.

7. Transportation costs money. Not letting the oil companies save money by drilling for crude oil close to home in ANWR and in the Gulf of Mexico means we have to ship it via tanker or via pipeline. Tankers and pipelines are vulnerable. Leaks cost money. Cleaning up leaks costs money. Maintaining tankers and pipelines costs money.

8. For all that, inflation accounts for at least 50% of the story. Gasoline, unburdened by many of the above costs in 1967, cost 33 cents a gallon. That's $1.98 in 2006 in inflation adjusted dollars. Gasoline cost 25 cents a gallon in 1915; it would cost $4.86 in 2006 dollars. Clearly we're not at historic highs once inflation is factored in, as any economist who could tell tailbone from elbow would do.

9. Aquafina, which is filtered tap water, costs $2.56 a gallon ($0.04/oz * 64 fl oz.). Anyone care to discuss price gouging here?

10. If you're pissed off about the price of gasoline, stop driving, particularly during the summer months. The reduced demand will drive prices down, plus take away the profits of those nasty oilmen. Of course, GovCo will need to jack up your property and sales tax to compensate....

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