Behind the High Price of Gas

Posted: June 20th, 2006 by Militant Libertarian

This excellent article details why gas prices are so high… it’s probably not what you think.

by Brian Farmer

So that Americans have access to reliable, affordable gas and oil, American oil companies need to develop domestic sources of supply, but the government won’t let them.

Whenever gasoline prices increase significantly in a relatively short period of time and news media report concurrently that the profits of oil companies are also rising, one can predict, almost like clockwork, widespread public outrage. Cries of “obscene profits” will arise, along with demands that the state and federal governments “do something” about the high cost of gasoline. Politicians will fall all over themselves getting to the nearest microphone in order to condemn the “price gouging” being perpetrated by the oil companies on the American public and to threaten the imposition of “windfall profits” taxes. The public becomes convinced that oil companies are engaged in a conspiracy to drive up the price of gasoline.

That’s precisely what’s been happening recently, and Exxon-Mobil further fanned the flames, when it handed its retiring chief executive a $400 million retirement package. It’s hard to understand that kind of compensation, but it’s oil company stockholders (more than 40 percent of which are pension funds) who should be outraged over this type of remuneration, not consumers. As hard as it is to believe, hefty executive compensation is not behind the run-up in gasoline prices. Even if the oil executives worked for free, the price of a gallon of gasoline wouldn’t be likely to cost even a penny less.

Nevertheless, the profits of the oil companies do appear to be inordinately large, even excessive. But that’s because the oil industry itself is so huge. Actually, as a percentage of total sales, the profit margins of oil companies turn out to be in line with the average across all industries, and much lower than a lot of industries, such as banking, pharmaceuticals, and real estate. Of course, that’s no consolation to the millions of lower-income Americans, whose very limited discretionary income is being eaten up by rising gasoline prices.

To those who entertain the notion that oil companies alone are driving up gasoline prices, we have to ask some questions: “If oil companies can control gasoline prices to such an extent, then why would prices ever go down?” Also, “Why would oil companies drive up prices, when they know the terrible public relations problems it causes, and the retribution they could bring on themselves by the government?” After all, the last time oil companies made “windfall profits,” back in the 1970s, the government imposed price controls and higher taxes (which led to shortages, even higher prices, and long lines at the filling stations). In fact, gasoline prices do fluctuate, and to understand why requires an understanding of the factors that affect supply and demand, and how they interact. – read the rest at this link!

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