The Loom of Time: The price of gasoline, free market economies, angry consumers, and demagogues

The price of gasoline, free market economies, angry consumers, and demagogues

Published Friday, April 28, 2006 by cam | E-mail this post

Hey Andrea I'm writing this post for you. I was surprised and taken back a little by your anger over the price of gasoline. I'm sorry Andy, I did not in any way mean to put you down, or to diminish the hardship you and your family face due to the price of gasoline. What I was trying to do was explain to you why there is no big bad boogie man to blame for the high prices. The prices are in fact a function of the free market economy that has brought you the prosperity that you enjoy.

This is an issue that is easily demogogued by cynical or stupid politicians. People fall victim to the demogogues because they do not understand how the economy works, and are easily tricked into thinking they are being taken advantage of by "evil corporations". The ever convenient scape goat, especially for those with a socialist agenda.

The above graphic gives a breakdown of the price of a gallon gasoline. The cost of crude is of course the largest component next the cost of refining, with taxes coming in a close third. This graphic is a national average, here in New York taxes are the second largest cost included in the price of a gallon of gasoline. Any politician that makes the claim to want to do something about the price of gasoline, that is beneficial to the consumer, and it does not involve new domestic exploration, deregulation, or the lowering of taxes, is lying, deluded, or both.

These are the reasons for the high gas prices:

- China and India are buying huge quantities of oil these days (high demand)
- Americans continue to increase travel time for work and vacation (high demand)
- We haven't built a refinery in 30 years and ours are at full capacity (low supply)
- Enviros won't let us drill in Alaska or off the coastlines (low supply)
- Enviros require us to have over 50 different formulations of gasoline for pollution control (low supply, high cost)
- Venezuela is now run by a communist dictator (unstable supply)
- Iran's president is threatening to nuke anyone and everyone (unstable supply)
- African countries are in constant state of civil war (unstable supply)
- Oil speculators and traders continually inflate the prices as they see fit (unstable pricing)

The demogogues just love to rail against the profits made by the "evil corporations" that supply our energy needs. As if the fact that they have made a profit is proof positive they are price gouging. Please don't fall for this, if you do you are being pandered too, and manipulated. The greatest cause for the large profits being made by oil companies right now is our booming economy.

Corporations exist for one reason and one reason only, to make a profit. They are not doing anything wrong or immoral when they succeed in making a profit. A corporation is not an entity unto it's self, it is in fact an organization of a group of people. Getting angry at a corporation for making a profit, is like getting angry at a sports team for winning games. The American public acts like a bunch of spoiled children on this issue, and there is no shortage of politicians willing to pander to them, instead of explaining the cold hard facts. Chuckie the smuck Shumer wants to hold hearings on price gouging by the "evil corporations". Neil Cuvuto gave a great response.

I see Chuck Schumer wants to investigate the oil companies for price gouging. Why doesn't he ask his fellow politicians to do the same about tax gouging?

After all, oil companies' profit works out to nine cents a gallon. Taxes total more like 40 cents a gallon.

But you don't hear Schumer whining about the taxes. After all, that's an easy source of revenue for a monotonous list of social programs whose failures are legendary. Better to keep funding them through taxes that are killing us, than demanding accountability due all of us.

Senator, if you want to bring gas prices down, start offering solutions and stop playing games.

Start opening areas for more oil exploration here, so we don't rely on oil from over there.

Profit margin's for oil corporations are not out of line, like Cuvuto said, they average around 9 cents per gallon. These are not outrageous profit margins, and in fact when compared to other industries are on the modest side of the spectrum.

I have listened to dim witted politicians propose a windfall tax on oil companies to in effect punish them for making a profit, because the average Joe is feeling the squeeze from the high prices. This is one of the stupidest things that could be done. If you raise taxes, you damage employee salaries and benefits, you deflate stock value, you reduce supply, and you increase prices at the pump. It may make some folks happy to hear that those "evil corporations" are being punished for making profits, but in the end they are in fact being masochistic, for everyone is being punished, to include themselves the consumers.

Price controls are a sure fire way to chase venture capital away from whatever industry is burdened by them. People with money to invest in oil company stocks will invest it some place else. Some place where the government does not guarantee a low to nonexistent return on the investment. Price controls in the 70's is arguably one of the major reasons why we experienced gas lines and shortages. Yes everyone thinks it was the Arab oil embargo that caused the shortages and lines, not so. It was a combination of things that was made worse by the embargo, but the truth is even before the embargo, the country had experienced gas lines and shortages.

Harvard economist Joseph Kalt found that price controls in place from 1974 to 1980 kept domestic production 0.3 to 1.4 million barrels per day lower than it otherwise would have been, and the Congressional Research Service estimates that the windfall tax on oil profits from 1980 to 1988 decreased domestic production by 3 to 6 percent. Less domestic production equals higher consumer prices.

The truth is high gas prices have almost nothing to do with profit margins on oil, and that the solutions being put forward by pandering politicians such as, windfall taxes, price controls, anti-gouging laws, would do much more harm than good. It may make those who are angry feel better, but these solutions would do nothing to lower prices, and in fact would have the exact opposite effect. If lower prices for a gallon of gasoline is the goal. Instead of pandering to angry consumers, we should be exploiting our own natural oil reserves, deregulating production so that there are not 50 different blends throughout the nation, and building new refineries.

When compared to the other costs of keeping a household and raising children, fuel prices have been remarkably low and stable. It just doesn't appear to be the case. The increased cost of fueling a vehicle is something you notice personally and immediately as soon as it happens, and it comes out of your pocket each and every time you fuel up. It is easily the most noticeable cost of living increase for everyone. All you need do is drive down the road, looking at the signs posted at the gas stations as you pass them by.

It will not make you feel any better I know, but the United States of all the industrialized countries pays the least amount for it's energy needs. The reason for this is our free market economy and low tax rates, in comparison to other countries. The fact is due to the worlds dependence on oil for it's energy needs, and that oil is a finite commodity. The price of oil is only ever going to go up, and that is not anyone's fault. It is simply the nature of the world in which we live.

I love you and your family very much, and would never try to diminish the hardships you face trying to raise your children, and keep a beautiful home. Never the less if you should be taken in by those who would demagogue you for their own agenda, whatever it may be. You are not serving yourself, or your family as well as I know you really want to. You will end up supporting ideas and those who espouse them, that in truth will only end up making your task of raising a family more not less difficult.

Much love Cam.