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By Robert Rapier on May 25, 2007 with no responses

Record Prices = Record Profits?

So, I am running through some of my daily news searches – things like “gas prices”, “gas gouging”, “alternative energy”, etc. I ran across this gem:

Gas price gouging becomes even more obvious

It is basically just another ignorant screed from someone who apparently thinks oil companies can just raise and lower prices at a whim:

As long as no significant gasoline retailer breaks ranks and the price at the pump remains fairly constant from one street corner to the next within a region, there is no reason for any oil company not to raise prices. So they do.

An absolutely abysmal understanding of the issues. It is funny that people seem to understand that when the price of gold rises, gold mining companies make more money. And there doesn’t seem to be this widespread belief that the reason they are making more money is that they just decided to raise the price of gold. People understand that they can’t do this. But these same people seem to think that oil companies can just go out and raise prices when they want.

And then this:

Oil companies last fall did all they could to keep Republicans in the majority in Congress because no matter how high prices went during its reign, the GOP never did a thing to rein them in. No hearings questioning oil company executives about their pricing practices. No anti-gouging bills. Nothing.

Prices drop every fall, for reasons I have explained several times. Last year was no different, it just happened to be an election year so it gave the conspiracy theorists something to get worked up over.

As I worked my way through the article, I thought “Boy, this sounds just like the FTCR’s hysterics.” Then I reached the end:

“These figures show that gasoline prices are not about the price of oil, but about maximizing the already obscene profits of oil companies and their refiners,” said Judy Dugan, research director for the consumer advocate Foundation for Taxpayer and Consumer Rights.


So, what is the connection between record gas prices and record profits? Absolutely yes, there is a connection. I expect oil companies to once again turn in huge profits (keeping in mind that the profit margins are in line with other industries) and there will be a new round of political grandstanding. Eventually congress is going to be pressured into passing some sort of legislation, but almost everything that will be politically palatable to them will make matters worse for consumers in the long run.

Right now the money is being made in the refining sector. When oil prices stay constant, and gas prices skyrocket, most of that is going to the refiner. Refining margins are certainly very healthy right now. But too many people – including most of the politicians – have their cause and effect backwards. High refining margins do not cause high gas prices. The high gas prices are not a result of the desire of the oil companies to make more profits. (They do desire to make more profits, but they can’t just raise gas prices as a result). The high profits are a result of the fact that gas prices have risen. (And of course some of those high profits are going to pay for things like compulsory ULSD and ULSG requirements, the phasing out of benzene, etc.)

Why have gas prices risen? Is it as the article above suggested – just companies raising prices with nobody breaking ranks? Anyone who takes a bit of time to watch the utilization numbers, imports, demand, and inventories will understand why price moves as it does. I know that takes a bit more effort, and that the lazy way out is to just argue – as Judy Dugan says like a broken record – that the price rise is “about maximizing the already obscene profits of oil companies and their refiners.” And it is obvious that many are ignorant of the basics and too lazy to do the research. The scary thing is that many (most?) of our political leaders fall into that same category.

A fundamental problem, which the Judy Dugans of the world never seem willing to address, is that Americans like to drive whenever and wherever they want. Now that the price of this habit is coming home to roost, they demand that politicians protect them so they don’t have to change their consumptive ways. Tell a European or an Australian about the pain of $3 gasoline and they will laugh in your face.

The best thing for all parties would be to come to terms with the fact that the days of cheap oil and gasoline are over. That era is finished. Start planning for the next one.