High gas prices put everyone in a bad mood. It was a big enough hit to the family budget when a gallon of gasoline passed the $2 mark. Only a few months later, that gallon can cost $3. This has many Americans thinking they are being ripped off. So just who is to blame and what can be done?
Do not blame your local gas station. No matter what the prices are, those businesses only make between 7 and 11 cents per gallon. That means they make less than $2 every time you fill up. And if you, like 70 percent of their customers, pay by credit card, which levies a 3 percent fee on the retailers, they may make less than $1.
Gas stations make most of their money with their convenience stores. Coffee, soda, and junk food have a much bigger profit margin than gasoline. According to industry statistics, gas stations derive only one-third of their profits from selling gasoline, with two-thirds coming from the "Quik-Mart" part of the operation. And to add to the retailers' woes, the more gasoline costs, the more their customers pay with credit cards and the fewer Slushies they buy.
We could blame the big oil companies. After all, they are making record profits, with Exxon Mobil racking up a $9 billion quarterly windfall. Politicians are accusing the oil companies of "price gouging." But, in general, in a free economy, prices are determined not by the company-however much it might profit when the value of their product soars-but by the marketplace. When the supply is small and the demand is great, the price goes up. It has to.
Today, a big chunk of the world's oil comes from unstable countries with unreliable output. Not only Iran and Iraq but strife-torn Nigeria and Castro acolyte Hugo Chavez's Venezuela. At the same time, countries that were once "Third World" and impoverished, such as China and India, now have booming economies that are demanding more and more oil.
We could with more accuracy blame the government. The federal gasoline tax is 18.4 cents per gallon. Then states add their own tax on top of that, which may be as much as 30 cents a gallon. But more importantly, government limits the supply of gasoline. Congress keeps forbidding drilling in the ANWAR oil field in Alaska. Florida will not permit offshore drilling, even as China and other countries put in wells just outside Florida waters. Environmental regulations prevent oil companies from opening new refineries. All of this artificially restricts supply, sending up the price.
And the government certainly cannot regulate prices. Richard Nixon, despite his conservative image, slapped price controls on gasoline after Arab states decided to punish America for supporting Israel with an oil embargo and prices soared to close to $1, which people then thought was outrageously expensive. But all Mr. Nixon accomplished by mandating low prices was to create massive gasoline shortages, since companies could not afford to make gasoline they could not sell for a profit.
But high prices will eventually increase the supply. In Oklahoma, where I am from, many farms have tiny oil wells that have not operated for years. It costs too much to run them for the few barrels they could pump out of the ground. But when we visited Oklahoma over the Easter vacation, these little wells were pumping like crazy.
The high prices also make alternative energy sources profitable. Now truckers are finding that they can save money with "bio-diesel" made out of soybeans. People are buying fewer gas-guzzlers and more hybrids, not from guilt trips but out of sheer economic necessity. High prices will cut consumption, encourage conservation, and arguably do more for the environment than any number of Earth Day celebrations.
Yes, high gas prices are painful. But they are no reason to abandon free market economics, which is the only mechanism that can get us out of this mess.