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Gas price logic...

DaveNay

DaveNay

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Seems logical to me.
Economics 101: The Price of Gas

Daily Article | Posted on 4/22/2008 by Sterling T. Terrell

Gas prices are up and oil executives are once again testifying before Congress. Clearly, many politicians, pundits, and consumers lament the rising cost of gas. Before we join them in their chorus, let us take a step back and ask this question: Are gas prices really all that high?

A change in price can be a result of inflation, taxes, changes in supply and demand, or any combination of the three.

First, we need to take into account inflation. The result of the Federal Reserve printing too much money is a loss of purchasing power of the dollar: something that cost $1.00 in 1950 would cost about $8.78 today. As for gas prices, in 1950 the price of gas was approximately 30 cents per gallon. Adjusted for inflation, a gallon of gas today should cost right at $2.64, assuming taxes are the same.

But taxes have not stayed the same. The tax per gallon of gas in 1950 was roughly 1.5% of the price. Today, federal, state, and local taxes account for approximately 20% of gas's posted price. Taking inflation and the increase in taxes into account (assuming no change in supply or demand) the same gallon of gas that cost 30 cents in 1950 should today cost about $3.13.

Neither have supply or demand remained constant. The world economy is growing. China and India are obvious examples. At the same time, Americans continue to love driving SUVs and trucks. As for supply, we are prohibited (whatever the reasons may be) from using many of the known oil reserves in our own country. Furthermore, due to government regulation, the last oil refinery built in the United States was completed in 1976. In addition, the Middle East is politically unstable which leads to a risk premium on the world's major source of oil. It is obvious that the demand for oil has grown while supplies have been restricted.

The average price of gas in the United States today is approximately $3.25. The question is, why are gas prices not higher than they are?

Blaming greedy oil companies on the rising price of gas is simply irresponsible. The profit margins of a few selected industries are as follows:
  • Periodical Publishing 24.9%
  • Shipping 18.8%
  • Application Software 22.5%
  • Tobacco 19%
  • Water Utilities 10.2%
  • Major Integrated Oil and Gas 9.5%
  • Hospitals 1.4%
  • Drugstores 2.8%
The water utility industry has higher profit margins than major oil and gas firms! Why isn't every CEO with profit margins above that of the oil companies made to testify before Congress for "price gouging"? Clearly, greedy corporate profits are not the issue.

Again, while just over nine percent of the price of a gallon of gas goes to oil company profits, approximately twenty percent of the price of a gallon of gas is composed of federal, state, and local taxes.

Those who want the government to step in and do something about the high price of gas are either forgetful of recent history or too young to remember the oil crisis of 1979. During that time, restrictions on the price of gasoline led to the inability of some to find gas at all. Price ceilings always lead to shortages. The only thing worse than having to pay "too much" for gas is not being able to find gas at any price.

Let us not be swayed by politicians out for power or by reporters out to create news where none exists. Facts and economic logic should prevail rather than rhetoric.

Sterling T. Terrell is a Ph.D. candidate in the department of agricultural and applied economics at Texas Tech University. Send him mail. Comment on the blog.
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Original article.
 
B

bczoom

Super Moderator
Staff member
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Just now getting a chance to read the article.

I'm with you. It makes sense.
 
A

Av8r3400

Gone Flyin'
How dare you inflict logic on the hysteria of the masses!

Oil companies are Evil!

Oil company executives are Evil!

Anyone who owns stock in oil companies are Evil!

:w00t: :bonk: :w00t: :bonk: :w00t:
​
 
XeVfTEUtaAqJHTqq

XeVfTEUtaAqJHTqq

Master of Distraction
Staff member
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Like Av8r said - it's not fair for you to use common sense in an forum thread!

We need to blame someone for all our problems!
 
urednecku

urednecku

Active member
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DaveNay said:
Seems logical to me.Original article.
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The article mentions "the oil crisis of 1979." I remember it being hard to find gas at a pump. But I also remember Tampa Bay, Florida and the Gulf of Mexico around Tampa bay, was full of oil tankers they would not unload. Soon as the price was up where they wanted it, there was suddenly more than enough oil. I think the same is happening now, they are just holding it in the ground instead of in the tankers.
 
