Economic Ignorami by Rand Simberg
Every time we have a natural disaster like this, this idiotic topic comes up, and we once again have to explain Econ 101 to the products of our public school system, probably in futility.
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You know, I think that this is an explanation for socialism and collectivism’s continuing grip on the public mind, despite its long history of unending failure. There’s just something in human psychology to which it naturally appeals, and rationality just can’t break through. It just “feels” unfair for prices to go up in an emergency, regardless of the demonstrably bad consequences of attempting to legislate them.
Three Cheers for “Price Gougers” By Rand Simberg
In any locality, when the supply of a particular item is reduced with no change in demand, or the demand for it increased with no change in supply, or supply is decreased with a demand increase, prices will go up.
This is a signal to the market. To those demanding the product, it is a signal that the supply is relatively short, and that they should perhaps rethink the level of their demand, if possible. To the suppliers, it is a signal that more of the resources must be brought to market. In both cases, it will result in a change in behavior on both parties that will restore the balance between supply and demand. Moreover, it does so in a useful, quantitative way. It tells the supplier how much expense, risk and effort she should expend to increase the supply. This calculation may even bring new suppliers into the market. It also indicates the degree to which it is sensible for the consumer to change their demand. When by fiat we pretend that the price has not gone up, it’s like covering up the signposts, and we shouldn’t be surprised when those supplying no longer attempt to increase the supply, and those demanding can’t be bothered to reduce their usage of that particular commodity.
It’s amazing what you can learn if you just ask a question or two instead of assuming you already know the answer.
Why are gas prices spiking today?
Gouging, right? It’s the evil big oil companies ripping us off again!
Actually, no, it isn’t.
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It’s been more than a few hours, and shortages are already here.
So the price of a gallon of gas is skyrocketing, even at stations, like Pilot, that have enough gas to get through the interruption without going dry. So why are they raising their prices? Aren’t they gouging?
Nope. If you’ve been out in Knoxville at all today, you’ve seen long lines of cars at gas stations. You’ve seen people filling up cars, trucks, motorcycles, lawnmowers and gas cans. They are in a panic mode, and they’re buying more gas than usual. Even though Pilot has enough to get through the crisis at normal levels of sales, there’s no way they can sustain sales at the rate they are going. So what do they do? They raise prices. By raising prices, they discourage people with brains from buying more gas than they need. They discourage people from driving more than they need to. In effect, they are encouraging conservation by using market forces rather than governmental coercion.
And it will work.
Filed under: The Myth of Price Gouging , econ 101, economic myths, gas prices, gasoline, Gasoline prices, price gouging, supply and demand
There is no doubt that panicking buffoons acting like frenzied sharks with blood in the water certainly contribute to situations like this. But several sources have indicated there is no shortage of supply in some of the areas with jumping prices.
In my area in Michigan, prices went up anywhere from 20 to 60 cents from Friday to Saturday. No shortages. No lines of cars at any stations. That’s just obscene profiteering in my book. And what about Canadian prices jumping about 50 cents? They don’t get their gasoline from US refineries.
cynicalsynapse:
“But several sources have indicated there is no shortage of supply in some of the areas with jumping prices.”
What are these “several sources”? Your claim that there are “no shortages” is likely incorrect considering that environmental policies have strangled our energy production for the last 30 days: limited drilling, no new refineries, no new nuclear plants, etc. More recently, a number of refineries in Texas were shut down due to Hurricane Ike. It will take days to get them started again.
The notion that any profits are “obscene” indicates that you’re likely viewing this whole situation from emotionalism. No profit is “obscene” unless the profit was obtained illegally or immorally. But despite pointless investigation after pointless investigation, oil companies have done nothing illegal or immoral. (1) They have provided a product which is the blood of our economy, (2) their profits are high because their product is so important, (3) oil companies pay extortionist taxes which eclipse their “obscene profits.”
What is “obscene” is the pandering and interfering by politicians who have never administered a lemonade stand, let alone produced gasoline. What is “obscene” is that oil companies aren’t able to conduct their business as they see fit. And who suffers from this political incompetence?
