Tuesday, April 25, 2006

Price Gouging?

It's all over the television news, both local and national coverage, especially over the past week or two: the rising cost of gasoline. Every politician wants his or her constituents to know that it is something they're concerned about and if it takes an investigation into price gouging or a cap on "windfall profits", then by God, that's what they'll do to fix this problem.

But is it really that big of a problem? Now don't get me wrong. I'm no different than anybody else. I don't enjoy paying higher prices for gasoline, but I don't enjoy paying higher prices for any other commodity either.

In the past year gasoline prices have risen about thirty percent, from $2.25/gallon to about $2.91/gallon. That's highway robbery, right? Well, just to illustrate why it isn't, let's look at a few other commodities. Now, you can check out any of the oil industry sites to see their take on this increase as it relates to the rise in costs of other commodities (I would suggest Conoco-Phillips), but this will help to put it into perspective a little simpler. In the same period, April, 2005 to April, 2006 Aluminum rose over 45%, Copper over 107% and Gold over 49%. I don't remember hearing anyone calling for a cap on profits from these sectors. These commodities are also very essential to our economy and our everyday lives but no hearings on capitol hill over the copper industry, right?

I know what I'm getting when I buy a gallon of gas. It's a substance that will propel my vehicle a few miles down the road. It's largely tied into the cost of a barrel of oil in the current commodities market. During that same period mentioned above, the cost of a barrel of oil went from $54.81 to $74, a 35% increase. That tells me that the cost of a gallon of gas is pretty closely tied into this increase of the material needed to make gasoline. I can't complain when the cost of making gasoline has risen thirty-five percent and the cost of the gasoline itself has risen only thirty percent, can I?

When I graduated from high school in 1975, the cost of tuition at a state university was around $300 for a full semester of classes. That cost has now risen tenfold or more. Has the product been improved? I think not. The American Council of Trustees and Alumni (ACTA) asked high-school level questions of college seniors in a February 2000 survey of historical literacy and found that 81 percent would have received a D or F (American Council of Trustees and Alumni, Restoring America's Legacy, September 2002, at http://www.goacta.org/publications/Reports/america%27s_legacy.pdf.). The increase in the cost of higher education has exceeded the increase in the consumer price index by several percentage points each year for most of the past twenty years. Meanwhile the value of that education has become entirely suspect (this is to say that the product has diminished in qualilty, not necessarily that the product is not as valuable in getting a better job).

The wisdom of setting price caps or attaching windfall profits taxes to any industry is weak at best. Such a strategy was tried by Nixon in the Seventies and resulted in product shortages and an economic decline for the entire country (I remember seeing long lines for gas and getting to the pump only to find a sign saying, "OUT OF GAS"). Consumers will bear the brunt of these approaches to price control, as no industry will make a product to lose money. Either they make money or they will not produce, it's that simple. On average the oil companies make about 9 cents/gallon on the gasoline they sell. Government taxation nets (in some states) over sixty cents on that same gallon! What do we get for our money from these exorbitant government taxes? That's a rant for another day (if you've been here before, you know it's a rant for just about every other day!).

10 comments:

Hawkeye® said...

There are a few more variables than even the ones you talk about here, but you are going in the right general direction. Gas prices are higher because oil prices are higher... for sure!

But who really raises the price of gasoline? I believe it's the commodity traders. You've got traders on the NYMEX and the COMEX who are taking into account factors like Hugo Chavez in Venezuela, Mahmoud Ahmadinejad in Iran, Abu Musab Al-Zarqawi in Iraq, etc.

And when traders worry that supplies might be cut off by these jerks, they start bidding up the price of oil because they know it might be more valuable down the road (at which time I suppose they'll sell their shares and make a killing).

The "Big Oil" companies that Chuckie "Schmukie" Schumer likes to complain about don't set the oil prices... it's the commodity traders!

I'll drink to that! Maybe a nice IPA? Whaddaya think?

Regards...

camojack said...

We pay a lot less for gasoline than quite a few other countries...but if there weren't so many taxes included in the price of gasoline, THAT would make it cheaper in a hurry.

Maggie said...

The North Carolina Conservative Party is doing something re rising gas taxes in this state.Go to
Stop the Gas Tax Hike.com and see for yourself.

Beerme said...

Hawkeye®,

Oh yeah, there are LOTS of other factors. As I was explaining to my son yesterday, the cost of oil has alot to do with the instability of the countries in which it is produced. Oil companies put their people and capital at risk by working in these countries, and must provide much more expensive and effective security for those assets. That cost, just as every other cost, is passed down to the consumer. Market manipulators do have an effect on oil prices, for sure, but it takes quite a large amount of money to shift the cost of these expensive stocks. Fortunately for them, even if they move the stocks a few pennies, when they effect is mutliplied by hundreds of thousands of shares, the gain can be quite handsome.

And a nice IPA sounds like a good choice, indeed!

Beerme said...

camojack,

Taxes are much more influential on the price of gas than the oil companies' profits. As stated in the article, in some states, the federal and state taxes amount to over sixty cents on a gallon of gas (The least amount taxes add to a gallon among the fifty states is around 44 cents). Compare that to the average 9 cents the companies net.
Which leads me to ...

maggie,

I checked out your link and watched the ads. This is a good idea. Beats the hell out of whining about a company that is making nothing but a fair profit on a commodity they sell, doesn't it?

mig said...

Total agreement. And I keep saying the price of a cup of coffee is right up there! And Sneakers. And there is the thing with a sweatshirt. No logo: $5 with a Nike Logo $55... hello.

The trotting Possum said...

Those People seem to have their own elegant solution: give everybody a two month "holiday" from federal gas taxes (lowering prices by about 18¢ per gallon), while they draw up a scheme to "bust up" the "Oil Monopoly" into "Baby Shells". When the federal tax is reinstated, they'll have a lot more companies to collect from, increasing the revenue from Other People's Money.

I'd post something about this over at United Possums, but I keep passing out from holding my breath while waiting for the government to do something positive. So far, the only non-partisan response has been the usual demogogary.

Latest estimates say there is about a $20-per-barrel "fear factor" built into the speculations on oil futures.

And what about this business with the Chinese drilling 70 miles off our coast?

Beerme said...

Possumtrot,

Toooo right, my friend!
The government is all about making political hay while doing NOTHING helpful or intelligent. It's all about the evil corporations making money and the government helping us poor abused consumers.

The fear factor has quite a bit of valid reasoning behind it. For example, some of the oil finds that are now paying off for the oil companies, were researched and developed, starting 10, 15, or even 20 years ago. When a company has to look that far ahead for the end production of their commodity, they NEED to know how stable a government is if that's where they plan to drill. Now, the flip-side of that (and a reason for the ungainly profits being made this year) is that if you start developing an oil field 17 years ago when oil was $30 a barrel, and you sell the oil 17 years later when oil is $72 a barrell, you tend to make enormous profits. Keep in mind that there was risk and is always risk involved: enormous monetary risk.

As for China drilling near Cuba, I tend to think China will pay someone else to do the drilling, but they are all over the world looking for oil and paying top dollar for it. They need it badly and since their government isn't burdened with social programs and third world aid programs, as we are, they will get what they want. We could have long ago worked something out with Cuba to keep the area American. We didn't and we'll have to eat this one.

Kajun said...

When something gets too expensive---don't buy none!

Beerme said...

kajun,
Well said, sir!
Used only a tank of gas over the past two weeks in my truck. Parked the guzzler and drove my wife's Saturn when we drove further than a few miles. Didn't like it, but saved a bunch of money on gas.

No problem.