There was a letter to the editor this week in the Billings Gazette entitled There’s no good reason for such high gas prices (1). Ironically, the letter came from Wyoming, which at the time had the 2nd lowest gasoline prices in the country. It is a pretty good lesson on the level of delusion of the average person regarding our energy situation. The Gazette allows blog style commentary following the letter, and here was a sample of the initial responses:
It is not the Democrat governor of Wyoming you should be pointing your finger at for high gas prices. Rather it is the Republican controlled oil & gas companies and the rich oil lobbyists in Washington. One only has to look at who is in the White House to see the source of high gas prices.
Price gauging is putting it mildly it’s robbery.
Since I am a firm believer in education, I tried to explain why gasoline prices are high:
There are a number of factors that are contributing to rising prices, but the primary reason is supply and demand. This is the same reason prices shot up after Hurricane Katrina. When producers see that their inventories are going down (i.e., demand is high), they raise prices so they don’t run out of product. If they can, they will raise production to meet demand, but most refineries are already running full. The worst thing a producer can do is completely run out of product, so they raise prices to make sure they don’t.
There are also other factors that are contributing to rising prices. Winter gasoline blends are cheaper to produce, and because they use more butane there is more supply available in the winter. But that season is ending, resulting in less supply that is more costly to make.
That seemed to just enrage people (typos were not edited out):
So, Mr. Rapier, you are saying the rich oil company lobbyists and CEO,s have absolutely nothing to do with energy prices ? Then why were there no such high prices prior to the current administration and Congress takeover ? Walks like a duck, it must be a duck.
Maybe one step back and mention OPEC and the US involvement in Iraq the reason that lead to higher prices to begin with. Forget about Katrina being the scapegoat here.
It’s all a metter of timing. And, NOW is the time for gas prices to sky rocket AGAIN! We don’t have any choice. Have any of you sent letters to your congressment or to the Prez to tell them we are sick and tired of the gouging? I went on a one woman campaign last year. Sent letters every day to Mr. Prez. Did it do a bit of good? I doubt it. They just said, “Drive less.” Well, if I drove any less, I’d be walking and it’s too dang far to town! I was sure to congratualte Bush and his family on their financial earnings through oil!
The bottom line- Our nation is run by oil men. That of course is GW, and Dick “I Shoot PEN Raised Birds” Cheney.This generation of oil men has sold us down the river a long time ago. Mr. Rapier, I appreciate your continued protection of these rampant profiteers. The defense of this industry is consistent with defending pharmaceutical companies, or even the tobacco industry 20 years ago.The oil companies could care less about the american consumer. They care exclusively for their shareholders and could care even less for the future of our nation, or how this industry has put us behind a big ol’ 8 ball I like to call the middle east.Can you imagine life without having to get along with arab countries?
Rob, BULL. Senate hearings are questioning the mergers and the elimination of competition as the cause for high prices. EXXON PROFIT OF $10BILLION!!! More revenue than Saudi Arabia last year. Again Rob BULL. You have overlooked the elimination of competition and they are getting away with it. GOUGING PLAIN AND SIMPLE!!!
With the emphasis on CAPS and exclamation points, that last one must have a valid point. Right? In fairness, some people seemed to “get it”:
Want to know why energy prices are so high? Look in the mirror! You want a 2,000 + sq foot house and 2 SUV’s in the driveway. You enjoy your 75 MPH limit in Montana and many of you want it removed to go 80 or 90? Have you insulated your attic fully? Bought a Hybrid? Put ALL flourescent bulbs in your light sockets? Don’t worry about Exxon just do your part and it will come down then go back up.
The only thing I can see that we can do in spite of oil companies is use less fuel. That will drive the price down.
We are lucky relative to the rest of the country. The price around here is $2.35 a gallon, but the average for the country is $2.50. Places that have mandated ethanol are ones where the price is really feeling some pressure. Producers have to phase out MTBE for ethanol, and there isn’t enough ethanol. In the next few months, expect to see $3.00 gasoline and shortages in some places that mandate ethanol. This is according to several recent newspaper stories. I think the Wall Street Journal nailed it when they wrote “this is what happens when Congress holds energy markets hostage to narrow special interests.” Congress is reaping what they sowed.
Mr. Rapier’s last post was absolutely correct. The oil market is a world market, and prices are set by supply and demand.
Are you aware that the major reason countries and people like us Americans do NOT wean ourselves from oil…is because it is still the most plentiful and cheapest mass energy supply around. Nothing to replace it. You can demand alternative fuels all you want but monetarily, the oil still carries the day in affordability.
Clearly the public is angry over higher gasoline prices. The senate is calling “Big Oil” CEOs to Washington to berate them for higher prices. Rampant profiteering is blamed. OPEC is blamed. But few people seem willing to accept personal responsibility. Fuel prices are high because of the way we use energy. We have around 4% of the world’s population, and use about 25% of the world’s energy. We built our society around cheap energy, and now that the era of cheap energy is coming to an end, we want the politicians to step in and do something about it. Punish the oil companies! Give me alternative fuels! Just don’t make me pay so much for them that I can’t continue in my current lifestyle. I would hate to give up that Lincoln Navigator and my home in the suburbs 30 miles from my job.
It is past time for a wake-up call for the average American. The era of cheap energy is finished. You can no longer refuse to change your driving habits and expect no consequences. YOU can do a lot to reduce your energy usage. Energy prices will continue to rise. Oil companies will continue to benefit from the dwindling supplies. Legislating against them will do absolutely nothing to solve the problem. Demand must be reduced. That can be accomplished by oil companies raising prices, or it can be accomplished by collectively changing our driving habits. How is it that Europe can deal with gasoline equivalent to $5.00 a gallon? Their driving habits are different than ours. Their society has not been led to believe that cheap energy is something akin to a fundamental right. And lucky for us. If the rest of the world had as high a per capita energy consumption as us, there wouldn’t be enough to go around. You couldn’t get gas at $10 a gallon, because there wouldn’t even be enough to go around at that price.
