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  • Fueling Misunderstanding about the Oil Market

    With gasoline prices at a two-year high, President Barack Obama today called for a crackdown on “price gouging” at the pump. Some consumers may feel relief to hear that the White House intends to protect them from supposedly unscrupulous suppliers. But the President’s energy policies are a lot more to blame for the current high prices than any market manipulation. And to the extent his “price gouging” rhetoric persists, the rise in oil prices could worsen.

    Oil prices have spiked some 22 percent in the past year, amid rising demand from China and India, political unrest across the Middle East and North Africa, and inadequate refining capacity worldwide. But as documented in a recent Heritage Foundation report, the Obama Administration’s policies on domestic oil drilling and alternative energy also are driving prices higher and, therefore, inhibiting economic recovery.

    For the President to blame “price gouging” not only misrepresents the actual problem, it reveals a distorted view of the free enterprise system. Prices reflect the relationship between suppliers and consumers. If the government attempts to control prices, it risks disrupting the market signals that prompt suppliers to increase their production or consumers to cut back on their use.

    In the case of oil and gasoline, higher prices induce producers to increase supply—precisely what’s needed to alleviate shortages. But, with the threat of fines and jail time if they charge “too much,” producers will be reluctant to respond to the higher market prices. Consequently, the shortages persist or worsen.

    The record shows that government price controls have consistently proven to be disastrous. In the 1970s, for example, artificially low prices imposed by the Carter Administration resulted in shortages that caused gas lines a la Eastern Europe.

    Numerous federal and state antitrust laws already protect consumers from price collusion, abuse of monopoly power and other anticompetitive actions. But there is precious little evidence that any such violations are occurring in the market today. To overcome the current price increase, President Obama would be far more successful by abandoning his anti-oil agenda rather than continuing to demonize the oil industry.

    Posted in Economics [slideshow_deploy]

    16 Responses to Fueling Misunderstanding about the Oil Market

    1. Panskeptic says:

      Blame the President first, boring, predictable and wrong. In fact, price gouging exists, oil companies look out for themselves, not for the nation, and the Koch Brothers in particular have polluted the political dialog in this country to the point where conservatives make no sense at all.

    2. William says:

      Well, when the price of gasoline drops not one whit because of his "decree", hopefully people will realize once again that Obama is an empty suit.The price of gasoline does not have to be this high.

    3. Stirling, Pennsylvan says:

      This president has in interviews said that the price of oil "would nessesarily skyrocket" under his plans for "Green Energy," to make alternative energy more affordable. So he is just delivering on his promise. It's just happening faster then he would like, causing people to wake up to his real intentions.

    4. Pingback: Misunderstanding the Oil Markets « American Elephants

    5. Ed Gallagher says:

      Were it not for his class warfare attacks Obama's statements on policy would end after saying "Good afternoon….." Fortunately the American public is catching on to his playground tactics of blaming everyone else for the abject failure of every one of his policies and initiatives. If one were cynical, one would think he means to destroy the very fabric and foundation of the American free enterprise system as he has been so singularly sucessful at failure.

    6. Jack Goode, USA says:

      This was a very good analyis based upon facts compared with the appalling, but not shocking, distortion of data to communicate a false message by President Obama during the press conference on Friday. I like your comment that his message is "distored view." I was reminded of the "just words, just speeches" phrase from the Obama campaign back in 2008.



      At what cost to the American tax payer will this admin continue to push their green agenda? There is no doubt this admin could care less about the cost at the pump.

      We have ample oil, natural gas and coal. Why are these resources being ignored?

      Disgraceful leadership.

    8. A. Sale says:

      Obama, is primarily a figure-head. He has numerous "department" heads who are veterans in their fields. Even so, Every decade has its own set of world-wide challenges to decipher. We must not turn our lack of understanding of our set of challenges into empty rhetoric. Certainly, we should not act against our President

    9. Canadianson, SeaTac says:

      Putting the fuel cost increases on the retailer is a sign Obama hasn't got a clue. Those of us at the retail level know our margin doesn't increase. It doesn't matter what the price is to us we still make the same 15 cents per gallon. It just costs us more and more to make that same 15 cents.

