Gas Pump Prices

Here’s what’s wrong with current gas prices.

In suburban Chicago we have gas prices ranging from $3.20 per gallon to $3.69. That doesn’t include Chicago which includes more taxes, fewer gas stations per capita, plus Cook County taxes. Chicago pump prices are most likely $3.69 to 3.99. And that’s for regular, non-premium octane product.

News reports state that a mechanical problem struck the Whiting, Indiana BP-Amoco refinery causing it to shut down operations for 5 weeks. That causes a shortage of gasoline for the Illinois, Indiana, Wisconsin and Minnesota markets directly. Prices have jumped from $2.49 to 3.49 in days.

With world oil prices in its first major slump in decades, world prices should have gas prices under $2 per gallon. In many areas in the nation this is already a fact. But not in the Midwest! No. And that’s an unusual thing. Even discounting the Whiting refinery incident.

First of all, the Whiting factor is not a large disruptive cause for price fluctuation. Just because BP says it is doesn’t make it so. It is not the only refinery in the region. There are plenty other sources for refined gasoline product. One refinery does not make this a make or break proposition for pump prices.

Another thing, 20 years ago or so, maybe less, the oil industry found itself with a refinery overcapacity. So they shut them down. Shell Oil shut down several in Illinois and abutting states. They were fully functioning and performing well. The problem was they were producing an over abundance of stock products and prices reflected the downward pressure. So refineries were close, even destroyed. The result? Refinery capacity dropped like a rock and spot shortages began appearing regularly. Thus prices firmed up at the pump and remained that way until today.

This is not a free market phenomenon. It is an oligopoly market intentionally made to produce higher prices to boost oil company revenues and profits. Monopoly is one kind of market. Oligopoly is another – large and few competitors arranged so they can control prices of their common class of products.

Timing of refinery shut downs is another man made pricing tactic. Shutting down refinery capacity at critical times to optimize price pressure is a tactic with criminal intent. If the shut downs were caused by explosions or massive storm damage, public suspicions would be contained. But not when the companies do this intentionally.

If this is such a large problem for them, the solution is expanding refinery capacity.

We must remember several overarching principles. First, all oil drilling and pumping of raw crude from the ground, was given favored status by US government policy for generations. They were even able to take a ‘depletion allowance’ which was in place to mark the reality that all oil wells are finite. They have an end to productive life when the crude oil deposits are fully depleted. So, they received a tax credit of 20% indicating the assumption that crude would be fully depleted from each well within 5 years. Only the life of a well stretched on for 20 years or more! So we taxpayers PAID oil companies huge sums of money just to do business. We also gave them tax credits for exploration, new refineries, new pipelines and new drilling operations.

Once those sweetheart deals were in place, oil and gas markets were controlled so the companies were protected from downward swings of profitability. If geopolitical pressures threatened foreign crude flow, wars were waged to favor American markets. That may seem an oversimplification of history to some readers, but I invite the doubters to do their own research and learn just how oil markets are not free markets. And you and I as consumers pay for it daily. As well we pay annually in our tax system.

You’ve heard of ‘most favored nation’ foreign affairs designations? Well, we have a ‘most favored industry’ category that signifies the hegemony of oil companies.

It is a shame. Our own government doing this to us. Our own ‘free’ market system being used against us and being anything but free.

Economic policy is supposed to guide governments to maximize economic good for the most people at least cost. The policy ought to protect the risk takers to do this work for the good of the people by allowing them to earn reasonable profits through thick and thin. But our form of government ought never be used to eliminate failure from the business dictionary. Risk takers know they could lose. They take the risks because if they win, they win big. The trick is to encourage them to take risks and reward them, but not to enslave the rest of us in the doing.

Gas pump prices should range today from $1.99 to 2.49 a gallon. They don’t, and that’s not only unfair, it is destructive of the travel industry, restaurant industry and auto industry. If gas prices rise, we cannot afford to take a vacation or even a short trip. High gas prices directly reduce consumption at local diners and eateries. Ask the owners of those businesses how they have fared these past 10 years with out-sized pump prices. They will tell you quickly their problems!

Same results occur for other common retail outlets.

If we are serious about building economic stability for the new millennium, free markets need to be free, or all players need to be informed of how they are not free and what hidden costs make this so.

Linking the oil industry to other aspects of energy markets and automotive manufacturing further exemplifies how insidious policy is haltering market prices, how engineering redevelopment of transportation is limited, how environmental protection goals are hampered. Think about it. National policy is making larger problems on our horizon. All of them can be avoided. But only if we unlink energy, oil, automotive and environmental law from each other.

A whole new industry of invention is waiting for us to adopt. Why do we let others thwart this progress?

August 24, 2015