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“Gasoline Prices” (or “In Praise of Capitalism”)

Today a woman at work told me that she was buying gas when the pump she was pulling from ran out. The attendant said that she’d have to go to another pump. By the time she got there the price had risen thirty cents.

“This can’t be right,” I thought. “The government has to do something,” I thought. With gasoline prices rising by the hour and sometimes by the minute, I began to question my instinctive trust of capitalism. And I long ago concluded that capitalism is the only economic system compatible with freedom.

Thank god for Professor Walter Williams though. He lifted me by my ear and said, “Straighten up, kid. You’re talking crazy.”

The last time the government tried to do something about gasoline prices was in 1979 when President Jimmy “I’ll-Never-Lie-to-You” Carter instituted price controls. Mr. Williams explains that President Carter’s “hairbrained scheme” only made matters worse:

We saw long gasoline lines, and that’s if the gas station hadn’t run out of gas. It’s estimated that Americans used about 150,000 barrels of oil per day idling their cars while waiting in line.

Professor Williams explains that we haven’t seen the long lines and shortages and fights at the gas pump because “… price has been allowed to perform its valuable function - that of equating demand with supply.” A basic axiom of capitalism.

Up until the recent surge in gas prices foreshadowed by Hurricane Katrina, Professor Williams does a simple exercise. He wondered how much more gas costs now than it did in 1950, adjusted for inflation:

In 1950, a gallon of regular gasoline sold for about 30 cents; today (8/31/2005), it’s $2.50. Are today’s gasoline prices high compared to 1950? … what cost 30 cents in 1950 costs $2.33 in 2005. In real terms, that means gasoline prices today are only slightly higher, about 8 percent, than they were in 1950.

Thank you, Professor.

I implore you to read his whole article. With the same gusto, I ask you to bookmark his website and read his columns from time-to-time.

Comments

ruminator said:

I went through a similar, but much more personal, exercise a few years ago (about 14, to be exact). I compared what I earned as an engineering working for the federal government with what Wife and I made before I returned to school. In constant-dollar terms, after about eight years of college and many years of experience, our income was no different than it was 15-years earlier.

That was a depressing thought. It made me wonder about the futility of all the work I put into my university education. The best I could come up with was that at least I enjoyed my job more than I did 15-years prior.

Posted on Sep 03, 2005 08:11 PM

August said:

An interesting thing I learned about the gasoline industry when I worked for a small, locally owned gas station, was that gas prices at the pumps are are only indirectly related to the price of oil...

What actually happens is this (it may be slightly different in the US, where frankly your government subsidizes the living daylights out of the oil industry--so does ours, but not nearly to the same extent--to the point where prices probably should have been at this level a decade ago... but I digress):

1) The price of oil per barrel changes because of either fluctations on the market (ie. purely through buying and selling), or something happens at the extraction/refining level to make it more expensive/harder to produce.

2) Wholesalers track this, and then *immediately* factor in the change, *as well as* adjusting shipping rates. Gasoline will cost twice as much to ship to a town of 7 thousand people than it will to a town of 14 thousand, even if the town of 7 thousand is closer to the wholesaler, because smaller markets are used, at the wholesale level, to subsidize larger ones.

3) At the actual point of sale to the consumer, at-the-pump prices are adjusted based on this new number... see, gasoline profits for the actual gas station are razor-thin. Sometimes less than two cents a litre (or 8 cents a gallon, for you Americans), and so gas prices at the pump *have* to be based on how much it costs to replace what they are selling, rather than on how much it cost them to buy what's already in the ground. It's the only way most gas stations will stay in business, because a price fluctuation of a couple cents could leave them incapable of replacing their stock and still paying their employees. During "normal" situations, price changes can take hours, or sometimes even a full day, to change at the pumps, but in times of crisis or perceived crisis, most managers are in constant contact with wholesalers, trying to make sure their next shipment doesn't bankrupt them.

Posted on Sep 06, 2005 04:18 PM

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