Consider the following statistics published last week in the Erie Times-News (2): While 66.7% of Americans stated that gas prices are seriously affecting their quality of life, 46.9% said they have no plans to get a more fuel efficient vehicle. Just don’t blame oil companies for making those kinds of choices when gasoline rises to $5 a gallon.
References
1. There’s no good reason for such high gas prices
2. “Drivers Fume Over Rising Gas Prices.” Erie Times-News March 29, 2006.
There are a number of factors that are contributing to rising prices, but the primary reason is supply and demand.
Exactly right Robert.
The only way gasoline prices will drop is if fewer people want to buy it.
Oil companies could not raise the price arbitrarily w/o a corresponding demand. If they did, unused gasoline would be sitting in storage tanks around the country.
The primary reason for that huge demand is our profligate use of gas. I walk to work each day (three miles each way) and everytime I see a 110 lb woman,or 180 lb man driving alone in a SUV weighing 4,000 lbs, the reason for our fuel crisis is all too obvious: They are using fuel to move 4,000 of metal, glass, rubber, and plastic just to move their own little pink bodies.
Much has been said recently about Brazil’s ability to provide their own motor fuels using only cane sugar ethanol, with people asking, “Why can’t the U.S. do that?”
Those who ask that question overlook the fact that on a per capita basis, Brazil uses only 12% as much energy as we do for transportation.
If we cut our use of motor fuels use by seven-eighths to Brazil’s level, we would need to import hardly any fuel from overseas either.
Everyone in this country who complains about the high price of gasoline, need only look in the mirror to find the answer: Quit driving, or find a way to get to work without also needing to burn energy to move a couple of tons or more of vehicle along with you.
Regards,
Gary Dikkers
Hey Gary,
Saw your letter in the paper. Weren’t some of those comments unbelievable? No personal responsibility at all. Everyone wants to keep their trucks and SUVs and demand that the price of gas be brought down.
By the way, I ran across your posts in Mark Gottlieb’s Blog. I notice he never responded, but I saw some of those despicable tactics from your opponents in that thread. Too bad they can’t argue the merits, and leave the ad homs alone.
RR
This paper by the economist David D. Friedman discusses (among other topics) the “belief in just prices.” I believe it sheds a considerable amount of light on why Americans react the way they do to gas price increases. (Since this paper doesn’t directly examine the issue of gas prices, it’s far from the whole story, but it still examines an important aspect of the situation that might otherwise be easy to forget.)
I understand why the public feels as they do, but my hope is that they can be educated that there is a good reason that prices are going up (other than we are trying to gouge them).
The examples from the paper were all examples that I would describe as much more optional than energy (restaurants, movie theaters, rock concerts). If a rock concert is too expensive, you just decide not to go. But when energy gets too expensive, it takes a long time to significantly adjust your lifestyle to that. I think that’s why consumers are really angry. They feel like we have them over a barrel, and are taking advantage. The proof to them is the record profits.
RR
When I visited my parents this last Christmas, I went down to the Texas beach for a couple days. I met a German couple who were touring the country. They told me gas was $14/gallon in Germany, slightly less in France.
$14/gallon. Not $5/gallon.
Robert, You should try to put oil companies profits in perspective. When there are millions of Americans consuming billions if not trillions of gallons of oil, the law of numbers say that any one company is going to make a large profit. Not because they are price gouging, but because they are selling so much oil & gas. When you look into the numbers, even more you will see that oil companies actually pay more in taxes every year than they make in profits.
So if you really wanted to have an impact on the price of oil, maybe we should reduce the taxes to oil companies. Of course, that’s not what Congress is trying to do now. They actually want to tax American oil companies even more. This action will only hurt American companies and make fuel even more expensive.
Andy,
I am not complaining about oil company profits. I work for an oil company. Our profits are in line with most other industries. We just have such large amounts of capital employed, our profits look huge. But earnings on sales even during these times of record profits are only about 10%.
Historically, we have been cyclical. In the down years we will only earn 5% or so. I think those cyclical days are over, and it will be 10% or more from here on. So, buy oil stocks. 🙂
Bravo, Robert. Your points are well made and well taken. I appreciate your reasoned comments and responses. I have such a hard time figuring out why some folks want to vilify success–even big success. And I thought your point that oil companies make only 10 cents per dollar of sales was astonishing. Keep up the good work!
Let’s be happy that the cost of gasoline hasn’t gone up with the rate of inflation on most other commodities. In fact I recently read that over the past 20 years the cost of gasoline has only gone up about 68% where other items have gone up dramatically like housing (93%) medical care (218%) tobacco and smoking products (396%).
Well, if the government is successful in implementing a Windfall Profit Tax, gas prices will surely increase. We need for our government to help strengthen American companies, not burden them with exorbitant taxes that will only reduce their global competitiveness.
Squarepeg, Amazing figures…coupled with Robert’s post about oil companies making only 10 cents per dollar of sales, they really illuminate the debate in a new way.
Walter Williams had a column where he tackles this subject and explains it nicely. He uses the example of one town running out of bread and what would happen if the suppliers of bread had their “windfall” profits taxed. Bread would stop flowing to the city and the price of bread would remain high. If the market is left to work on its own then bread will flow to the town to meet the need and prices would drop.
Basic economics and it applies to oil as you pointed out with Katrina and Rita and the fallout from the disruption of supply and added demand.
http://www.townhall.com/opinion/columns/walterwilliams/2005/11/09/174865.html