Economics of prices {price-gouging oil companies}

JewishWorldReview.com ^ | May 31, 2006 | Walter Williams

[thackney]

Here's what one reader wrote: "Williams, I can understand how the destruction of Hurricane Katrina and Middle East political uncertainty can jack up gasoline prices. But it's price-gouging for the oil companies to raise the price of all the gasoline already bought and stored before the crisis." Several other readers made similar allegations. Such allegations reflect a misunderstanding of how prices are determined.

Let's start off with an example. Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you'd sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices. When I stop by to buy another pound of coffee from you, how much will you charge me? I'm betting that you're going to charge me at least $5 a pound. Why? Because that's today's cost to replace your inventory.

Historical costs do not determine prices; what economists call opportunity costs do. Of course, you'd have every right not to be a "price-gouger" and continue to charge me $3.25 a pound. I'd buy your entire inventory and sell it at today's price of $5 a pound and make a killing.

If you were really enthusiastic about not being a "price-gouger," I'd have another proposition. You might own a house that you purchased for $55,000 in 1960 that you put on the market for a half-million dollars. I'd simply accuse you of price-gouging and demand that you sell me the house for what you paid for it, maybe adding on a bit for inflation since 1960.

[ThinkDifferent]

I would really love to know how the BP station down the street from me can jack up the pump price SEVENTEEN CENTS overnight. That's the biggest jump I've seen since Katrina hit. Someone please tell me how that's not gouging. Compare that to the Exxon station across the street that raised it's price five cents.

Maybe the BP station had held off increasing their price for as long as they could in the face of rising costs from their supplier, while other stations gradually raised their prices. Regardless, how is it "gouging" if there's a lower-priced competitor right across the street?

[mysterio]

So you don't purchase transported goods in Florida?

[Cobra64]

Own and manage your own business. If you don't get it, you die. If you do, it's fun.

That's for damn sure. The part I like especially, is that you're doing something productive in the marketplace, meeting challenges, excelling, beating the competition, employing good people, the list is endless.

[Cobra64]

Sorry to inform you, but most people pay no attention to what gas costs. They do not choose the cheapest, but the most convenient. So the most price pressure comes from TV and congress, not the consumers.

True. Some pay more attention to gas prices than their TAXES. I know a guy whose Fed taxes went up 5k last year and he didn't flinch. But he bitches when it costs him $10 a week more in gasoline.

[Cobra64]

This is really getting monotonous. Come to Florida for a hurricane and we will show you how we go for ten days without any electricity or gasoline. Nobody is forcing you to buy fuel. You are the victim of your own choices.

Your comments (above) to mysterio are on target; as are your other observations and comments here.

[Cobra64]

I know but some inviduals are too dense to observe traditional communication protocols. and then there are sum who cant seam two find the caps lock kee.

[weaponeer]

It may or may not be price gouging. However, I would really love to know how the BP station down the street from me can jack up the pump price SEVENTEEN CENTS overnight. That's the biggest jump I've seen since Katrina hit. Someone please tell me how that's not gouging. Compare that to the Exxon station across the street that raised it's price five cents. I'm having a real hard time understanding how that's not gouging.

I'm having a hard time understanding how the BP station did any gouging at that price? If gas was $.12 a gal cheaper across the street, how did the BP station sell any? Why would anyone pay $.12 a gal more than they had to? If they did, they must have wanted to. Why?

[NCC-1701]

"...Why would anyone pay $.12 a gal more than they had to?..."

I don't know the answer to that. However, while sitting at a stoplight next to the BP, I saw two idiots pull in there and gas up. What idiots. They must have a LOT of disposable income. I never said they were gouging. Just making an observation on one of the biggest jumps in pump prices I've ever seen. It was stunning on the face of it. BTW, I don't gas up at BP or Exxon.

[mysterio]

show you how we go for ten days without any electricity or gasoline.

I see. The supplies are sent there on magic trucks that run on air.

[thackney]

By the end of the year we will have 10% ethanol in our gas

In some areas, but no where close to that as an average for this country.

[thackney]

That's why the demand is inelastic.

Demand is only inelastic for fuel on a short term scale. The following graph is the monthly consumption of motor gasoline for the United States from 1995 to early 2006. The data is from:

U.S. Finished Motor Gasoline Product Supplied, EIA

The blue line is actual monthly consumption. The purple is a running average. This at the same time as a growing economy over the last few years. You can see price does bring demand down. I have made changes to the amount of fuel I use in the last year, have you not?

[Fzob]

Wiiliams wrote a book for them. An excellent read.

http://www.amazon.com/gp/product/book-citations/046508138X/104-2113723-5397563

[mysterio]

I've cut down as much as I could. But below a certain level, I can't go down any further without losing my job. I can't afford to move there. I'm about 30 miles away. Most people in my area drive 50 or so to work. Maybe if prices stay high enough our town will actually start to be more self-sufficient. It's actually starting to happen already, which is a great side effect of this.

[ClaireSolt]

So, you say. I think Congress mandated it.

[ClaireSolt]

Thanks!

[ClaireSolt]

I may buy transported good, but I do not buy the fuel to move them. I know the cost of transport is included in the price, but it is the job of the retailer to supply me with goods I can afford, if he wants my business. Not my problem, dude! The can bring em in by pack animal , for all I care.

[Cobra64]

However, while sitting at a stoplight next to the BP, I saw two idiots pull in there and gas up. What idiots.

Mybe at that price there was no line, and they were in a hurry. I often pay more for convenience. So they paid $1.20 more than the station across the street. I've seen people blow $20 bucks buying stooopid lottery tickets, while bitching about a nickel increas in gasoline.

[mysterio]

I may buy transported good, but I do not buy the fuel to move them. I know the cost of transport is included in the price,

You just bought fuel in that case.

[thackney]

So, you say. I think Congress mandated it.

Congress has not mandated. It would be absolute lunacy if they did. You should try working the math of how much ethanol that is and what it would take to produce it. We certainly don't have the process plants to create that much nor the available land to grow the crops needed.

Here is a previous FreeRepublic discussion to start the math.

The fuel rule change was to restrict the use of MTBE. Ethanol is just one way to meet the reformulated and oxygenated gasoline requirements.

[thackney]

Domestic drilling and refinery building would be smart policy if we want to stick with oil. Which party can I vote for to get that done?

What have your senators and represenative said when you contacted them about the importance of this issue? Mine support it.