I’m not sure what to make of this news from the Seattle P-I (and reported elsewhere as well):
Senators condemn oil price ‘gouging’
Responding to high-octane suspicions of price gouging at the pump, senators from both parties Tuesday condemned price manipulation but differed over the best way to attack the problem…
Sen. Maria Cantwell, D-Wash., is convinced that the oil companies have artificially increased prices and wants President Bush to have the power to cap gas prices if necessary. She likens the conditions to those that caused the Enron fraud of the electricity market in 2000 and 2001.
"Absolutely. I just don’t have the document to prove it," Cantwell said when asked if oil companies are price gouging.
I don’t mean to defend the behavior of oil companies here, and I also don’t want to get mixed up in semantics. But I’m far from convinced that the recent runup in gas prices is actually a case of unethical profiteering. It seems to me to be simple market economics: oil and gasoline supplies are tight, and demand is up. And that dynamic alone—quite independently of any malicious manipulation by oil companies—seems to be what’s forcing prices up.
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But I’ll just say that there seems to be a material difference between recent gasoline price runups and the California energy crisis. The winter of 2000/2001 was one of the driest on record, which meant that hydroelectric production was unusually low up and down the West coast. But that scarcity set the stage for market manipulation: a handful of energy companies were able to game the California electricity market by (among other tactics) taking some power plants offline—allegedly for "maintenance," but really to manufacture more scarcity.
But nothing similar seems to be happening here. US oil refineries really do seem to be running full-out, or close to it: they’ve got very little unused capacity, and the only ones that have been shuttered for maintenance recently are the ones that got pummelled by Katrina. So refiners, at least, don’t seem to be gaming the system.
Likewise, major oil producers—not just domestically, but globally—seem to be pumping just about as much as they can. There’s very little unused production capacity left right now—and, as a consequence, very little cushion against supply shocks, such as those caused by Katrina.
So: global oil supplies are tight; global demand for petroleum products is high and increasing; domestic refiners and oil producers are both running as fast as they can; spare production and refining capacity is low & unstable. That’s a perfect, free-market recipe for higher prices. There’s no need to invoke corporate malfeasance to explain high prices: in a market for a finite & highly valued commodity, price runups are exactly what one should expect.
Now, I’m not saying that higher gas prices are desirable, fair, or good for the economy; and there are probably reasonable arguments that some oil companies shouldn’t be reaping such an economic windfall from a supply shortage. But just because oil companies are benefitting from high gasoline prices, it doesn’t follow that they’re causing prices to rise. For that, blame the fact that we’ve shackled our economy to a scarce commodity and a fickle marketplace.