This is getting absolutely ridiculous. Not the prices themselves, mind you, but the endless hand-wringing over them.
I feel compelled, as someone that is about to receive his second degree in economics, to inject some sanity into the national babble over gasoline prices. I noted the public’s lack of sanity when it comes to this issue back in February 2004. My point then was that America seemed disproportionately upset about gasoline prices relative to its share of family expenses (it’s still fairly small, even at $3/gallon) and that the idea that gas prices aren’t where they “should” be is completely arbitrary and unrealistic — as unrealistic as the idea held by many Americans that some conspiracy is afoot to manipulate said prices.
Gasoline is a commodity that, at any given time, has a fixed quantity available for purchase. Therefore, it is subject to the simple rules of supply and demand. Simply, demand is increasing because energy consumption and automobile purchases in China and India (which combine for over 40% of the world’s population) are growing exponentially. Supply is at best fixed, since the United States hasn’t built an oil refinery in thirty years. Due to the fact that Iran feels like being suicidal by advancing its nuclear program, Nigeria is having a nasty civil war, and Venezuela tends to both hate our guts and be politically unstable, three of OPEC’s five largest producers of crude oil are subject to potential supply disruptions. (Incidentally, Citgo gas stations are owned by the government of Venezuela, which has often called for our destruction. Just a heads up.) When you increase demand and decrease supply, the price goes up fast.
Yes, Exxon had the most profitable year for any company ever in 2005, making $36 billion. First off, most of that is redistributed to shareholders, which are largely middle-class folks who own mutual funds in their retirement accounts. Regardless, it’s time to introduce a very basic finance concept known as profit margin, which is the ratio of profit to overall revenue. The best companies — in the parlance of idiots in the media, the ones that “make excess profits” or “gouge consumers” — would have the highest margins. Let’s compare Exxon to other big companies in very profitable industries:
Exxon (gasoline and natural gas): 9.8%
Citigroup (finance and banking): 15.7%
Altria (i.e. Philip Morris – tobacco): 22%
Merck (pharmaceuticals et. al.): 25.3%
Wow, it sure does seem like Exxon is ripping off the American consumer, doesn’t it? For every dollar they make selling gasoline, over 90% of it goes to cover costs. Overall, the fossil fuels industry has a profit margin of 7.7%, which is BELOW THE NATIONAL AVERAGE of 7.9%. Compare that figure with the levels in other sectors, like banks (20%), software (17%), or telecom (10%).
The idea that Exxon should be subject to a “windfall profits” tax — which ought to be renamed the “fuck you, free market” tax or something of that sort — is patently ridiculous. If they hit Exxon with an extra bill, then people will say that other companies with higher margins ought to have the tax applied to them. Sooner or later, you’ve increased corporate taxes for everyone and the American economy slips into a deep recession (if you thought outsourcing was bad now, just wait for THAT!), since companies have to close factories or stores and fire marginal workers to keep themselves profitable. Most Americans fail to realize that large corporations create most of the jobs in this country, pay most of the wages, invent most of the new products, and pay for most of the health insurance. Instead, most of our fellow citizens (and therefore most pandering politicians) see corporations as a piñata that they can whack until money falls out of it, all without any consequences. Companies do the things that I mentioned because they are profitable for them. Take away the profit incentive and you eliminate the benefits of the free market. Does everyone out there follow?
Anyway, President Bush wandered up to a podium somewhere today and announced that he was gonna do somethin ’bout this. He said that the government would stop adding gas to the national reserve and loosen EPA restrictions on what kinds of gas can be sold in different places (see map below — look at all those different mandated blends!), both of which are reasonable options. He also said, however, that rising prices were “a hidden tax on the working people” — a phrase I really hate hearing in reference to alleged corporate malfeasance of one sort of another, since PRICES OF VOLUNTARILY BOUGHT GOODS AND SERVICES ARE NOT TAXES — and said that he would support investigations into price-gouging. Well, I can save the federal government a lot of time with that investigation, since I just explained the whole damn thing. Oh well, what do I know? I only actually analyze things rather than making stupid knee-jerk reactions. What is it about gasoline that seems to get Americans riled up about it more than any other product in the entire world?
(Added @ 2:00 am) As an aside, can anyone tell me why gas is cheaper in New Jersey than surrounding states — especially since the entire state is anachronistically full-service by law? Are there just lower gas taxes, or does NJ subsidize gasoline in some way? Comments from better-informed NJ readers would be welcome.
(Added @ 1:45 pm) Well, the answer would appear to be the first possibility I proposed. Gasoline taxes are 14.5 cents per gallon in New Jersey (not including the Federal tax of 18.4 cents per gallon), making it third-lowest in the country behind Georgia and Alaska. This strikes me as pretty strange, given that New Jersey is not known to be a low-tax state when it comes to, well, anything else. Taxes in neighboring states are significantly higher: 23 cents in Delaware, 25.9 cents in Pennsylvania, and 22.6 cents in New York. Based on my experience, though, the NJ-DE gas price spread is more than 8.5 cents. The mystery continues …
