September 2, 2005 

WRTA

Brown Shoes Diary

Gasoline Prices and Gouging

The destruction wrought by hurricane Katrina isn't fully understood yet, but all too predictable has been the release of cry babies, political blowhards, and economic ignoramuses it apparently brought ashore--they're all over the TV set, the radio dial, and the newspapers.  (A notable and noble exception is an essay in the Altoona Mirror on 9/2 by Walter E. Williams.)

The spike in oil prices due to the shut down of Gulf area refineries is not the stuff of conspiracies--at least it shouldn't be.  Prices have risen not because of those greedy oil corporations who are intent on gouging us to maximize their profits, but simply because it is temporarily impossible for supply to keep up with demand.  High prices are the market's way, and the most efficient way, of stretching out what supply we have.  I should think this is as simple an economic concept to understand as there is, but no shortage has occurred among politicians and pundits in decrying those soulless, evil oil executives.

Let's review Economics 101.  Prices go up only when consumption dominates supply.  There are two actions then that drive gasoline prices up: one, people buying gasoline; two, a shrinkage in supply.  I know of no evidence where oil companies are willfully shrinking supply.  (Perhaps you think they created the hurricane themselves that knocked out 1/4 of America's oil refineries.)  If you have any, you've got a story, so pass it on to the press and make yourself famous.  I am aware of many roadblocks our politicians have put in the way of expanding oil supply so maybe that's the real first step during this "crisis"--undo the destructive and restrictive acts of government.

A more fundamental point is the following: buying drives prices up, selling brings them down.  In other words, the oil companies and gas retailers are doing their best to bring prices down; it's their customers who are driving prices up.  You can wish for lower prices all you want, but the more you buy the less likely you're going to get your wish.

Now, a word about 'gouging'.  What exactly is it?  I can only think of one definition for gouging which is the effort of an individual or business to maximize its profits.  We all do that, all the time.  I sell my labor for the highest salary I can get from my employer.  If I ran a business I'd charge the highest price I could get from my customers.  (And guess what?  My employer tries to pay me as little as possible and customers like to pay the cheapest price possible.)  We might be selfish in doing so, but as Adam Smith taught long ago, this is the best thing we can do for society.  These actions result in the most efficient use of resources.  Yes, the oil companies are charging the highest price they can get, given supply and demand conditions.  When the demand slackens or the supply increases, they will be helpless to stop prices from coming down.  Oh, by the way, despite occasional spikes, the price of oil and gasoline over the long-term has been steadily downward.  Thought you'd like to know.  Have you sent a thank-you note to the oil producers?

Some will argue that the current large profits that oil corporations get ought to be taken from them and given to relief efforts and other charitable organizations.  Before you do that, you might want to consider what a corporation is.  It is nothing but a legal fiction.  The profits belong to its stockholders.  Who are its stockholders?  Well, no doubt most retirees in America own stock in oil companies either directly or indirectly.  People saving for college also are likely to own stock in oil companies.  People saving for retirement or trying to provide long-term help for their loved ones also are some of the many who own these profits.  Labor unions, teachers, colleges are just some of the institutions that use stock ownership to help in their mission of serving society.  When someone claims the oil companies are ripping us off, what they're really saying is that all these diligent, hard-working, and deserving people are ripping us off.  It is not just an ignorant comment, but one that is insulting and un-American.

Children throw temper tantrums and demand immediate gratification.  Adults should know better.  American adults know that dealing with problems is most effectively done through free market action, not through socialism.  Ideas like putting a freeze on gasoline and heating fuel prices were tried in the 1970s and led to shortages, long lines, and costly rationing schemes.  Remember when Christmas lights were illegal and government mandated that thermostats be set high in the summer and low in the winter.  We tried socialism in dealing with the Arab oil embargo back then and the result was to take a temporarily bad situation and make it worse and permanent.  Let's show a little patience in these months of economic turmoil and trust the American ideal of free enterprise.  It only works when it's tried--every time.