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!).