Markets and Gas Prices? He Told You So — $1.80 Ago
I love saying I told you so. But setting aside my sinful pride, I hope the turmoil in the retail gasoline market does teach all of us in Indiana at least one simple yet profound lesson: Gasoline prices follow oil prices.
Eighteen months ago retail gasoline prices surged to around $3.50 a gallon. At the time I argued that high gasoline prices were the byproduct of supply and demand and not a result of producer greed. (Link to original article here.)
Responses to my column were predictable:
At the time, I predicted the profits associated with high refiner markups would attract new refining capacity (even as regulatory barriers made refinery expansion problematic) which “will inevitably increase available gasoline supplies, put downward pressure on gasoline prices and reduce refiner margins.” Sure enough, 18 months later gasoline prices hover at $1.70 per gallon in Indiana. And the Nov. 21 Wall Street Journal reports that “refiners are getting squeezed because gasoline prices have been falling faster than prices for crude oil.”
So much for the absence of “corrective agents” in the price system or for the power of Bush and Cheney to “jack up” prices for their own profit “as they wish.” The greed theory of prices so dear to the heart of the populist left was a curious theory then and it is now. “If higher gasoline prices are a byproduct of business greed, are lower gas prices a byproduct of business generosity?” Do any of the critics want to answer that now? Has human nature mutated so radically in the last 18 months so as to eliminate greed from the gasoline market? I think not.
Not that Friday’s crude decline will show up in Saturday morning’s pump prices, but inevitably both oil price increases and declines do show up at the pump. The laws of supply and demand and the power of the competitive market forces ensure that retail gasoline prices are, on the whole, reasonable reflections of the costs of refining and delivering gasoline.
And finally, private ownership, unregulated prices and free enterprise work better in providing gasoline than any design offered by aspiring politicians or government bureaucrats. Economic turmoil may be maddening, but it can also be educational — if we are willing to learn.
Cecil Bohanon, Ph.D., is a professor of economics at Ball State University and adjunct scholar Indiana Policy Review Foundation. Contact him at firstname.lastname@example.org.