The price gouging going on these days is outrageous. Just a few weeks ago, someone sold a modest house for $389,000 that could not have cost $100,000 when it was purchased 25 years ago. The sellers didn’t seem to feel shame about extorting that price from the young couple that will struggle to make the payments.
I should not throw too many stones. Three decades ago, I sold some corn for $3.45 a bushel. At the time I decided to grow the corn, I expected a price of $2.10 or so and bought seed and supplies accordingly. My costs didn’t change; in fact, the corn sat in a bin for months before I crooked the local feed store out of that $3.45.
I was 25 at the time, so I could follow Congressman Henry Hyde’s example and excuse my sin as a “youthful indiscretion.” But I price-gouged again. Five years ago, I was approached to be an expert witness in a legal case. Asked for my fees, I named a rate per day that was $1,200 higher than I had ever received before. I had not gotten another degree and was no more capable. But the poor saps paid what I asked.
By now, you know where I am going. Is it wrong to sell gasoline for $3 or more per gallon just because of Gulf Coast storms? Many think it wrong and want it punished. But doing so would be bad public policy.
You’re thinking: “Wait a minute! Oil companies raising prices after a hurricane is different than a farmer getting good prices or houses appreciating in value. Oil companies have monopoly power, while farmers are at the mercy of market forces. And people who sell a house after decades deserve more. After all, they will pay more if they move somewhere else.”
Yes and no. The differences are not quite as stark as one might think.
Energy companies still pay for the sins of John D. Rockefeller. People talk of “big oil companies” as if the industry had not changed since 1900 when Standard Oil owned an entire system from well to gas pump.
But the oil industry is no longer so vertically integrated, and it is much more competitive than it used to be. The major companies no longer dominate either refining or gasoline retailing in the United States. They have bailed out precisely because those businesses are so competitive and the profit margins so low.
Retailing is so competitive that filling stations cannot make enough money selling gasoline to stay in business. Instead of gas stations that sell a few candy bars and bottles of soda, they are becoming convenience stores that happen to sell gasoline.
The public is outraged by the fact that gas retailers raise prices for Memorial Day, the Fourth of July and Labor Day, thinking there must be outrageous gouging going on. In fact, for many stations, such weekends are the only time they make a profit selling gas. The rest of the year, gas sales may contribute toward covering fixed costs but are not nearly enough to keep a station open.
Nor is refining much of a moneymaker. No new refineries have been built in 25 years, and many have closed. Large oil companies sold off many of their refineries to little-known, more specialized firms. Importing refined products is common. Overall, refining is more competitive than in the past, not less.
True, firms at all levels can make more money when gas prices are $3.09 per gallon than when they’re $1.29. But most of the windfall goes to the owners of the crude in the ground. Refiners and retailers may enjoy fat margins for days or even weeks, but such high profits are ephemeral.
And high prices perform a useful function for society, signaling businesses and households to use less fuel. When prices rise more in one area than another — as they have in Georgia over the last week — such high prices motivate shipments from regions where prices are lower.
When a storm damages wellheads, pipelines and refineries, there is less fuel to go around. Governments can impose price controls or punish gouging, but the shortfall has to be allocated somehow. History shows us that allocating gasoline by making people wait in line is expensive for society, and not any more fair than allocating with market prices.
Demagogues are quick to call for anti-gouging laws or excess-profit taxes. Enacting such measures after the fact costs society a great deal. Enacting them on a permanent basis requires a Stalinist bureaucracy to determine which prices are fair and which are not.
Moreover, if society opts for such measures, they should apply not just to visible products like gasoline. Economic research shows there is much more abuse of monopoly pricing power in help-wanted classified ads than in fuel refining or distribution.
This is particularly true in markets with only one daily newspaper. Employment ads are not a frill. Finding jobs is as important to people as buying gas. Should we establish agencies to regulate classified ad rates?
It is human nature to bridle at paying a higher price than one we are accustomed to. We should not, however, let emotional reactions lead us to measures that ultimately harm our economy.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.