Nothing more displays the ignorance of the general public about the workings of the free market system — and especially the capital markets as well as the cynical exploitation of that ignorance by politicians — than higher energy prices.
As gasoline prices topped $3 a gallon in much of the country in April, one driver, as he stood beside his expensive SUV, told a television reporter that "the government" should crack down on the oil companies and force them to roll back prices.
And the politicians, including President Bush, cynically fed the driver's angst by suggesting "price gouging" by the oil companies.
Of course, the SUV driver would object if someone suggested the government roll back his salary, and he probably willingly pays the equivalent of $4 a gallon for bottled water.
One e-mail passed around on the Internet in April urged drivers to boycott ExxonMobil on the theory that if its gas sales plunged, ExxonMobil would cut its prices drastically to clear its inventory. That would force other oil companies to drop their prices to remain competitive. This neat scenario had appeal because drivers wouldn't have to cut back their driving at all, just avoid Exxon and Mobil gas stations on the way to another station.
Let's look at what would happen if drivers boycotted Exxon gas stations. First, demand would increase at the other stations as demand dropped at Exxon stations. They would jack up the prices to reduce demand to make their existing supplies last as long as possible.
Because no oil company in the U.S. has significant excess capacity, the other companies would have to find extra supplies of gas from somewhere. Who would have the extra gas? ExxonMobil. What would it do with that surplus? Sell it to the companies that weren't being boycotted and hence had excess demand.
Exxon likely would make as much profit from such a move (because the other companies would have to pay the shipping costs) as it would from selling the gas itself. The only ones seriously hurt by this would be the people employed at the boycotted stations.
Of course, politicians of all stripes pander to the public at times like this. They decry oil company profits, when the profit margins of oil companies are just about 10%. Take a look at the margins of tech companies, even media companies — they're far higher. Oil company profits seem so high because they sell lots of gallons of gas and make their 10% on every one. When prices go up, revenues go up, and so do profits because 10% of $3 is more than 10% of $2.
Politicians also don't bother to point out that federal, state and local taxes are a larger percentage of the price of a gallon of gas — approximately 23% — than oil company refining costs and profits combined — approximately 18%.
They have been particularly quiet about the impact of the federal mandate replacing MTBE with ethanol by early May as an oxygenating agent at a time when there is a shortage of ethanol production and transportation capacity. The ethanol mandate alone has reportedly added 15 cents to the price of a gallon of gas.
Politicians would rather scream price gouging and threaten a windfall profits tax that would suck money from oil companies and hamper their exploration efforts than tell the public the truth: Get used to rising prices. There's a world shortage of crude oil and a shortage of refining capacity in the U.S. Until those conditions change, or demand drops, prices will stay high.
And one way to discourage the development of new oil fields, new refining capacity, and the development of alternative energy sources is to reduce the profit incentive through new taxes, or, heaven forbid, price controls.