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The Kansas City Star, Mo., Jerry Heaster Column

Posted on: Thursday, 17 November 2005, 21:00 CST

By Jerry Heaster, The Kansas City Star, Mo.

Nov. 18--OIL PROFITS AREN'T DUE TO PRICE GOUGING: Price gouging is a lot like pornography. It's difficult to define, but most people recognize it when they see it, or think they do.

Take 9/11, for instance. The day they crashed airliners into the World Trade Center buildings and the Pentagon, gasoline prices spiked close to $3 a gallon, based on fears that Mideast turmoil might push oil prices up precipitously. At most stations the pump price was set around $3 a gallon for regular, but one station in Overland Park saw an opportunity and took it. Its operators immediately reset their price to about $5 a gallon. This led to lots of media coverage, but few sales, because most consumers saw it as the attempted price gouging that it was. The next day, the station's price schedule was more in line with the nearby competition, and there was even a sign out front apologizing for its attempt to use public panic for personal gain.

But can consumers claim gouging when everyone is charging about the same higher price for gasoline in the wake of a natural disaster and disrupted supplies?

When oil company profits were reported recently, a lot of people, including some in Congress and a commentator on the right, thought they smelled conspiratorial collusion and price gouging. The problem, as oil company executives tried to explain during hearings into possible hanky-panky, is that just because the oil companies made a lot of money about the time Hurricane Katrina was creating havoc doesn't mean there was an industrywide conspiracy to push up prices or otherwise gouge the public.

Price, when administered honestly in a relatively free market, is simply a signal to tell the public the relationship between supply and demand. It is nothing more or less, if you will, than a way to convey a message on the relative availability of what is for sale. It's something everyone who takes an intro economics course learns forthwith and remembers as long as it is convenient to remember.

When a hurricane caused oil rigs and refineries to shut down in the Gulf of Mexico region, oil companies anticipated future shortages and raised prices in anticipation of the future replacement costs of the gasoline they had on hand. This tamped demand and, except for rare instances, ensured adequate supplies in most markets as motorists cut back on their driving. Now that the emergency has run its course, prices have begun to retreat and have dropped anywhere from six bits to a dollar in the past several weeks.

Was what happened gouging because it helped lead to record profits? Hardly. Year in and year out, oil companies invest the same amount of capital on exploration, production and distribution whether oil is selling for $10 a barrel or $60 a barrel. As for the cost of a barrel of oil, the price is set globally, not domestically. The best way to judge whether the record profits reflect gouging is to look at the profit margins of the companies to see whether they are out of line with the industry.

The American Petroleum Institute reports that the average profit per dollar of sales within the industry was 7.9 cents during the second quarter. The National Review reports that ExxonMobil is making 9.8 cents for every dollar in sales. This compares with 13.8 cents for McDonald's and 21.2 cents for Coca-Cola.

All of which would seem to indicate that it's a lot more profitable to fry burgers and make sugared water than it is to turn oil into gasoline.

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Copyright (c) 2005, The Kansas City Star, Mo.

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KO, XOM, MCD,

Source: The Kansas City Star (Kansas City, Missouri)

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