Get Real on Gasoline Prices

A new oil shock is underway.  Turmoil in the Middle East is inevitably going to result in higher prices at the pump.  On my morning bike ride, gas was 2.85 a gallon.  On the way home, there were signs offering gas for 3.09, an increase of nearly a quarter.

My fellow Americans are going to have a conniption fit. 

The reasons for that fit rest with a shameful confluence of economic ignorance on the part of consumers, fecklessness on the part of petroleum companies, and witless demagoguery by civic leaders.  We who believe in the free market need to step up our efforts to counter this nonsense, or we'll find ourselves in a pickle as political opportunists step in to regulate an important part of the economy.

First, there is the problem of ignorance.  Friends and co—workers I talk to don't understand anything about how a gallon of gas get to the local station.  Conversations I've had with otherwise sensible people sound like the fevered ranting of conspiracy nuts.  They genuinely believe that oil companies are colluding with each other and sticking it to the little guy.

About the only people getting rich off high oil prices are people who own the crude oil.  Crude oil is sold much like selling items on EBay.  If a bunch of people want Spiderman # 25, or a particular pattern of Jewel Tea earthenware, the price will go up and the owners of that commodity will make good money.

If your job is to refine crude oil or sell it retail at the corner gas station, your life isn't so rosy.  Gas comes from crude, which has to be refined.  Crude oil producers, typically government controlled entities, don't fix prices.  Cartels like the Organization of Petroleum Exporting Countries (OPEC) don't set costs on a barrel of crude, they set production levels on the amount of crude they allow to be pumped from the ground. Their goal is to keep the amount of crude in the worldwide system as limited as possible so that prices stay high.  Collusion like this among producers would be illegal in the US under antitrust regulations, but since much of the oil rests below the soil of sovereign nations, there isn't much to be done.

Refiners, who make fuel from crude, have to buy oil essentially at auction.  They compete among themselves to buy batches of oil to turn into gas.  Refiners have to buy tomorrows batch of oil from today's revenue, so you can imagine they are pretty quick to raise prices when futures contracts start going up.  Distributors and retailers are in the same sort of boat as refiners.  They have to buy gas and diesel on a market where prices can go up and down.  They too have to buy tomorrows fuel with today's revenue.  Both refiners, distributors and retailers run at low profit margins.  It takes very little increase in the price of crude oil to turn profit into loss.  For this reason, they have to pass the costs as quickly as possible to the consumer.

All this is exacerbated by the fact that the number of people who use gas is growing.  India and China, two nations who have vastly larger populations than America, are making demands on the global supply of oil.  Anytime you have increasing demand on a limited supply, you will have increased prices.  There is no escaping this reality.

That said, my second point is aimed at oil companies.  Oil companies provide a vital service to the US, but so far they have stood mute while being painted as robber—barons.  If I ran an oil company, I'd make sure part of my marketing thrust included messages about supply, demand and the supply chain.  Instead, they ply us with enviro—weenie commercials hawking what they do for the environment or their research into alternative fuels.  Instead of putting up just the final retail price of gasoline at the filling station, I'd love to see a breakdown of all the costs per gallon, including the taxes.  Politicians who browbeat them in public ought to be responded to in kind.

This brings to bear the third point.  Even my home state's Republican congressmen have made statements that demonstrate their ignorance about the energy industry.  Jim Talent, who ought to know better, proposed regulating where domestic supplies of crude are allowed to be shipped.  The fact that it is cheaper to ship Alaskan crude to Japan and import Mexican crude to refineries in Louisiana appears to be lost on him (oil tankers don't run on fresh air and happy thoughts, you know).  If this regulation would make crude more expensive by increasing shipping costs.  In that event, guess who pays?  Democrats decry the high prices of fuel, but then oppose domestic drilling that would increase the supply and lower prices.

The laws of supply and demand are immutable and may not be mocked.  We have two choices.  All the fuel we want at market prices, or limited supplies at regulated prices.  The former may lead to more expensive fuel sometimes, but over the last several decades, prices have not been out of line with average inflation.  The latter means gas shortages like those experienced during the Carter years, since uniformly low prices provide insufficient incentive to conserve or find alternatives among other unwelcome effects.  Given the option between an economy governed by how much I'm willing to pay versus how long I'm willing to stand in line, I'll take the former.  I saw pictures of grown men standing in line for toilet paper in the Soviet Union.  None for me, thanks.

We who do know better have to engage in these discussions, patiently explaining these two choices.  Letting demagogues get away with exploiting American's ignorance for their political gain will lead to increased regulation on an already heavily regulated industry, and will be all our undoing.

Tim McNabb is a web developer in St. Louis.  His blog is on hiatus, but archives are available at the site. 

