Monday, December 05, 2005

Food for thought on Gas prices

Another lesson in basic economics, courtesy of Steve Chapman (Chicago Tribune):

Still, a lot of people think the reason gasoline prices soared in September is that oil companies are greedy. But if that's true, why didn't they raise prices a year ago? For that matter, why don't they raise them now? The critics on Capitol Hill don't seem to notice that pump prices have fallen by 92 cents a gallon since Labor Day, a 30 percent decline.

That happened mainly because of a couple of minor factors known as supply and demand. Consumers curbed their driving when prices peaked, and in recent weeks, Gulf Coast oil refineries have increased their output. Both factors helped to loosen a tight market. And the big oil companies were somehow powerless to keep prices up.

They usually are. For all we've heard about their "record" profits, it's not that lucrative a business. Over the last five years, the American Petroleum Institute points out, the oil and natural gas industry netted 5.7 cents on every dollar of sales, compared to 5.5 cents for all U.S. companies.

For every boom in the oil patch, there is a bust, which usually lasts longer than the good times did. During much of the last quarter-century, the industry has grappled with glut. Measured by its return on investment capital, report Jerry Taylor and Peter Van Doren of the Cato Institute in Washington, "the oil and gas sector has been less profitable than the rest of the U.S. economy over the past 33 years."

That will come as a surprise to most people. We remember the high-price periods with bitter tears, but we take the low-price periods as part of the natural order.

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