Gas Prices in America

On the front page of USA Today was another story about how people are angry over gas prices.  All over you see people posting blog articles and myspace bullitens and flikr photostreams about gas prices.  So, here’s my weigh in on the whole topic. 

 Yes, gas prices are rising to previously unheardof and unimagined levels.  Yes, oil companies are making millions more in revenue.  But in reality, who is really to blame?  50% of Americans, according to the  USA Today Gallup Poll, were angry the Gas and Oil companies.  26% are angry the President over gas prices!  Sometimes I wonder what these people think the President has the capability to do.  Maybe they think it’s as easy as a presidential mandate to lower gas prices.  “Let’s completely ignore the checks and balances on Government (just like when we all got mad at FEMA after hurricane Katrina) and cast blame on people who have no power over the issue!” they probably say.  In my opinion, only 4% of America are getting close, and getting angry at congress.  On average, Government Gas taxes cost 45.9 cents per Gallon.  In some states, such as California, gas taxes exceed 60 cents per gallon.  Which brings me to the 1% of americans that in my opinion are right on the money: the 1% that is angry at environmentalist liberals. 

 See,  many folks think that petrol companies are raising the prices of gasoline simply to make a greater profit at the expense of the american public.  Realistically, though, who isn’t out to make a profit?  Sure, there’s the folks that volunteer or work for NPO’s (who don’t make an economic profit, but still manage to pay their employees well enough), but the world just doesn’t work without profit-driven initiatives.  Capitalism depends on it.  So let’s take a look at rational human behavior when it comes to a couple of key economic concepts: Demands and Shortages. 

Supply and Demand is the backbone of Economics.  Basically, it says that the more consumers are willing to spend on something, the more suppliers are willing to spend to provide the good.  Conversely,  the less a product costs, the more people are likely to buy it.  Capitalism works on the basis of competition.  Companies enter the market and leave the market as it becomes respectively more and less economically profitable to be in the market.  This means that if companies are not making an economic profit, they will not enter the market. 

 Shortages happen when the quantity supplied of a product is not enough to meet the quantity demanded.  There are 2 real options to mitigate this.  First, you can increase the amount of product supplied.  Secondly, you can increase the price of the product to decrease the quantity demanded. 

 So applying this to the situation, let’s start with the shortage issue.  The truth of this matter is that there is no shortage of oil.  We have plenty of oil to last us for at least a century, and if not that, then pretty close.  What we are lacking here in the US is refining capacity.  Refining capacity in the United States has not changed for over 30 years.  The reason for this is simple:  environmental regulations.  Because of environmental regulations, it is not feasible for companies to try and build new plants.  Since environmentalists have stopped the creation of new sources of fuel, we end up with a shortage that is a root cause of these problems.  So if environmental restrictions are too harsh here, why not import the finished gasoline from other countries?  The answer for that is that congress has prohibited the importation of Gasoline to protect the american refinery workers. 

So how do we know this is really a shortage and not oil companies raising their prices arbitrarily?  Competition is the answer.  Capitalism works to find the equilibrium point in markets: the point where the quantity supplied equals the quantity demanded.  In the gas world, the quantity supplied is not enough to meet the quantity demanded on the market.  And since the refining capacity hasn’t changed for 30 years, the option to make more gasoline is a non-option.  So the only option they have left to mitigate the shortage is to raise the price to stifle the quantity demanded to something they can supply without taking heavy losses.  And that’s what we are experiencing today. 

About this time people are screaming “What about the price wars?  Such and such gas station has the lowest prices in the country, why can’t they lower all gas prices that low?”. The answer to that is price wars are relatively short term, and there is always a loser.  The way price wars work is that the two stations lower their prices as much as they are authorized to try and win business from their competitor.  Eventually, the profit on one or the other is so low that they decide to close.  Once they close, the price war is over, and the other company goes back to selling at the normal, if not a higher price.  The point here is that short term flatlines or losses can be justified by future profits.  They are taking economic losses in the short term to try and gain a long term economic profit. 

So, here’s some action items for the USA if they want their gas prices to be lower.  First, lower demand for gas.  70% of americans in that gallup poll said they were willing to change something to decrease their demand on gas.  Second, kick an environmentalist in the shin and do your part in trying to loosen up some of the restrictions in place to make it easier to build new refineries.  And if you don’t particularly care to be working in a refinery, then you ought to think about writing your congressman to get them to lift the international trade barriers on refinded fuel (and throw in a word about repealing those gas prices as well).  If we are able to increase supply and decrease demand, then we’ll see an end to these high prices (provided the government doesn’t levy more gas taxes as the price goes down, as they have before).  Until then, apathy and complacency will win the day and we’ll just deal with the higher gas prices.  Alternatively, start your own oil company and steal all of their business with your incredibly low prices.