Gasoline Prices and the Primitive Man (and Woman)
In order to determine if something adds up, one must know basic arithmetic. In social matters, one must know some elementary economics. Wondering why gasoline prices haven’t decreased as fast as crude oil prices in the last few days, Rep. Diana DeGette (D., Colo.) declared:
Something just doesn’t add up.
The Wall Street Journal of yesterday had a good story on this (Collin Eaton, “Why Is Gasoline Still So Expensive if Oil Prices Have Dropped?,” Wall Street Journal, April 13, 2022). It is a story in the journalistic sense, that is, it is not heavy on theory—economic theory in that case. Yet, some economic knowledge underlies it, including explanations of how the last producer in the chain before the consumer, the service station owner, “sets” “his” price. To reformulate: he basically tries to charge what the market will bear without charging more than his competitors. The WSJ piece also shows an instructive chart, reproduced below, of the parallel movements of wholesale and retail gasoline prices.
Of course, gasoline prices don’t include only crude oil, even if it is the main component at 61%. Transportation, refining, and taxes are the other components. Crude oil, transportation, and refining include profit, which is a residual and is expected to be the normal profit in these industries given the specific market risk of each. If you think that the profits are not normal, you can make a fortune by outcompeting the “gougers” and still making a normal return on your investment. Moreover, if the thousands of crude producers and the more than one hundred refiners (only counting those localized in America) were so efficient at gouging the consumers, why would they ever decrease gasoline prices?
Who seriously believes that transferring to the state all oil fields and all other inputs necessary to produce crude oil and gasoline would reduce the final price to consumers and taxpayers? Both history and economic theory strongly suggests that politicians and their employees have been the most efficient gougers in the history of mankind.
In defense of Rep. DeGette, she is not the only politician to spread untruths. (On this very topic, see also “Gas Prices, Oil Executives Take Center Stage at Congressional Hearing,” Wall Street Journal, April 6, 2022.)
What Joseph Schumpeter said of the rationally ignorant voter applies even more to the rationally blabbing politician (see his Capitalism, Socialism and Democracy [1942-1950], an otherwise puzzling book as my anniversary review will show in the summer issue of Regulation). Schumpeter wrote:
The typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognize as infantile within the sphere of his own interests. He becomes a primitive again.