The price of gasoline is perhaps the price consumers notice more than any other. They see it prominently displayed every time they drive by a gas station and they feel it right in their wallet every time they fill up their tank. So when gasoline prices are on the rise, it isn’t surprising to hear consumers complain. In recent weeks, they’ve been doing a lot of complaining.
According to the AAA’s Daily Fuel Gauge Report, the national average price of regular gasoline is currently $3.87 per gallon. That’s up from $2.85 a year ago and $3.58 just one month ago. Never mind that gasoline prices are still much cheaper in the U.S. than in most other countries, or that prices are not out of line when adjusted for inflation during the past several decades. The recent rapid rise has consumers crying foul and state attorneys general warning gas stations not to price gouge. Attorney General Martha Coakley of Massachusetts recently cited a provision in the law that prohibits the selling of petroleum based products at “an unconscionably high price,” whatever that means.
While some price gouging might be occurring in certain markets, in general, gouging is not nearly the universal problem some politicians would like us to believe it is. Gasoline prices are up for a number of valid economic reasons.
First, supply has been disrupted. Gasoline is made from crude oil and unrest in the Middle East, particularly Libya, has disrupted supply, causing crude oil prices to rise.Second, in an attempt to stimulate the economy, the U.S. government has debased the value of the dollar. A cheaper dollar increases the price of imports. Not coincidentally, oil is our biggest import. In addition, when investors fear a falling dollar, they pile into commodity-based futures contracts, contributing to rise in prices.
Third, demand for gasoline is on the rise. Recessions soften demand for all kinds of goods and services, including gasoline. But when economies recover, demand strengthens. While the U.S. recovery has been lackluster, the fact is that jobs numbers are improving. Gasoline demand has strengthened as more people again are commuting to work.
Price gouging is unlikely in highly populated markets where there are several gas stations within a three or four mile radius. If you think the price is too high at one station, it’s easy to go to another. For gouging to take place in such areas, gas station owners would have to be colluding with one another. Without a thorough forensic audit of their books, it would be impossible to prove that. Most gasoline retailers typically make only about a nickel per gallon. While it’s true that some stations charge more than others, the difference is usually explained by higher costs. For example, a station located in a prime spot such as a busy intersection is probably paying more for its lease than one in a more remote part of town.
If politicians really want to reduce the price of gasoline, they should get off the backs of gas station owners and focus instead on taxes. State and federal taxes add about 43 cents per gallon on average to the price of gasoline. This doesn’t take into account additional revenues by taxing the profits of all the entities involved in the petroleum business. The truth is that the government makes more money when gasoline prices go up. Politicians will lend a sympathetic ear to consumers, but the last thing they want is lower tax revenues.