Gas prices are at all-time highs and one of the drivers of the near 40-year-high inflation rate.
It’s costly to fill up our cars right now, but unlike other household purchases, we cannot cut gasoline out of our budgets. Many Americans are wondering why gasoline is so expensive.
We’ve heard from Democratic leaders in Washington a variety of reasons: COVID-19, the supply chain, and even Russian President Vladimir Putin’s invasion of Ukraine.
Now, the Left—led by President Biden and Democratic Senator Elizabeth Warren—is blaming corporate greed. They claim the nation’s largest oil companies are price gouging and that is why you are paying more at the pump than at any time in recent history.
Last week, Warren introduced the Price Gouging Prevention Act of 2022 to demand that companies explain why they are raising their prices.
In a statement she charged:
Prices are rising, and consumers are paying more, while giant corporations are using inflation as a cover to expand their profits.
This bill would crack down on corporate price gouging by setting tougher rules of the road and enhancing enforcement, and I’m going to fight to get this done.
Is it true that gas prices have skyrocketed because oil corporations are price gouging?
False. Completely make believe.
Gas prices are a significant problem. According to AAA’s gas averages, as of May 25th, 2022, the national average is $4.59, up from $4.12 one month ago and $3.04 from one year ago.
This places hardships on nearly every family budget. The question is what is driving these prices?
The left claims that corporate oil profits are high because companies are able to raise prices and pass along increased costs to consumers.
Rising profits are not evidence of price gouging. First, we should define what price gouging is. It is deliberately charging unfair prices. Usually it’s limited to a single industry, geographic region, and time such as after a natural disaster. The practice is outlawed in most states.
Gasoline prices rise due to increased demand as consumers drive more or utilize more energy and that has happened as the pandemic winds down. Prices also rise when there is less supply: not only do we lack enough drilled or imported oil but refineries are unable to boost production.
Gasoline and diesel are refined from crude oil. U.S. refiners obtain crude oil from other countries making them price takers (i.e. they must accept the prices offered and are unable to affect the market price themselves). If world crude oil prices are high, U.S. refiners have to pay higher prices for the crude they buy. In turn, they charge gas stations higher prices, which in turn charge consumers more at the gas pump.
In the past, the Federal Trade Commission (FTC), which investigates claims of anti-competitive behavior such as hiking prices unnecessarily or market concentration and price collusion, has examined the reasons that energy prices rose in 2004 and 2005 and found that most cases of price were not due to big companies taking advantage of a situation, but market forces.
If U.S. producers and refiners could expand output, that would ease prices. However, as a New York Times opinion writer Peter Coy explains, there are multiple factors restricting capacity that are unlikely to change anytime soon:
A major refinery in South Philadelphia experienced an explosion and fire in 2019 and has never reopened. Other refineries have shut down in California, Louisiana, New Mexico, North Dakota and Wyoming. Industrywide operating capacity is down 5 percent since the start of 2020. “No country has lost more capacity than ours, though global projects are planned that will make up for the losses within the decade,” Ericka Perryman, a spokeswoman for American Fuel and Petrochemical Manufacturers, wrote in an email.
And one big factor discouraging future investments in production is U.S. energy policy under President Biden and his radical green agenda:
While refiners have a short-term incentive to produce as much as they can, their long-term incentive is to be cautious about adding capacity. The world needs to move away from hydrocarbon fuels as quickly as possible to save the planet from climate change. Knowing that, refiners are reluctant to invest heavily in plants that could soon be rendered obsolete by regulation or renewable forms of energy. “How do you invest in long-lived assets if the administration is signaling that they want you out of business by 2030?” asked Dean Foreman, the chief economist at the American Petroleum Institute.
Let’s also not forget that during the pandemic shutdown, when transportation ground nearly to a halt, refiners and the energy industry suffered significant profit losses. Wall Street investors expect them to “pay down debt, raise dividends and buy back shares [rather] than build more refining capacity.”
Oil producers face the same regulatory headwinds from this administration and pressure from their investors as oil refiners.
Accusations of price gouging aren’t limited to energy-industry companies, meat packers face new anti-gouging legislation as well.
The end goal with these bills and others aimed at antitrust issues are to beef up the FTC with new enforcement authorities and resources.
Real instances of price-gouging, such as reselling baby formula at 10 times the normal price, should be prosecuted.
However, most of the price increases we are experiencing in gas and about every other industry result from too little supply and too much demand with ill-advised policies at the root, not corporate greed.