With gasoline prices averaging $1.70 across the nation, Americans are suffering another conniption fit over “Big Oil.” But the widespread conviction that oil monopolies are forever robbing us blind is little more than an urban myth.
For starters, if “Big Oil” companies are indeed behind this price spiral, why did they decide to gouge Californians (where prices are nearing $2.00 a gallon) and not, say, motorists in Portland, Seattle or Atlanta (where prices are hovering around $1.50)? Do they just “have it in” for motorists in some parts of the country but not others?
And if “Big Oil” were the serial gouger of public imagination, why have 28 separate federal, state and local investigations over the past 22 years — without exception — ended in complete exoneration of the industry? “Cover‐ up!” you might say. Then the departed Clinton‐Gore administration must have been in on it. After all, the administration’s highly charged investigation of gasoline prices last year also came up empty in a report issued last month.
We don’t need conspiracy theories to explain gasoline prices. All we need is a dose of Econ 101.
First, more than 30 percent of the gas pumps in the country are in areas that require expensive, environmentally friendly gasoline in the summertime. That gas costs about a dime more to make than the conventional gas used in winter. Second, oil companies have been frantically stockpiling gasoline this spring to ensure that a supply disruption won’t blow prices through the roof, as it did last summer in the Chicago/Milwaukee area. This has taken fuel off the spot market and driven up the price further. But all this represents is future demand competing against current demand.
How much of the price hike can be explained by the above story? Publicly available data suggests that the “Big Oil” makes only about 4 cents of profit on every gallon of gasoline sold. Everything else is either production costs or taxes.
Recent reports suggest that, even with the current inventory buildup, an unexpected breakdown at a few key gasoline refining plants or pipelines could send prices this summer above $3.00 a gallon in some locations.
That’s not so much a prediction as it is a warning. Because there are more than a dozen specialized markets for gasoline in this country, a sudden shortage in one often can’t be met by shipping excess gasoline from another. It takes time and money to retool refineries to produce different kinds of gasoline, which means temporary shortages in one blend or another take time to address. In the meantime, given that motorists are rather slow to change their driving behavior in the face of gasoline price hikes, it takes a huge increase in price to reduce demand even a little and to keep the pumps from literally running dry.
Why is there so little refining capacity available? The Naderites allege that the industry is purposefully keeping a lid on capacity to maintain high prices. But until last year, the refining business only returned about a 4 percent profit. It’s no mystery why people don’t invest in refining under those circumstances. After all, you could simply put money in your checking account and get a better rate of return. Conservatives, alternatively, allege that the environmentalists have blocked new refining capacity. But again, why search for political bogeymen when economic explanations will suffice?
Let’s keep things in perspective. Gas prices seem ridiculously high now, but in today’s dollars, gasoline was selling at $2.50 a gallon in 1981. We’ve seen these prices — and far higher — before. They come and they go. High prices induce investors to bring new supplies to market in search of profit. High prices likewise discourage consumption, ensuring that scarce commodities don’t become nonexistent commodities.
Today’s oil boom will become tomorrow’s oil bust and die of natural (economic) causes. We don’t need conspiracies to explain energy markets. And we don’t need a “national energy plan” to do what the market will do on its own.