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.

[mysterio]

In my opinion, he is using examples that most people can understand to explain the fundementals of pricing. Despite the differences in the use of gasoline and those products they are not strawmen intended to deceive. They are simply easy to understand examples.

But they are not accurate examples, though they are easy to understand. Coffee is something you can choose not to buy.

In fact, your post seems more of a lament about gasoline prices and free maketeers than the structure of the argument. Is it possible that your complaint is a strawman itself?

Good point. I admit to being upset about my energy costs more than doubling. And I lean libertarian on many issues, so I don't enjoy being at odds with libertarians on the free market issue. But the way our transportation and energy are currently set up, it doesn't appear to fit the free market model. It seems like you have one real energy choice and a government protecting the status quo.

[Dinsdale]

You might be able to quit buying coffee, speak for yourself.

I am usesless without coffee. I could ride my bike to work as long as a had a strong mug of good joe.

The 'net would cease to function, we're all 'Java Junkies'. Everybody is forced to pay the cost of coffee everytime they log onto the net.

[mysterio]

and we are still all forced to buy fuel

And food, and shelter, and clothes...

But there are various forms of food, shelter, and clothes, all available for very different prices. There is basically one form of fuel, available for a very narrow price range and embedded in the cost of everything else. See the difference?

[mysterio]

I share your love of coffee.

[thackney]

With biodiesel and ethanol available today? No, I don't. Gasoline and diesel are primary fuels because they are the cheapest available. I don't care to have my tax dollars used to fund competing products. I would like the America's resources opened for production instead of being held hostage by environmentalists and their appeasers.

"America has no shortage of oil... Washington, DC has a shortage of the political will required to let American workers go get it." -- Rep. Richard Pombo

[mysterio]

But the average American has very limited access to biodeisel or ethanol. Hopefully that will change soon.

I don't care to have my energy dollars held hostage by third world dictators.

[mysterio]

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?

[thackney]

There are still more choices.

EPA Certifies Baytech 2006 Propane, CNG Vehicles
http://www.allbusiness.com/periodicals/article/869849-1.html

[expat_panama]

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?

If you really want more drilling and refining done then vote for people that will get government out of the way so you can do it.   I was involved in both for a while but I've sold my drilling interests and at the moment I just own part of a refinery outfit called Energy Transfer Partners LP. 

You may want to be careful though, because it's possible to loose money doing that kind of work, especially when there are so many people who want more government involvement; and if you're not willing to risk your own money, don't make things harder for those of us who do.  Democrats that want the state to nationalize the industry are only working to make it so we all loose money.

[mysterio]

Oh, I know dems want to block drilling whenever possible. Seems like Republican lawmakers are on the same page with them, though.

[Philistone]

Inflation is good. Deflation is bad.

Inflation is good since it increases the velocity of liquidities through the market (since your money will lose value if you just sit on it).

Deflation drastically decreases the velocity of liquidities through the market (since your money actually gains in value as it sits in your mattress).

Don't make the mistake of thinking that inflation comes entirely (or even mostly) from the government "printing" more money. Inflation comes about from an increase in private credit (corporate bonds, bank lending, etc.) that grows faster than productivity.

[ClaireSolt]

I didn't enjoy the classes as much as I did the practicum. Own and manage your own business. If you don't get it, you die. If you do, it's fun.

[ClaireSolt]

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.

[Dinsdale]

Inflation is your friend.

Would'nt you like to drive a million dollar car? I know I would.

[Cobra64]

I have no problem with stockbrokers or business analysts. I want our country to achieve energy independence and give the oil based economy some real competition. And I'm really tired of watching constitutionally-questionable laws being passed in the guise of preventing terror when a lot of our energy money is going to that area of the world and into the hands of those who would destroy us. Seems the best anti-terror move would be to stop importing energy from the Middle East. Or at least to come up with a viable alternative and cut into their bottom line with some good competition.

What you want, is not necessarily reality, and your assessment of the petroleum industry exudes ignorance.

If you would PAY attention to FACTS and listen to others and sift through opinions and focus on FACTS, you wouldn't be so ignorant in making unfounded remarks.

My wife reviewed your posts and she just laughs and considers you a hopeless dolt. Of course her assessment of you is through the prism of being in the petroleum industry. Thirty-two years working in Texaco's World headquarters in New York. She has prepared speeches for Texaco's Presidents and CEOs over the years. Worked in the trading group. Research, exploration, and marketing. Wrote portions of the Corporate Annual Report.

She knows chemists in the Texaco research facilities in Beacon, NY. Our neighbor was a research chemist for Amoco oil.

If you would LISTEN to FACTS about what the environmentalists are doing to hamper the industry, you might UNDERSTAND something. That is why I used the sarcasm 1-800-ENVIRONMENTALIST. Thanks the tree huggers for keeping the EEEVIL oil companies from exploring, drilling, extracting and refining and delivery channels.

You've made dopey assumptions that we are stock brokers and other childish innuendo based on emotion, not FACTS.

I asked you to compare your ROI to any oil company; you did not respond.

Here are some places to study if you get off your ass and bother to read. If you can think, you will discover that it is the GOVERNMENT who is GOUGING. Look at the TAXES being confiscated from the EVIL oil companies.

http://www.taxfoundation.org/publications/show/1139.html

More basic friggin basic ECONOMICS:

http://www.jewishworldreview.com/cols/williams1.asp#top

When you reach puberty, let us know. Then maybe we can advise that you take a business economics class in high school.

[ClaireSolt]

What, besides Dem talking points, makes you think we need more research? We have funded that research for 30 years. Now we are implementing it, except when the Cronkites and Kennedys turn NIMBY.

[ClaireSolt]

What moron is paying 17 cents more than the station across the street? Put him in protective custody!

[ClaireSolt]

I think 7% of our oil comes from the Middle East. By the end of the year we will have 10% ethanol in our gas to replace that and some of what we get from Hugo Chavez (14%).

[ClaireSolt]

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.

[mysterio]

Name call all you want, but the fact remains that everyone has to buy gasoline. That's why the demand is inelastic. And much of our oil is imported from third world dictators and countries that hate us.

Here are some places to study if you get off your ass and bother to read. If you can think, you will discover that it is the GOVERNMENT who is GOUGING. Look at the TAXES being confiscated from the EVIL oil companies.

I'm all for getting government out of the way of drilling and refinery building. Since that will not happen, I think I would rather see some of the money the government is stealing from us go to developing a domestic source of energy. And if that source of energy outcompetes oil, then that's great.

And also, typing every other word in all caps does LITTLE to make you appear INTELLIGENT or proficient at DEBATE. Instead, it's PREDICTABLE and ANNOYING.