Wednesday, May 03, 2006


Some common sense on gas prices:
Both conspiratorial and cost-based supply explanations are unsatisfactory because they ignore demand. Gasoline prices are high because consumers have decided that it's still a “good deal” given the alternative. Until that changes – or until new supplies are offered – prices will remain high indefinitely.
A good analogy to what's going on in the gasoline market can be found in the housing market. Home prices are not dictated by construction costs or by back-room meetings of real estate executives. They are established by auction. Prospective buyers rarely think about how much houses cost to build.
Instead, they think only about whether a house is worth more to the buyer than the price asked by the seller.
In gasoline markets, prices are likewise established by auction. Those auctions occur in a multitude of regional spot markets. Oil companies generally sell gasoline to their franchised service stations at the spot price plus transportation and various business-related costs. Service station owners then post whatever price they like, but given competition, they can rarely charge much beyond their acquisition costs.
...And generally, people do not view pricing via auction (in essence, pricing based on willingness to pay) as unfair. Sure, we all need gasoline, but we all need food, housing and lots of other stuff, too. Why do we rail against “price-gouging” oil executives – who are simply charging auction prices – but not against price-gouging home owners or greedy eBay merchandisers?
I assume that question was rhetorical.