A new oil shock is underway.  Turmoil in the Middle East is inevitably going to result in higher prices at the pump.  On my morning bike ride, gas was 2.85 a gallon.  On the way home, there were signs offering gas for 3.09, an increase of nearly a quarter.

My fellow Americans are going to have a conniption fit. 

The reasons for that fit rest with a shameful confluence of economic ignorance on the part of consumers, fecklessness on the part of petroleum companies, and witless demagoguery by civic leaders.  We who believe in the free market need to step up our efforts to counter this nonsense, or we'll find ourselves in a pickle as political opportunists step in to regulate an important part of the economy.

First, there is the problem of ignorance.  Friends and co—workers I talk to don't understand anything about how a gallon of gas get to the local station.  Conversations I've had with otherwise sensible people sound like the fevered ranting of conspiracy nuts.  They genuinely believe that oil companies are colluding with each other and sticking it to the little guy.

About the only people getting rich off high oil prices are people who own the crude oil.  Crude oil is sold much like selling items on EBay.  If a bunch of people want Spiderman # 25, or a particular pattern of Jewel Tea earthenware, the price will go up and the owners of that commodity will make good money.

If your job is to refine crude oil or sell it retail at the corner gas station, your life isn't so rosy.  Gas comes from crude, which has to be refined.  Crude oil producers, typically government controlled entities, don't fix prices.  Cartels like the Organization of Petroleum Exporting Countries (OPEC) don't set costs on a barrel of crude, they set production levels on the amount of crude they allow to be pumped from the ground. Their goal is to keep the amount of crude in the worldwide system as limited as possible so that prices stay high.  Collusion like this among producers would be illegal in the US under antitrust regulations, but since much of the oil rests below the soil of sovereign nations, there isn't much to be done.

Refiners, who make fuel from crude, have to buy oil essentially at auction.  They compete among themselves to buy batches of oil to turn into gas.  Refiners have to buy tomorrows batch of oil from today's revenue, so you can imagine they are pretty quick to raise prices when futures contracts start going up.  Distributors and retailers are in the same sort of boat as refiners.  They have to buy gas and diesel on a market where prices can go up and down.  They too have to buy tomorrows fuel with today's revenue.  Both refiners, distributors and retailers run at low profit margins.  It takes very little increase in the price of crude oil to turn profit into loss.  For this reason, they have to pass the costs as quickly as possible to the consumer.

All this is exacerbated by the fact that the number of people who use gas is growing.  India and China, two nations who have vastly larger populations than America, are making demands on the global supply of oil.  Anytime you have increasing demand on a limited supply, you will have increased prices.  There is no escaping this reality.

That said, my second point is aimed at oil companies.  Oil companies provide a vital service to the US, but so far they have stood mute while being painted as robber—barons.  If I ran an oil company, I'd make sure part of my marketing thrust included messages about supply, demand and the supply chain.  Instead, they ply us with enviro—weenie commercials hawking what they do for the environment or their research into alternative fuels.  Instead of putting up just the final retail price of gasoline at the filling station, I'd love to see a breakdown of all the costs per gallon, including the taxes.  Politicians who browbeat them in public ought to be responded to in kind.

This brings to bear the third point.  Even my home state's Republican congressmen have made statements that demonstrate their ignorance about the energy industry.  Jim Talent, who ought to know better, proposed regulating where domestic supplies of crude are allowed to be shipped.  The fact that it is cheaper to ship Alaskan crude to Japan and import Mexican crude to refineries in Louisiana appears to be lost on him (oil tankers don't run on fresh air and happy thoughts, you know).  If this regulation would make crude more expensive by increasing shipping costs.  In that event, guess who pays?  Democrats decry the high prices of fuel, but then oppose domestic drilling that would increase the supply and lower prices.

The laws of supply and demand are immutable and may not be mocked.  We have two choices.  All the fuel we want at market prices, or limited supplies at regulated prices.  The former may lead to more expensive fuel sometimes, but over the last several decades, prices have not been out of line with average inflation.  The latter means gas shortages like those experienced during the Carter years, since uniformly low prices provide insufficient incentive to conserve or find alternatives among other unwelcome effects.  Given the option between an economy governed by how much I'm willing to pay versus how long I'm willing to stand in line, I'll take the former.  I saw pictures of grown men standing in line for toilet paper in the Soviet Union.  None for me, thanks.

We who do know better have to engage in these discussions, patiently explaining these two choices.  Letting demagogues get away with exploiting American's ignorance for their political gain will lead to increased regulation on an already heavily regulated industry, and will be all our undoing.

Tim McNabb is a web developer in St. Louis.  His blog is on hiatus, but archives are available at the site.