California

California

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First, we need to take into account inflation. The result of the Federal Reserve printing too much money is a loss of purchasing power of the dollar: something that cost $1.00 in 1950 would cost about $8.78 today. As for gas prices, in 1950 the price of gas was approximately 30 cents per gallon. Adjusted for inflation, a gallon of gas today should cost right at $2.64, assuming taxes are the same.

But taxes have not stayed the same. The tax per gallon of gas in 1950 was roughly 1.5% of the price. Today, federal, state, and local taxes account for approximately 20% of gas's posted price.
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Expanding on that a little -

1) Devaluing the currency by printing more dollars is one way to pay for this war and the other government costs that have no revenue source. The procedure is to borrow, (issue bonds) then pay off the bonds later in 'funny money'. This means the bond holders end up bearing some of the cost, indirectly. Somebody has to pay.

2) The dollar is being devalued relative to oil, gold, farm commodities, even some foreign currencies. Those stay relatively constant in value, while the buying power of each dollar slides downward. In effect and indirectly, when you pay $20 for a tank of gas using devalued currency, you just paid $20 of your share of keeping this expensive war going. (I'm describing the mechanism here, not debating whether that is worth $20. That's another issue for a different thread).

3) Gas taxes. 1950 roads were nothing special. Go find some old primary route that has been superseded and imagine modern America with no greater road capacity than that. The first round of highway building was just to connect cities, then in the 30's 'farm to market' routes were added to stimulate the economy. Neither really addressed the issue of capacity. After 1950 the engineers started designing for huge traffic volumes and people started moving to the suburbs and commuting daily. The higher gas taxes today are a conscious choice, to pay for this more complex, high volume system. Keep your eyes open and prevent gas taxes from being diverted to other uses, but the portion spent on building or maintaining roads is money well spent. We simply live in a more complex culture. People would rather commute by car than streetcar. Gas taxes are a rational way to get the commuters to pay for the huge traffic capacity they requested.
 
California

California

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California said:
...when you pay $20 for a tank of gas using devalued currency...
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Bah. Too late to correct a typo. Lets try that again:

2) The dollar is being devalued relative to oil, gold, farm commodities, even some foreign currencies. Those stay relatively constant in value, while the buying power of each dollar slides downward. In effect and indirectly, when you pay an additional $20 for the same tank of gas using devalued currency, you just paid $20 of your share of keeping this expensive war going. (I'm describing the mechanism here, not debating whether that is worth $20. That's another issue for a different thread).
 
XeVfTEUtaAqJHTqq

XeVfTEUtaAqJHTqq

Master of Distraction
Staff member
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California said:
you just paid $20 of your share of keeping this expensive war going.
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Or funding unnecessary social services, welfare programs, indirect support of illegal immigrants, and general government buffoonery.

We are being screwed on so many fronts it's not funny anymore. Actually, it stopped being funny 30 years ago. Now it's just damn pathetic. :glare:
 
American Woman

American Woman

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urednecku said:
The article mentions "the oil crisis of 1979." I remember it being hard to find gas at a pump. But I also remember Tampa Bay, Florida and the Gulf of Mexico around Tampa bay, was full of oil tankers they would not unload. Soon as the price was up where they wanted it, there was suddenly more than enough oil. I think the same is happening now, they are just holding it in the ground instead of in the tankers.
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I'm with you Honey bun.....their out to get us, and they are just waiting off shore for the right price gouge
icon10.gif
 
fogtender

fogtender

Now a Published Author
Site Supporter
Well when they kick the "Environmentalist" out of the way and allow some common sense and allow drilling in ANWR and other places in the United States with modern drilling that isn't anything like in the 50's... We live the way we do because of oil energy and we can still look for other resources but, if we lose it, we will be back in Caves... Can't get much more environmental than that!!!
 
urednecku

urednecku

Active member
Site Supporter
DaveNay said:
Buying my gas 500 gallons at a time hurts, but it sure helps to smooth out the daily fluctuations.
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Keep watching the prices. In the early /mid '70s my parents & I had 250 gallon tanks, & had gas delivered bulk to our house, (about 15 miles from town.) When we started this we were saving some money. Then one day I noticed they prices in town about 10 or 15 cents LESS than the bulk prices we were paying. And did not have to pump it by hand.
A couple months ago I went to the bulk plant for some non-taxed diesel (agricultural use), and asked about their gasoline prices. It was higher than the local station. The man figured the Hess station was losing about 25 cents per gallon, compared to what he was paying, & him being a bulk dealer. :confused: Go fugure.
 
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