As I’m sure most of you have noticed, gas prices have skyrocketed again. Last week I saw gas for over $3 a gallon here in Seattle (I’m pretty sure it had hit over $3 before but I didn’t see it). As I’ve mentioned before, high gas prices don’t really bother me for a variety of reasons. Primarily, I view high gas prices as the catalyst that gets alternative fuel sources developed more rapidly, as to which this article alludes and as Richard Posner explains:
From the broad national standpoint, we should welcome high gasoline prices because it is in the national interest to reduce our consumption of gasoline, and high prices will do that, dramatically so in the long run when more substitution is possible. The burning of gasoline in vehicles creates pollution and emits carbon dioxide that contributes significantly to global warming; and curtailing driving in order to reduce the consumption of gasoline would alleviate traffic congestion. Furthermore, a large part of the world’s oil supply comes from nations such as Venezuela, Nigeria, Iraq, Iran, Saudi Arabia, and Russia that are actually or potentially unstable, hostile to the United States, or both, and it would be prudent to reduce our dependence on such suppliers. And in fact output has fallen recently in the first four nations in the list, which has contributed to the price spike.
I do realize I am in the fortunate position that increased gas prices really aren’t going to break my bank, but it seems most of the people whining about gas prices are in the same fortunate position I am. I also don’t begrudge the oil companies their record profits. They produce and market a commodity that everybody wants and are willing to pay through the nose to have. If they can’t turn a record profit in such conditions, then they are really crappy businessmen. Of course, there is that perennial paranoid theory that Big Oil co’s are in cahoots to gouge us, the helpless customers, and destroy the environment ASAP. This has never been proven, though I would admit proving a conspiracy is a very difficult legal task, but one would think that something would have turned up with all the investigations and nosing around Congress does. Who is really profiteering off of high gas prices? Probably our governments, as this little op-ed points out. Money quote:
“From 1986 to 2003, using 2004 dollars, the real national annual average price for gasoline, including taxes, generally has been below $2 per gallon,” noted the Federal Trade Commission in a 2005 report absolving the industry of collusion. “By contrast, between 1919 and 1985, real national annual average retail gasoline prices were above $2 per gallon more often than not.”
In other words, gasoline prices were lower than at anytime since 1919 for much of recent history. Some conspiracy! Maybe somebody should have been investigating consumers for “gouging” the oil companies.
And just who is the profiteer here? While the average profit on the sale of a gallon of gasoline is nine cents, the average state and federal tax on that same gallon of gasoline is about 45 cents (and 52 cents in Michigan). And if we must have an investigation, how about investigating the extent to which government regulations drive up prices and block new production?
Indeed. I don’t expect these little factoids to change anybody’s mind, especially people utterly convinced that the problem is Big Oil and the solution is Big Brother. However, I’m not going to throw a hissy fit because some company that sells something I desperately want is making a 4% profit off of each gallon I buy. Welcome to capitalism, everybody. If somebody doesn’t like the high gas prices, then they shouldn’t buy gas. Maybe they can fill up those completely empty busses I see toodling around on our highways.
By the way, you can read the FTC’s 2005 investigative report on gas prices here, and you can rest assured yet another investigation is already underway for 2006. Money quote from the executive summary of 2005’s report:
In no other industry does the FTC maintain a price monitoring project such as its project to monitor retail gasoline and diesel prices. Most recently, on June 10, 2005, the FTC announced the acceptance of two consent orders that resolved the competitive concerns relating to Chevron’s acquisition of Unocal and settled the FTC’s 2003 monopolization complaint against Unocal. The Unocal settlement alone has the potential of saving consumers nationwide billions of dollars in future years.
The vast majority of the FTC’s investigations have revealed market factors to be the primary drivers of both price increases and price spikes. This Report describes the complex landscape of market forces that affect gasoline prices in the U.S.
The full report is 166 pages, but it seems like it might be pretty interesting reading. Not!
The fact that in inflation-adjusted dollars the price of gasoline is roughly the same as it was in 1949 and much lower than it was in 1982, or that retail gasoline prices are twice as high in the United Kingdom (and several other European countries) as in the United States, is no consolation to these people. Moreover, because people buy gasoline frequently, they are very conscious of changes in its price. And there is so much publicity about oil and so close an identification of the Bush Administration with the oil industry that people are primed to think of gasoline prices as having a special economic and political significance, and to suspect that increases in such prices are a result of malign influences.
In fact the cause of the price spike is primarily, as I said, the increase in crude oil prices, and that increase is in turn primarily the result of rapid growth in demand for oil by China (now the world’s second-largest consumer of oil) and India, a growth that has outpaced supply. The notion that this represents a crisis–that the world is running out of oil–is ridiculous. In the short run, with demand rising faster than supply, price rises steeply, producing “obscene” profits since roughly the same quantity is being sold at higher prices. In the longer run, consumption falls as consumers search out substitutes; supply rises as previously uneconomical sources of oil become economical; and so profits fall back to a normal level.
Interestingly, Posner and Becker disagree on the benefits of increasing of the gas tax. My economic sensibilities aren’t very sharp, but I find Becker to be more persuasive on this issue. Also, I just hate taxes.