Thursday, May 04, 2006

Gouging by Government

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?


Dan Roth said...

I think we need to start localizing control of oil issues. For example, if the people of Alaska want to drill ANWR, who are the representatives of the lower 48 to tell them otherwise? It drives me crazy when Negative Nancy Poloci and Hippie Harry Reid say what one state can do with its resources when they'll most likely never even go there. Also, if one state wants to build a refinery, they should be allowed. Call me a federalist, but it just seems wrong to me when the federal government tells states what they can and can't build or do with their natural resources.

Anonymous said...

Finally somebody who has a clue. Notice how many senators are pushing for the $100 rebates when they could be spending their time on how to actually fix the problem.

Dan Roth said...

They're just pushing that $100 rebate now because a lot face re-election in a few months (1/3 of the senate, all of the house). So that rebate will look good come Nov. to actually FIX the problem, it would take a bit longer for the voters to see the effects.

A.J. said...

Another idea that is being kicked around is up to a 6 month moratorium on the federal gas tax which is 18.4 cents per gallon. Michigan's gas tax is 19 cpg (15 cpg for diesel), plus a .0875 cpg tax for the "refined petroleum fund." In other words, we are paying about 37 cpg, which is about $4.50 in taxes alone on a 12 gallon tank.
Of course, ending the tax still doesn't ween us off the dependence on foreign oil, if I may use the cliche.
It's also worth noting that yes, oil is purchased from the OPEC cartel, but it's also a publicly traded commodity on Wall Street. The traders look at world events- Venezuela, Iraq, Iran, Bolivia, etc- and make decisions based on expected supply. Also, the fact that thousands of cars are being added to the streets everyday in China and India is putting a strain on the world's oil supply.
I don't think the McDonald's analogy was a good one. Today, double cheeseburgers are $1. If the price of double cheeseburgers jumped to $2.25 in the space of a couple weeks, you don't think people would be upset and complain? Of course they would, but no one NEEDS a double cheeseburger, so people would just stop going there, and they'd substitute with something else. People need gas to get to work, and there is no substitute for it. The gov't could tax us a dollar per gallon, and the oil comapnies could raise their prices, and we'd still pay it. We need to seriously invest in affordable, practical mass transit, forget about ethanol, and drill in our own oil reserves until we find a practical alternative.