If you've got a monopoly, you can set the price to whatever you want so that you maximize your profits. If you don't have a monopoly, the next best option is to create a pool with other companies. In this pool, you collectively decide how much each company will produce. By limiting the supply, the pool can force prices to go up until the pool has maximized their profits. This is called collusion, and it's illegal. If the government finds out a pool exists, they break it up and send the CEO's to jail for a very long time. But sometimes the government creates the pool unintentionally. For example, the government made it a crime to advertise cigarettes on the TV and radio. This drastically reduced marketing costs for the cigarette industry and profits jumped. If Cigarette makers could have colluded to limit advertising, they would have done so. Instead, the government did it for them.
Gas prices are rocking the pumps. Politicians will tell you oil companies are gouging the consumer. The problem with politicians is that they are not businessmen or economists... they are lawyers. And I do not expect any lawyer to be an expert in macro-economics. All intelligent analysis says that prices are caused by supply, demand, and intrusive government legislation.
Demand has a direct affect on price, and supply has an indirect affect on price. Demand is higher this year than it was last year. Consumers continue to do what they do best: consume. Supply has not significantly increased to meet this demand, if at all. Demand goes up, price goes up. Supply doesn't go up, price goes up.
I've already posted briefly on this topic where I suggested the following solutions: permanently repeal the federal gas tax, standardize the gas mixture across the nation, and allow oil companies to build new refineries.
Let me elaborate on the last point. The public/government has not allowed a new refinery to be built in decades. Existing refineries are maxed to capacity. The only way to keep up demand is to increase supply. The only way to increase supply is to build more refineries. Does "Big Oil" want to build more refineries? Hell no! Why? Because they are enjoying the fruits of a government enforced collusion.
Why do we hate OPEC? Because they intentionally limit the supply of oil in order to increase price and maximize profits. OPEC tries to emulate a monopoly by colluding, but OPEC's problem is that Saudi Arabia can't very effectively control the member nations of OPEC.
As long as the public continues to restrict refinery construction, we are, in effect, helping big oil collude. WE are limiting supply, WE are monitoring new refinery construction, and WE are enforcing the supply cap.
Big oil spends a lot of money on lobbying. I wonder which side they are on? If they were smart they would spread money around to keep restrictions tight so that supply is limited. If they were really smart they'd get the politicians to do exactly what they are doing: squabble about the cause and come up with ridiculous solutions like repealing the gas tax for 2 months or sending everybody a check for $100.
What would happen to the price of 30" plasma TV's if the government gave every family $500 to buy a 30" plasma TV? If you guessed that the price would go up by $500, you just pasted the General's quiz on "Basic Economic Principles that Politicians Don't Understand".
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The public/government has not allowed a new refinery to be built in decades.
This is in the U.S. only?
So we have plenty of oil available, but not enough refined gas?
That's the word on the street. I wouldn't go as far as to say there is PLENTY of oil available, to be perfectly honest I don't know how well our supply of crude oil is keeping up with demand.
The only thing that I think would accurately explain why cost has gone up AND oil profits have gone up is a supply shortage. The price per barrel of oil may explain some of the price per gallon of gas increase, but it doesn't explain record profits.
Good post, except I don't understand one thing.
>>Does "Big Oil" want to build more refineries?<<
>>The only thing that I think would accurately explain why cost has gone up AND oil profits have gone up is a supply shortage.<<
How about record sales to explain record profits? India and China are driving the energy demand to new heights.
Also, I'll bet any of the oil companies would love to build a new refinery in the U.S. Each company has incentive to increase its own supply in order to out-sell the other companies.
But, I see what you're saying: while Al Gore roams the earth, the feds will stifle competition.
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