Thursday, April 03, 2008

Economics 002

Yes, as one commenter pointed out after Economics 001, the title reflects the intent. College courses start in the 100’s. Enough said?

I don’t know what it is about Philadelphia, but that city seems to produce astute and delightfully snarky columnists. I have several of them bookmarked, among them Dick Polman’s American Debate. He is significantly left of center and dislikes dishonesty in politics almost as much as I do, but yesterday he displayed a rather dismaying soft spot not only for big business, but for the oil industry.

Consider this, “…Barack Obama engaged yesterday in some old-school substance-free politicking. He denounced the price of gasoline.”

While denouncing the price of gasoline may not be the most righteous cause in today’s political arena, I hardly think it rates as “substance-free.” The relationship between the pricing of oil-by-the-barrel and gas-by-the-gallon is murky at best.

However, oil company profits are stated by the media only in absolute number of dollars, so it’s difficult to determine what the numbers really mean. What return is the oil industry obtaining on its investment? What profit is it making on expense? What is that profit as a percentage of sales? These are factors that are a lot more significant than the raw number of dollars. If the media reported that an oil company made 4% profit on $500 billion in sales, no one would get as excited as they would when that company made “a record $2 billion in profit” this year.

Of course, then the oil company kingpins sit in front of a congressional committee and yak about how badly they need to retain their tax breaks…

Dick Pohlman goes on to debunk the accusation that oil companies are price gouging the public with the high pricing of gasoline,
“…rather, this analyst said, they were charging the highest price that the global market would accept - which is another definition of capitalism, at least in its more rapacious form.”

At least he admits it’s a “rapacious form” of capitalism, but actually it’s the very definition of price gouging. When pricing is based on the highest price you can get, rather than the cost of production and a reasonable return on investment, you are price gouging.

Let's say hotel rooms regularly go for $100/night. The Super Bowl comes to town and they jack the price to $300/night. It's the same room and in the same place and costing them the same amount to rent, for three times the price. But by the definition above, they are not price gouging. To the person paying that $300/night, who is paying three times as much and getting no greater value, that is most definitely price gouging.

Gas prices have always been higher in San Diego that anywhere else in the nation, and local politicians keep investigating whether or not oil companies are engaging in “price fixing.” They’ve never been able to prove their case and the oil companies keep saying that the high prices are due to demand.

It’s all the fault of us consumers because we’re using too much of it.

The corollary to that is It’s the consumer’s fault because we’re paying the price they charge. If we’d quit paying that price, they’d quit charging it.

That actually might work if the product were, say, marshmallows.

The mind-boggling part is that everybody says, “Oh, okay” and the whole thing goes away. If you talk to the independent service station operators they will tell you that the oil companies not only are price fixing, they are doing so in an open and blatant manner. But the oil companies say they are not, and guess which one of those groups gives campaign contributions.

Apparently they don’t give them to Barack Obama, though.

1 comment:

Anonymous said...

1) why do San Diegans pay the highest gas prices? Just offhand, I might have said Hawaiians do...

2) I tend agree with the assessment of price gouging, and definitely with the statement about using raw numbers.

3) and the idiocy of saying "oh ok" and it goes away. Like so many things, especially with politics. Too bad so many americans have short memories.

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