You do. And I do.
I’m afraid I didn’t keep track of the sources, which is why i didn’t link to them in my reply. I’ve visited a lot of blogs since Friday on the topic of gas prices. However, I googled fuel supplies and Flordia and Knoxville (which, by the way was one of the hot “gouge” complaint areas) are two examples.
That doesn’t mean we didn’t have stations run out of gas because of idiot consumers. Stations have to wait their turn for resupply. Nor does it mean there won’t be a tightening in supply. As you said, two dozen refineries are down, along with some of the major pipelines.
I don’t disagree that political interference is not helping the situation. But I suspect politicians no longer represent their constituencies. Rather, they represent special interests, including Big Oil. I think that’s why the pointless investigations you refer to haven’t yielded anything substantive. That’s just a way for politicians to make the public feel good.
You’re right: petroleum is what drives our economy. I don’t disagree that environmentalist agendas have restricted expansion of nuclear power and made new refineries and even new conventional coal-fired power plants less economically attractive. I’d be interested, however, to see the comparison of oil company taxes with revenues, write-offs, expenses, tax incentives, and profits. I don’t believe their taxes are as high as they might want us to think.
Oil companies can’t be left to conduct business as they see fit. Citgo, for example, has judged guilty of criminal violations of the Clean Air Act and has consented to emissions cleanup. Oil companies are not the best corporate citizens, no matter what their websites say.
I never said any profit was obscene. Oil companies are certainly entitled to profit; that’s what they’re in business for. I’m not the economic expert or the all-knowing guy to decide where the division is between high, but acceptable profits. But with the pundits constantly talking about recession and with unemployment on the rise in 43 states, things like ExxonMobil’s record-breaking $11.68 billion profit are kind of hard to take. That’s what’s obscene.
Not being a petro-economist, I’m not sure who’s making the big money on the current situation. The spikes in gas prices we’ve seen are largely driven by stupid people who seem to think this is their last chance to get gas before the world ends. But I’m suspicious that it begins with Big Oil hinting there will be disruptions in supply. The media snatches that and launches their hype. Before you know it, you have a self-fulfililng prophecy. The only question is, who’s making the money on it? We do know, in some cases, it’s the immoral station operator.
And yes, we’re all hostages of this, because oil is entwined into every aspect of our modern economy.
“Rather, they represent special interests, including Big Oil.”
But environmentalism is also a “special interest.”
That you refer to oil companies with the disparaging “Big” makes it appear that you have accepted the demonizing of oil companies. Why is that?
We never hear about “Big Education” and its constant failure. We never hear about “Big Environment” which has been a major cause behind the price of gas skyrocketing. We never hear about the corruption of “Big Union” and its effect on our economy. No, only private entities are “Big.” Anything the government touches, however, is never “big,” and yet everything government touches becomes a debacle. Environmentalist policy has directly hurt our economy and yet there are no investigations of them or their supporters. Instead, we get more arrogance extremism from them: Americans ask for more oil, and Dems/liberals/environmentalists only repeat their refusals.
“I never said any profit was obscene.”
You referred to “obscene profiteering.”
“pundits constantly talking about recession and with unemployment on the rise in 43 states, things like ExxonMobil’s record-breaking $11.68 billion profit are kind of hard to take. That’s what’s obscene.”
Consider the possibility that a recession (which requires 2 quarters of negative GDP — last quarter, GDP was 3.3%+) and higher unemployment might have something to do with our energy policies.
The “profits” that oil companies make are dwarfed by the taxes they pay to the government annually. Why aren’t we questioning why the government taxes so much from private entities (which only make the price of gas go up).
“The spikes in gas prices we’ve seen are largely driven by stupid people who seem to think this is their last chance to get gas before the world ends.”
Actually, in the last few months, American demand has been falling because of the high prices, which is part of the reason why the price of oil has fallen from $147 a barrel in July to under $100 today.
According to this article, the current oil situation is actually creating jobs.
Perhaps the blame might be less on oil companies and more on the rest of us.