Gas companies and gouging
It's a perrenial complaint, and completely understandable. The companies charge us too much for gasoline. The cry "They're gouging us! is heard. The most common complaint is how prices seem to spike quickly when crude oil prices go up, but drop slowly when they go down.
Unfortunately, the facts aren't nearly so convenient. I did some checking on GasBuddy.com and came up with the following chart produced from their historical price charts:
This chart shows the price of gas in Saskatoon SK (where I live) along with the Canadian average price and the market price of crude oil over the last 24 months. The chart does show that there is sometimes a delay between the price of crude dropping and the street price of gasoline dropping, although that delay appears to be fairly short. It also shows a similar delay between prices going up. Alltogether, it shows that there is a very strong correlation both ways.
Huh.
Another complaint is how Canadians pay so much more for gasoline, even after taxes are taken into account. Again, the facts fail to back up this argument. The Canadian Taxpayers Federation put out a report in 2005 called the "Gas Tax Honesty Campaign" (PDF). While most of the report details how poorly the tax collected on gasoline is being spent, page 26 compares the prices of gasoline in Canada to that in the USA, before and after taxes. The before taxes line in their chart is very close (within 10% at all points). Exxon Mobil also produced this op-ed (PDF) which includes a chart showing the price of gasoline around the globe in 2005, before and after taxes. Again, the before tax prices varies very little across the globe.
Huh again.
Then there's the matter of the use of the term "gouging". According to dictionary.com and Merriam-Webster, this term means "to engage in swindling, overcharging, or the like". I do not think that we are being swindled (meaning defrauded), and overcharging implies there is a price that they should be charging. This seems to imply there is a moral price at which their profit could be considered acceptable.
Consider this however: we keep buying. The demand for gasoline is highly elastic with relation to its price. This means that when the price goes down, we don't buy much more gas, and when the price goes up, we don't buy less gas. Sure, when the price goes up we may delay buying gas, but we still buy it, because we just can't stop driving. If we keep buying, what incentive do they have to keep prices low? It's not like they're in the business as a game for play money.
Yes, these companies are in the business to make real money. These are public companies that have a explicit reponsibility to the shareholders that help to fund the company to make the most money they can. It is important to realize that "shareholders" includes nearly all of us who own shares in mutual funds, who in turn typically depend on these investments to return a good profit so as to provide for our retirement.
Bruce on 04.10.07 @ 05:59 PM CST [link] [No Comments]