Gouged by Gas Prices? Give Me a Break

June 1, 2007— -- Were you "gouged?" buying gas this week? Or maybe over the Memorial Day weekend? Did you pay those record high prices we've heard about? It's time to say give me a break! But … to whom?

Drivers we spoke with called gas prices "ridiculous." And the media says it's a new record. Newscasts on CBS, NBC, ABC all announced new record highs. On Fox News, Jon Scott told viewers, "the average price of gas has hit a record high of, get this: $3.18 a gallon."

Well, get this: It's not a record high. That's what they say in the media, but it's only a record high if you don't adjust for inflation. And that's just silly. You might as well say the movie "Rush Hour II" made more money than "Gone with the Wind." The media ought to quote prices in real dollars, but maybe when they get excited, they just don't bother.

Once you adjust for inflation, it turns out gas cost more 25 years ago, in March 1981. When the 1981 price is converted to 2007 prices (not 2006 prices, as the EIA did), last week's average price of $3.22 is seven cents below the record, $3.29, which by the way was a monthly average. See for yourself at: http://www.eia.doe.gov/emeu/steo/pub/fsheets/petroleumprices.xls

Groceries, Gas and Government

Still, one reason that people are upset by gas prices is that the price is in your face every time you drive by the gas station. (Click here to tell us about gas prices in your neighborhood). But it may surprise them that this year the price of lettuce, broccoli and apples increased much more than the price of gas. You probably don't know that because they don't post big signs like gas stations do.

And think about what it takes to bring us gasoline. First, oil has to be sucked out of the ground, sometimes from deep beneath an ocean or underneath ice, or from places where workers risk their lives. And just to get to the oil means the drill has to bend and dig sideways through as many as seven miles of earth. What they find has to be delivered through long pipelines or shipped in monstrously expensive ships, then converted into three different formulas of gasoline, trucked in trucks that cost more than $100,000 each, and then the gas stations have to spend a fortune on equipment to make sure drivers don't blow themselves up while filling the tank.

Even after all that, gasoline is still cheaper per ounce than the bottled water gas stations sell.

'Record Profits'

At a press conference last week, Sen.John Kerry groused that, "Oil companies in America are reporting record profits. Record profits."

I say, "So what? When did 'profit' become a dirty word?"

I wish the oil executives would come out of their bunkers once and face the media. They could say something like: "Why are you complaining about our profit? What do you think we do with it? Buy fancy cars and homes? Well, we do actually, but nearly all of the money goes to looking for more oil and in following the environmental rules that you want us to follow. You should want us to make more profit. Anyway, the government takes billions more in taxes from the gas you buy than we make in profits. If anyone's gouging, it's the politicians!"

But they don't talk that way to the media, or to the politicians, many of whom believe the greedy oil companies cheat. After hurricane Katrina, Congress had the Federal Trade Commission investigate gas price gouging, but the FTC found "no instances of illegal market manipulation."

What Is Gouging?

But did the politicians listen to the study they commissioned? Apparently not, because now that prices are high, they're rushing in again to pass a bill to punish "price gouging."

But what is "gouging"? The bill outlaws prices that are "unconscionably excessive" or take "unfair advantage." Lawyers will salivate over the money they'll make debating vague words like those.

Laws are supposed to be clear so we'll know in advance what's legal and what's not. But there's nothing clear about those "crimes." That's not legislation. It's legislative posturing. Considering the perverse incentives of electoral politics, I'm amazed this bill got only 284 votes.

Worse, what if they really succeed in capping prices?

Do you remember what happened the last time the politicians imposed price caps? It was a disaster. It led to long lines at gas pumps. And many people couldn't get gasoline. Only when price controls were lifted did supplies rush in, and THEN prices went back down.

Supply and Demand

It's basic economics, says Economist Russ Roberts.

"Oil companies don't control the price of gasoline, any more than you or I control the price of our house," he said. "Housing prices have been rising in many American cities over the last five or ten years. It's not because we are greedy, it's not 'cause we are mean. It's because the market -- the supply and demand activities of all the consumers and all the suppliers -- pushes those prices up."

And that's what happened to the price of gas. Demand keeps going up because we keep buying gas, no matter how expensive it gets. Part of that is because, as a country, we spend a smaller proportion of our money on energy today (7 percent of GDP) than we did during the real record set in 1981 (13 percent). We can afford to pay more.

So, demand is up three percent in the last year, but there's only one percent more supply, because refineries can't refine more gasoline. Several caught fire in the last few months. In fact there have been 30 refinery shut downs this spring alone. And that's not surprising because refineries are old -- not one has been built in America since 1976. One reason is that local opposition and tough environmental rules helped make them unprofitable to build.

All this makes me want to say, "Give me a break!": to Big Oil for not facing the cameras … to the media for getting the story wrong … and to the politicians who may fix a problem by making it worse.