PRICE AND MEN
It has long been said that money can come between friends. But as the recent hysteria over rising oil prices reminds me, it can also come between the human mind and sound economic principles.
There has been much talk about "price gouging" by the oil companies, as we witnessed the average gasoline price rise to about $3.10 before falling to pre-Katrina levels most recently. But as I listened to well-paid pundits pillory the oil industry for being slick, I was left wondering: what is gouging?
Now, lest I be misunderstood, I hasten to point out that, no, I don't own stock in Exxon or Chevron (and I'm not Michael Moore - I really don't!) and, yes, I like filling up without taking out a second mortgage as much as anybody. Likewise, though, it would also please me to buy cheap-to-produce processed grains at reasonable prices. Yet, whenever I walk into a supermarket I find boxes of cereal routinely priced at around $4.00 each. Is that gouging? I mean, couldn't they turn a tidy profit at $2.00 per unit? Perhaps, but my solution is to wait for sales or buy the no-frills brands and, believe it or not, sometimes I refrain from buying the kind of cereal I'd prefer. And it occurs to me that if everyone else followed suit, prices would come down. But, hey, all of you out there across the fruited plains constitute the market, and if that's what the market dictates, so be it.
And speaking of slick, one could also wonder about how lawyers are compensated. Many attorneys earn hundreds of dollars an hour, sometimes using man's law to fleece mere mortals for acts of God. Lawyers also take a third of cash awards when working on contingency, generally speaking. And when they participated in the legalized theft of money from the tobacco companies, their haul in New York State amounted to 650 million dollars. What does that mean? Maybe that we'll have another John Edwards as a senator.
Back to the point, though, is this gouging? Wouldn't $75 an hour suffice? And over a half a billion dollars for avaricious middlemen in three-piece suits? No comment is necessary, except that, once again, such is what the market dictates.
Of course, cereal and surreal settlements are far from the only examples of exorbitant profits, for there are many. Among them, however, are not those reaped from gasoline by Big Oil, as they are relatively paltry. A study in the late 1990's demonstrated that the average profit made by oil companies off a gallon of gasoline was only 7.3 cents. But what about more recently, during the record-breaking hurricane season that big oil supposedly used as a pretext for raping America? Well, during the third quarter of 2005, ConocoPhillips reported that its robber-baron profit on a gallon of fuel was, get the Digitalis, nine cents.
Moreover, while we may long for bygone days when you could pay for your gallon of gas with a couple of coins, it is a better deal now than it was a half century ago. Gasoline cost about thirty cents a gallon in 1950; factoring in inflation that translates to about $2.32 today. With the average price per gallon at $2.201 as of November 21, this is yet another example of how free-market forces serve to better our lives.
Mind you, it's also significant that we are deriving these benefits despite a very bleak supply/demand picture. Demand is increasing markedly due to the motorization of leviathans India and China and the more than doubling of the number of cars on American roads since 1970. Exacerbating this is the myriad of unrealistic environmental regulations, which have hampered domestic oil exploration and extraction and have prevented the building of new refineries. It's truly staggering: we haven't constructed a new refinery in thirty years.
But this piece isn't only about oil. You see, I've long been both fascinated and irked by my fellow man's reaction to the prices of things and, more specifically, to price increases. For instance, it occurs to me that even our highest gas prices would bring the widest of smiles to faces across the pond, since Europeans are accustomed to ponying up about $6 for a gallon of their petrol. Why would they react so differently? Obviously, the answer is expectation.
Governed by emotion as opposed to a sound grasp of economic principles, we become conditioned to expect certain goods and services to be delivered at certain prices. Gas should be this much, lawyers that much and cereal its sum. Now, if a price increases in the usual, incremental fashion - let's say, a rise in gas of a penny every few months - like the proverbial frog in a frying pan of water we sit contentedly in place. Let a rise be sudden, however, and ire follows suit.
As always, the problem with reacting emotionally is that it clouds people's judgement, blinding eyes to relevant facts. The laws of economics - which is synonymous with saying, "the laws of human nature" - apply regardless of the product, service or situation. Let's examine the basics.
The principle of supply and demand influences prices, like it or not. When supply is reduced or demand increases, or both, prices rise. This has two effects: it causes people to reduce their consumption and increases profits, and both these things have positive secondary effects. Obviously, to reduce consumption is to have conservation, and greater profits provide an incentive to create more of the product that captures producers the windfall. Everybody wins.
Next, capping prices leads to shortages, like it or not. This is because it reduces profits and consumers' incentive to conserve. This is why we had gas lines under Jimmy Carter in the 1970s and Russians had bread lines in the Soviet Union. One reason why gas prices rose in the wake of Katrina was that the disaster shut down 25 percent of our domestic oil production capacity and 10 to 15 percent of our refining capacity, thereby reducing supply. The reason why we didn't have shortages was that, this time, the government was smart enough to not cap prices. But with the fuzzy economics and pie-in-the-sky thinking that prevail, next time our media-stoked fit of anti-corporate anger may just result in a cure that's worse than the disease.
Among the guilty is self-proclaimed man-of-the-people Bill O'Reilly, who has been pounding the anti-oil company drum for a couple of months now. He complained that gas was more expensive despite the fact that the oil companies were selling supplies that were purchased at pre-Katrina prices. What seems to elude him is that fact that - again, regardless of the product or service - current market value always factors into price adjustment. So, no, this doesn't make oil company executives villainous gougers - just normal people.
I'll illustrate this point with two examples, one fictional and one real-life. Let's say I have been buying widgets for a dollar a piece and selling them for two. Then, due to malevolent, pervasive, terrorist-created nanobots that target widgets, their wholesale price skyrockets to $100 a unit. Now, would O'Reilly insist that I continue to sell them for two dollars? The fact of the matter is that if I did so it might make restocking my inventory impossible, since my base-price has increased one-hundredfold.
Since that may be a tad too fanciful and clichéd for some, let's consider something more down-to-earth: real estate. Properties have appreciated precipitously because of the housing boom of the past decade. In point of fact, there are people who purchased homes for $75,000 in 1995 and sold them this year for $300,000. Is that gouging? I mean, c'mon, couldn't they just take $110,000 and go quietly? Even adjusted for inflation they would turn a profit. It's like Gordon Gecko's creed, "Greed is good."
Or, not really. Obviously, if sellers don't capture market value, they won't be making what's necessary to purchase another property in today's world. Besides, I reiterate, the profit motive is what provides incentive for investment and speculation.
Wait, Duke, widgets and homes aren't oil, say you? That's funny, 'cause that's exactly what Bill O'Reilly said. His argument is that oil is different because it's vital to the economy, but that's the pie-in-the-sky thinking to which I was referring. I shall repeat: the laws of economics/human nature apply regardless of the product, service or situation, like it or not. Wishing it to be otherwise doesn't alter reality. Click below to continue.
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© 2005 Selwyn Duke - All
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Selwyn Duke lives in Westchester County, New York. He's a tennis professional, internet entrepreneur and writer whose works have appeared on various sites on the Internet, including Intellectual Conservative, nenewamerica.us (Alan Keyes) and Mensnet. Selwyn has traveled extensively in his life, visiting exotic locales such as India, Morocco and Algeria and quite a number of other countries while playing the international tennis circuit.
And speaking of slick, one could also wonder about how lawyers are compensated. Many attorneys earn hundreds of dollars an hour, sometimes using man's law to fleece mere mortals for acts of God.