These days, it seems that gas prices are all the rage. People are mad. With that anger comes new levels of irrationality.
I wonder whether this would be an issue if gas prices weren't displayed on giant signs as we drive down the road. Government policies can cost people thousands of dollars, and you'll never hear a peep. But if gas prices go up twenty cents, you'll never hear the end of it.
Certainly, higher prices are no fun. But that hardly excuses the level of hysteria that has descended upon the nation. It seems as if people will start foaming at the mouth at the very mention of "big oil." The reaction is akin to the two minutes hate of Emmanuel Goldstein. People still don't understand economics.
"Price gouging" is the fashionable epithet being bandied about. What nonsense. Gouging is, literally, an act of violence. A voluntary agreement is the opposite of violence. Yet despite all this "gouging," people keep buying gas. Why do people agree to be "gouged?" If you don't want to be "gouged" at the pump, don't buy gas. Even if gas cost $100 dollars per gallon, this would not be "gouging" because you could choose not to buy it.
Around this point in the discussion, you can count on someone to bring up the record profits of the oil companies. Of course, ExxonMobil is capable of making large profits because it is a very large company. But how large are their profits, really? You might think that oil companies had suddenly decided to make an extra dollar per gallon in profit.
In fact, oil companies get less than nine cents per gallon. Those are the gigantic record profits that have everyone so upset. The profits of oil companies are smaller than the profits in many other industries. Nobody complains about the obscene profits of McDonald's.
In any case, there is nothing wrong with profits. In fact, profits are a good thing. Socialists would have you believe that profit is merely waste, and that prices would be lower if we could just eliminate profit. But profit is the cost of innovation. It is the chance of making a profit that drives so many people to make goods and services available to the public. The larger the profit, the greater the incentive to satisfy mankind.
The ginormous oil profits have led to calls for a windfall profits tax. The idea that large profits are a windfall would seem to contradict the idea that they result from a massive oil conspiracy, but no matter. The proposed windfall profits tax is a manifestation of the politics of envy. What purpose would it serve? It would increase prices rather than decrease them. Reducing the potential profits that an oil company can earn reduces the incentive to develop new sources of oil. That reduces the supply of oil, which increases the price.
Gasoline is made from oil. Hence the price of gasoline is determined by the price of oil. Oil companies don't make oil, they buy it from countries that produce it. If anyone is conspiring to fix prices, it would be OPEC, which is a cartel. Cartels exist to fix prices. In this case, though, there isn't much that even OPEC can do.
So if a conspiracy doesn't explain higher gas prices, what does? It is worth remembering that prices are mutually agreed to by buyer and seller. The buyer always wants to pay as little as possible, and the seller always wants to charge as much as possible. If a price changes, something else must have changed.
Economics tells us that an increase in prices means that either demand increased or supply decreased. In this case, it's some of both. China and India are continuing to use more oil as their economies continue to expand. Also, the summer driving season is beginning here in America.
On the supply side, there are continuing problems in Iraq, and there is increased risk of confrontation with Iran. Nigeria has been shut down as a supplier due to terrorist activity. Venezuela is run by an anti-American communist, and the newly elected communist leader of Bolivia just "nationalized" (stole) his country's oil fields. In addition, refining capacity is still limited thanks to hurricane damage and government regulations mandate switching fuel blends around this time.
In the midst of all this turmoil, though, there is one entity making out just fine--the government. Government takes an average of 44 cents per gallon of gas. Oil companies have to work hard for their 9 cents per gallon, but government takes its cut regardless. Oil companies can only profit when people freely choose to buy their product, but government taxes are backed by violence.
Government has also imposed environmental regulations which significantly impact the cost of gas. These too are backed by force. Government also stops oil companies from drilling for oil domestically, whether in ANWR, off the Pacific, Atlantic, or Gulf Coasts, or under the Great Lakes. It imposes regulations and allows lawsuits which make it next to impossible to open any new refineries.
Then, when all of this results in high gas prices, politicians (government employees) whip up hysteria against the companies that actually produce the oil. They demand a windfall profits tax, so they can take even more money, and make the cost of gas even higher. Who exactly is doing the gouging?