Oil Refiners Profit - Is it Gouging?

Reuters reports that American oil refiners are set for record profits this summer as demand peaks and supplies tighten. The industry uniformly blames an aging infrastructure and new government regulations that mandate more exotic, less polluting fuels. Astonishingly, margins today are better than they were in the immediate aftermath of the 2005 hurricanes which shuttered a quarter of US fuel production.

The government has conducted repeated investigations into price manipulation at the behest of numerous populist politicians who see prices at the pump soaring far more rapidly than the price of crude oil. Those investigations found no evidence of price gouging but numerous "independent" surveys of rising prices show clear evidence of manipulation.

The root problem with rising gas prices is that demand in the United States is almost completely inelastic. Despite an enormous run up in the price of gas at the pump, Americans have not cut back on their fuel consumption at all. For all of the people loudly complaining about the prospect of higher fuel costs, the aggregate response of the nation has been to do nothing. The economy is becoming slightly more efficient at squeezing greater economic growth out of the same amount of petroleum, but the total amount of oil flowing through the nation's economic veins has remained constant.

Consider virtually any other industry with a huge, totally captive consumer base and tremendous barriers to competition that squash out new competition. Over the past fifty years, the oil industry has actually not been particularly profitable given the necessity of its product to the rest of the economy. In fact, as recently as 1998, crude oil prices as low as $9 a barrel threatened the viability of the industry.

In any event, the rest of the world has already dealt with significantly higher gas prices than the United States. European nations in particular tax oil so heavily that seven or eight dollars a gallon are more likely than three. The next time that someone suggests that current levels of gas prices are going to cause a downturn or even a prolonged recession, remember that the oil sheiks do not yet control the world economy.