Thursday, February 5, 2009

Government, Not Business Is The Cause Of High Gas Prices

By David C. Lewis, RFA

Oil companies have largely taken the blame for our"record high" gasoline prices. But, are oil companies really to blame for our current situation?

Let's examine a few facts:

In 1950, $1 would buy you a lot more than it would today. What cost you $1 in 1950 will now cost you $8.78 in today's dollars. In 1950 gas prices were about 30 cents a gallon. If we adjust for inflation, gasoline prices should be $2.64. This is assuming taxes remained the same.

But taxes haven't stayed the same...not even close. In 1950, the tax per gallon of gasoline was roughly 1.5%. Today, taxes on gasoline make up about 20% of the posted price of gasoline, and a significant portion of the cost you pay to fill 'er up.

Still, that 30 cents a gallon in 1950 should cost about $3.13. But this assumes supply and demand has remained constant. They haven't. China and India are probably the most visible examples of this. China and India are quickly rising to the top of the "food chain" in terms of consumption, and they are requiring more and more energy every year.

Add to this the fact that the United States hasn't built an oil refinery since 1976. Government regulation has pushed this issue for the last 30 years. Some countries have nationalized their oil industry, making investors nervous which in turn causes a risk premium to be priced into oil (thus affecting gasoline prices).

As for the claims that oil companies post "excessive profits", consider that 9.5% of the price of gasoline goes to the oil companies. 20% goes to taxes. A small percent goes to gas station owners and the rest is used up in the cost of production and shipping.

If "windfall profits", or high, "excessive" profit margins were the real issue, why not go after other industries who bring in much larger profits than oil companies?

For example, why not chase down [Periodical] Publishing companies? There profit margins are 24%. The shipping industry, application software industry, and tobacco industry all operate at or above 18% profit. Some utilities have 10.2% profit margins.

How do we solve this problem? Do we cut back on distribution? No, that will cause a bigger problem. What's another solution? Legislate tighter controls and regulations on oil company profit margins? That will cause oil companies to jack the price even higher in an attempt to meet shareholder expectations and stay in business.These companies already operate on thin margins.

A third option is to just let them be. Don't blame the oil companies. Demand fewer coercive laws, regulations, and demand lower taxes.

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