Archive for Friday, May 25, 2007

Gouging not key to rising gas prices

May 25, 2007

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On Feb. 28, the Federal Price Gouging Prevention Act (House Resolution 1252) was introduced in Congress "to protect consumers from price gouging of gasoline and other fuels, and for other purposes." Nobody is in favor of consumer price gouging, so it's easy to make the mistake of thinking that passage of such a bill is a good idea. In fact, such federal price controls will do nothing to reduce gasoline prices in the long run. By making the production and marketing of gasoline more difficult and risky for providers, passage of HR 1252 will hurt consumers and make gasoline more expensive.

Federal price controls for gasoline do nothing to temper consumer demand or increase producer supply. Gasoline demand in the United States grows by roughly 2 percent to 3 percent per year, primarily as a result of rising economic activity. Supply/demand imbalances can become especially acute when gasoline consumption rises by nearly 10 percent during the summer driving season. (It's nice out, did you notice?)

Recent increases in gas prices have been blamed on growing demand from emerging economies like China and India, and on fears of oil supply restrictions tied to political instability in Iran, Nigeria and Venezuela. It's hard to imagine how gasoline shortages caused by federal price controls will increase political stability around the world.

In addition to restrictions tied to political instability and bad weather, gasoline supplies in the United States have tightened because of scarce refining capacity. Nobody wants a new oil refinery built in their own backyard. Building refineries that turn crude oil into gasoline takes years and costs billions of dollars. Industry data indicate that refiners were losing money as recently as 2002, providing a disincentive for investments. That's why industry data show there were only 149 U.S. refineries operating at the end of 2006, down from 216 in 1986.

High pump prices are directly tied to the escalating cost of crude. For every $1 increase of the cost of a barrel of oil, there is an average increase of about 2.5 cents per gallon in the price of gasoline. In case you haven't noticed, world crude prices are up - way up - and federal price controls will do nothing to reduce world crude prices.

Nevertheless, there is something Congress can do about consumer price gouging in the retail gasoline market. The federal tax on gasoline is 18.4 cents per gallon, and the average state gasoline excise tax is 18.2 cents per gallon. Sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees add another 9.2 cents per gallon to the average tax on gasoline. This means that the nationwide average tax on gasoline is a whopping 45.8 cents per gallon - or about $5 to $10 every time you fill up the tank! If Congress really wanted to help consumers, they could stop their own federal price gouging and roll back gasoline taxes.

Unfortunately, that's the type of federal price gouging that remains highly popular in Washington, D.C.

- Mark Hirschey is the Anderson W. Chandler professor of business at Kansas University.

Comments

Bill Chapman 10 years, 2 months ago

It should also be mentioned that many oil companies are very resistant to building new refineries - or even upgrading the equipment they use so the refineries can be more efficient. The oil companies are very careful to keep supply low so prices tend to keep pace with the economy. Keeping the number of operating refineries low is one way to do this without price gouging.

KsTwister 10 years, 2 months ago

I guess what I don't understand is why Lawrence is 3-4 cents higher than Kansas City or Topeka. That is why I put gas in my car in KC after a family graduation last night. If you have to drive out of this city, you save a little.

Confrontation 10 years, 2 months ago

KsTwister: Didn't you get the memo? Lawrence is just so absolutely special that they believe gas is automatically better quality when it crosses the city line.

20DaysInAugust 10 years, 2 months ago

The healthiest and most longterm solution is to reduce our demand. Alternative fuels will not be as cheap and abundant as gas had been, so we'll need to adjust our habits at some point or another. We're starting up 20 Days in August here in Arkansas. Come look at http://20days.org if you'd like to do it with us.

Iluminatti 10 years, 2 months ago

Clearly Supply Manipulation.
1.) US Refined Gasoline Supply can expand by millions of barrels overnight via large bulk gasoline tankers from expanded refineries in Trinidad... and, yes, Venezuela! 2. ) If Bush Administration were interested, A Program to Install Ethanol Conversion Kits in Existing Vehicles - Can REPLACE 85 PERCENT CURRENT USA GASOLINE CONSUMPTION - WITH -- E85 (85% Ethanol) From BRAZIL SUGARCANE by Dropping $ 0.56 Per GALLON! Import TAX Protecting US Agribusiness Conglomerates corn Ethanol HIGH PRICES! 3.) US Food Prices Would Not Increase Due To "Corn Shortage" feed, corn sweetners, etc. However, the Bush-Cheney Oil Government has TWO YEARS To Pat BACK OIL Multinationals 2000, 2002, 2004, and 2008 CAMPAIGN CONTRIBUTIONS!

frank regnier 10 years ago

It is hard to believe so many people I have encountered have never seen the film "Who killed the electric car". It really puts the things in proper perspective.

frank regnier 10 years ago

It is hard to believe so many people I have encountered have never seen the film "Who killed the electric car". It really puts things in proper perspective.

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