    10. Public Citizen - TRA says:

      We have high retail prices for gasoline because:

      A. We haven't built a new refinery in this country since the early 1970s. More than half the country's population has been born since a new refinery came online.

      B. We have restricted the ability to produce our own oil through increasingly restrictive regulations strangling our domestic drilling industry. Durring the 1980s wells that could be in production today with the improved recovery techniques now available were plugged with cement due to short sighted taxation policies. Many of these wells could be operated at a profit but we can't justify re-drilling them at current price levels.

      C. The EPAs constant expansion of power and control has made it more expensive to produce gasoline that meets local requirements. Couple that with our limited refining capacity and the down time required to shut down and reconfigure for each different kind of gasoline puts even more pressure on prices.

      D. We can't get the oil we do produce to where it needs to go for refining with our current pipeline system. A lot of the oil has to be trucked from pipeline terminals to refineries, sometimes hundreds of miles. Once again the regulation stranglehold restricts the ability to construct and operate the necessary pipelines to make delivery more efficient.

      Until government at all levels stops the heavy handed over-control of the oil industry at all levels the American people will continue to pay the price [no pun intended] for our short sighted and irrational policies.

    11. Tommy says:

      The price of gasoline could go to $5 a gallon and higher, and I will still gladly pay it. My car gets about 22MPG. Could you even imagine a cheaper way of getting from point A to point B, point B being 22 miles away, for anything less than $100?

      We are blessed to have such a low price per gallon.

      At the same time, Obama is speaking out of both sides of his mouth. On one hand he says to decrease supply (no domestic drilling) in order to move us towards greener energy and force car companies to produce more gas efficient cars. On the other hand, he wants to the price of gasoline to drop… How can he have both?

    12. Raul Bosque says:

      In addition to this well-written article, the gov't inflates the price of fuel by imposing high taxes on it. The gov't makes more money as the price of gas increases so they have an incentive to see high prices at the pump. If they were concerned with how fuel prices affect the economy, perhaps they should lower the taxes (and DWL) but I don't see them ever doing that.

    13. george fisher, racin says:

      Leave it to the arch enemy of the free market (BHO) to chant the usual litany, "price gouging". The only reason it catches on and gains momentum is the ignorance (willful, perhaps?) of most of the American public, vis-a-vis, simple, 101-level, economics.

      Meanwhile, the 'green' freaks-part of BHO's base-, who for years declared that we were running out of oil (10-year supply, max), help stand in the way of drilling, exploration, etc., right here in the US.

      What kind of positive effect would the unleashing of US tech/know-how on potentially oil-rich acres of land, have: upon prices, security, independence, jobs, etc.

    14. Tom says:

      People should recall that oil companies are businesses. The interest of a corporation is by definition the interest of its shareholders. So if you think you're paying too much at the pump (and you may be) you're free (at least for now) to invest in the corporations that are allegedly exploiting you. Your also free to make choices that encourage free trade and subsequently lower prices.

    15. Ken says:

      Give me a break. Gas prices at an all time high, unemployment highest in decades, food prices skyrocketing, our allies snubbed, enemies are bowed too, America degraded to the rest of the world, America seen as a paper tiger, deficit at an all time high, defies a court order on health care, disregards the constitution, on an on and on. This president is by far the worst, even worse than Carter, never thought this would be possible.

      Liberals, tell me what Obama has done that is good?

    16. Jim, Clarkston, MI says:

      When in doubt, follow the money trail.

      The federal taxes/gallon are about .18

      State taxes per gallon are about .20, plus sales taxes on a percentage basis of around 6% or another .20. Therefore, the governtments take per gallon is on the average around 60 cents per gallon.

      The net profit margin for most oil companies is around 8%. With gas at $3.50 that's around 27 cents per gallon.

      The government also taxes the oil companies billions of dollars, so they are getting another income from gasoline that way as well to the tune of Billions per year.

      So…as usual, the government points the finger in the wrong direction when trying to vilify businesses. And in this case, most of these oil companies are reflected in your IRA and 401k plans as well.

      Just sayin…

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