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Anti-PC League

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Day By Day© by Chris Muir.

Wednesday, November 09, 2005

The Economic Reality of High Gas Prices

Gas prices are finally coming down. reports that the average price for a gallon of gas in the U.S. is $2.29 per gallon.

That doesn't stop congress from launching an inquisition to find out who's behind the high prices:
The chiefs of five major oil companies defended the industry's huge profits Wednesday at a Senate hearing where they were exhorted to explain prices and assure customers they're not being gouged.
There is a "growing suspicion that oil companies are taking unfair advantage," Sen. Pete Domenici (news, bio, voting record), R-N.M., said, opening the hearing in a packed committee room.
"The oil companies owe the American people an explanation," he declared
Of course, these CEO's will probably roll over, play dead, and not tell the American people who is really driving the price at the pump: The government.

Here is a chart of gas taxes by state. Add the base price of unleaded or diesel to the added taxes and funds in the right column to find out how much you pay. In Florida, we pay between 45 cents and 52.9 cents per gallon.

During the hurricanes, prices were raised in anticipation of future shortages. It wasn't just an act of greed, but an act designed to lower demand, since the future of the supply was in question (NOLA was the major shipping inlet for the midwest). Plus our refining capacity is so pathetic these days, thanks to extreme environmental regulation, there was no way to fix the supply problem. Walter Willams also explained that "price gouging" laws helped to create a shortage during the hurricanes:
When the hurricane evacuation order came, there was an immediate change in the demand conditions for gasoline; namely, demand became much greater than the available supply. Retailers, in fear of prosecution by the attorney general, didn't do what would have brought demand more in line with the available supplies of gasoline -- raise prices.
Suppose a family evacuating Houston chose to make a 146-mile drive to stay with relatives in Austin. Their car has a half a tank of gasoline -- plenty to get to Austin -- but just to be safe, they decide to fill up. What do you think they might do if they expected to pay $2.75 a gallon but when they got to the gas station they found the gas selling for $3.75? I bet they'd say, "The heck with that; we'll fill up in Austin."

That's wonderful; they've voluntarily made gas available for someone running out of gas. In my book, for a motorist who's running on empty, gas available at $3.75 a gallon is preferable to gas being unavailable at $2.75 a gallon.
Nonetheless, gas prices are coming down as the supply is being normalized. Have the taxes been lowered? Nope. The goverment gets its profit regardless of who's running out of gas. People bitch about the "record profits" by the oil companies, yet the record profits are easy when you have record costs - oil hit $70 a barrel this year you know, and has not dipped below $60. Again due to the poor refining capacity in this country. The thing to look at is not the bottom-line profit, but the profit margin (the net difference between total cost and net profits). The oil industry is actually low when it comes to this. Take a look at the net profit margins of the top ten U.S. companies by industry, then look at oil companies profit margins:
Exxon Mobil's gross profit margin, for example, stood at 6 percent 10 years ago, when oil cost about $15 per barrel. The company now boasts a margin of 10.7 percent, while crude costs $61 per barrel.
"When you get to the pump and see these prices, it's hard to take," said Rayola Dougher, manager of energy market issues for the America Petroleum Institute, the industry's main lobbying arm. "I can understand people thinking it's all profits when they're paying 50 cents more. But it's really not."
Go back and look at the profit margin of Ditech Communications - almost 75%, but they are also in the highly competative communications market, which means they aren't gouing, but keeping their prices low, and spending there profits on R&D. Now look at Kinder Morgan, Inc., 46.1% profit margin, are they gouging? Keep in mind, KM is a utility company, possibly with some city contracts. In other words, it could likely be a government-granted monopoly. As this guy wrote there are 4 options if you want gas prices to go down:

If you want gas prices to be cheaper, you should do several things: (1) use less of it; (2) demand that politicians get their hands off the economy altogether, and stop threatening (or implying threats about) price controls on gasoline (as we had back in the 1970's, creating monstrous shortages and gas station lines); (3) demand that the federal government lift environmentalist restrictions so that drilling can be done closer to the U.S., thereby freeing us of dependence on oil from irrational dictatorships like Iraq and Saudi Arabia; and (4) demand that our government stop walking on eggshells, drop the necessary bombs on our terrorist enemies and take over their oil fields (created by Western innovation and technology in the first place) until the people in those countries show they are prepared to have a rational democratic republic which doesn't threaten the well-being of the free world.
I doubt anyone wants option #4, so we best get cracking on the other 3.