It’s that time again: consumers complaining about higher gas prices and motorists demanding the government to investigate potential claims of price manipulation or gouging. It is the same old song and dance routine we have become accustomed to after every major weather event.
In September, gas prices have surged close to $2.80 per gallon, primarily because of Hurricane Harvey. With production capacities taking a hit and refineries shutting down, market prices have reflected the disruption. And that’s all that these prices are: a reflection of market conditions.
So, there isn’t some vast conspiracy within the oil-and-gas sector. This means there isn’t a bunch of executives smoking cigars, wearing cowboy hats and thinking of new ways to hurt the consumer.
Higher Gas Prices Are Temporary
In recent years, U.S. motorists have witnessed tumbling prices at the pump.
Thanks to the shale revolution and the rise of “Saudi America,” the average cost of a gallon of gasoline has dipped to as low as $1.60. For the last 18 months, the average weekly gas price has been roughly $2.
And that ain’t bad!
Following a natural disaster, gasoline prices temporarily climb and fluctuate. Oil companies suspend operations, refineries close their doors and consumer demand spikes. As the cleanup initiates, prices usually decrease. Unfortunately, the severity of Hurricane Harvey has impacted the return to normalcy in the region, causing the value of the gas in your automobile to remain high.
The Texas Gulf Coast accounts for roughly one-third of the nation’s refining capacity. Since many of the refineries were affected by the weather event, the output took a hit, and prices inevitably rose, sending a signal that production needed to be ramped up to satisfy demand. Yes, it was the market, not a bunch of odious executives, dictating prices. It also suggests that the industry must do a better job of preparing for natural disasters.
Of course, that won’t prevent politicians and the public from submitting allegations of price gouging and manipulation. Don’t worry; they’ll forget all about it when the local gas station sells $2 gasoline again.
So What if Prices Jump?
We take oil for granted. We don’t think of how much oil has contributed to our society. Everything from ambulances rushing to sick patients to the import of coffee and avocados, oil has done more for the American people than Greenpeace ever did.
The question: so what if prices jump?
First, when adjusted for inflation, gas prices were higher in the early 1980s when a gallon was $3.29. If you go back 100 years, a gallon of gas would cost you nearly $4. And we’re whining about $2.60?
Second, we never consider how much goes into producing gasoline. This is where it gets interesting.
Oil companies need to invest millions of dollars in drilling contracts, manpower, equipment, and transportation. The personnel needs to drill deep beneath the ground, sometimes in the sea or under ice – many risk their own lives to extract the oil. Once this oil is sucked out of the ground, it needs to be delivered to refineries on massive ships or pipelines (we all know that requires government approval, which takes a long time). The oil then needs to be refined, placed on trucks, and shipped to stations.
You can’t forget about the government’s greedy fingers touching that Texas Tea as well. The government takes approximately $85 billion every year in gas taxes: a federal tax of 18.4 cents per gallon and a state tax as high as 58.2 cents in Pennsylvania. In total, 20% of gas prices are composed of federal, state, and local taxes.
Politicians keep harping on profits, even though the crash in crude oil prices caused 40 publicly-traded companies to post an accrued $67 billion loss. For the most part, oil companies have done reasonably well. Good for them! We should want them to make even more profits, which are then reinvested into research and development (R&D), exploration, equipment upgrades, and staffing.
A large portion of the profits is also allocated into adhering to environmental protocols and government regulations, something that should satisfy the salivating environmentalists and politicians.
State Meddling Breeds Disaster
When a disaster strikes the U.S., the media will express its collective outrage. The voting public will echo the media’s sentiments and request their esteemed representatives to do something about it. The politicians will listen and proceed to demand inquiries and justice.
The solutions proposed by both sides of the aisle often involve price controls or even more regulation.
Remember the last time the federal government placed price controls on gas? There were temporary shortages, motorists couldn’t get gas, and the national economy plummeted. Once the price controls were lifted, the market responded with action and everyone had gas again.
Indeed, state intervention breeds disastrous results. As Groucho Marx said:
“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.”
Despite the contempt held for the oil industry, we should be more grateful. A lot of money, resources and time is invested in production, and all it costs you is about a daily trip to Starbucks.
The next time you see your local gas station raise prices, don’t immediately think of the worst. It’s just the market at work. Want to do it yourself? Go right ahead. But as others have learned – like the men who tried to make their own bacon or manufacture their own toaster from start to finish – it will cost you an exorbitant amount of money.
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