Markets and Gas Prices? He Told You So — $1.80 Ago

December 8, 2008

For release noon Tuesday Dec. 9 (556 words)

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.)
 
Earlier that spring a refinery in Indiana had suffered a fire, crimping gasoline supplies and increasing price. Refiner markups were high, around $25 per barrel of oil. The difference was showing up in the price Hoosiers payed at the pump, but I contended that the high prices were temporary and not the byproduct of a wicked conspiracy.

Responses to my column were predictable:

 
“What hogwash . . . This is called getting ripped off,” said one.
 
“Wrong!” said another.
 
“Gas prices being high are a direct result of the greedy oil companies . . . when Bush and Dicky Cheney control 75 percent  of the world’s oil you know darn well that they are jacking up the price to make themselves rich and the rest of us poor!” said another.
 
“Supply and demand is no excuse for wanton disregard for the idea of a fair price for a product or service; supply and demand has no corrective agent with gasoline because the oil companies own the oil from cradle to grave and thus can manipulate the pricing as they wish,” said yet another.

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 cbohanon@inpolicy.org.



Comments...

Leave a Reply

Your email address will not be published. Required fields are marked *