Open Market

The Economics of Gasoline Prices

Everyone’s talking about gas prices. But while New York Times columnist Thomas Friedman praises high gas prices, other writers note the pain high gases prices cause to lower wage workers.

So what’s going on?

There is a very consistent correlation (graph) between the price of a gallon of gasoline and the price of a barrel of crude oil over time.

In the past, however, general inflation obscured the relative importance of oil prices on gasoline (graph). But with low inflation, the price you pay at the pump approaches the real (inflation-adjusted) price of gasoline. Therefore the impact of changes in the price of oil (due to supply and demand conditions, not an overall increase in prices) on gasoline prices has become more noticeable to consumers.

At the same time, the components that make up the price of a gallon of gasoline have changed:

 

1991-2004 Components of average retail price of gasoline

Crude oil: 39%

Taxes: 30%

Distribution/Marketing costs: 16%

Refining Costs and Profits: 14%

2004 Components of average retail price of gasoline

(What do We Pay for in a Gallon of Regular Grade?)

Crude oil: 47%

Taxes:  23%

Distribution/Marketing costs: 12%

Refining Costs and Profits: 18%

Crude oil now makes up a larger share of the price of gasoline than it has on average in the past (over a 15 year period).

A Few More Facts:

*Over the last 20 years, changes in crude oil prices have explained 85% of the changes in the domestic price of gasoline

*Except for a brief plateau in the late 1980s/early 1990s, domestic gasoline consumption has increased steadily

*That demand for crude oil increased in 2004 was not a surprise. The surprise was the rate at which world demand grew. The actual rate at which demand for crude oil grew in 2004 far outstripped the projections of likely growth in world demand

*The average annual return on equity between 1973 and 2003 was 12.6% for domestic energy producers, but 13.1% for the S&P Industrials 

These data, and much more, are found in Gasoline Price Changes: The Dynamics of Supply, Demand and Competition (PDF, Report of the Federal Trade Commission, 2005).

--Isaac Post

Civil Rights Clash in Arlington County

Are you guilty of sex discrimination if you refuse to produce a video for a feminist group? Or race discrimination if you refuse to print fliers for the Nation of Islam? According to most federal courts, you are not. But under the logic of a recent Arlington County (Virginia) Human Rights Commission ruling, you might be. It equates refusal to produce gay pride films with discrimination against customers based on their sexual orientation.

The Arlington County Human Rights Commission recently held a public hearing and subsequently investigated a Christian businessman on behalf of a gay-rights activist who claimed he wrongly “discriminated” based on “sexual orientation.” Tim Bono of Bono Film and Video in Arlington County refused to duplicate two Gay Pride films for political activist Lillian Vincenz. (Vincenz once told an interviewer that “gay people .. are, in general, so much more courageous, innovative, and open to new ideas than the average straight person.” (See 39th paragraph here))

In refusing to duplicate the videos, Bono cited his desire to honor what he perceived as Biblical prohibitions against the sin of homosexual behavior. Bono Film & Video informs every potential customer that it does not duplicate material that it may deem obscene, or that may embarrass employees, tarnish its reputation, or that runs counter to the company’s Christian and ethical values. (See the policy here)

Vincenz contacted Arlington County officials to get them to force Bono’s private business to duplicate her materials, despite the fact that Bono objected on the basis of his religious convictions.  The Arlington Human Rights Commission then ruled against Bono, ordering him to either duplicate Vincenz’s films himself or pay someone else to do it for him.

Bono’s supporters, such as the Virginia Policy Network, argue that his religious freedom has been violated. But there are two very different reasons to object to what the Arlington County has done.

First, there’s Virginia pro-business Dillon Rule, designed to prevent a patchwork of county-by-county regulation, which bars counties from adopting antidiscrimination ordinances that include categories other than those included in state law. Virginia law does not cover sexual orientation yet, although there are bills pending in the General Assembly that would allow counties to ban private sexual orientation discrimination. Thus, the Arlington County Human Rights Commission had no legal authority to investigate Bono to begin with.

Second, there’s the U.S. Supreme Court’s ruling in Hurley v. Gay, Lesbian & Bisexual Group of Boston, 515 U.S. 557 (1995), which held that although states have a legitimate interest in banning discrimination against customers based on their sexual orientation, it is “peculiar” to go beyond that to ban discrimination against gay rights messages. The Hurley decision ruled that the First Amendment right of free speech overrode a state’s civil rights law when it forced the organizers of a Saint Patrick’s Day Parade to admit a contingent of gay-rights marchers, since that was requiring them to disseminate a gay-rights message rather than to just treat gay people equally, as state antidiscrimination laws covering sexual orientation logically are limited to doing.

Courts and agencies are obligated to construe their antidiscrimination ordinances narrowly to avoid potential free speech problems, as the Saint Patrick’s Day parade case shows. Arlington County has not lived up to this obligation, construing “discrimination” based on sexual orientation so broadly as to be “peculiar” under U.S. Supreme Court precedent. That violates basic rules of statutory construction.

--Hans Bader

GDP Growth Spurt

New numbers [PDF] from the Bureau of Economic Analysis (via the Joint Economic Committee) are out today, and it seems the U.S. economy grew at a respectable 4.8% (annualized) rate for the 1st quarter of 2006. Contributing sectors included software spending (+16.4%) and exports (+12.1%). On the minus side, some of that firgure also came from increased government spending (+10.8%).

In other recent economic news, the Bureau of Labor Statistics reports that the U.S. economy created 211,000 new jobs in March, leaving the nation with a slim and trim 4.7% unemployment rate. Just for the sake of comparison, the Associated Press reported yesterday that Germany's unemployment rate just fell to 11.5%.

--Richard Morrison

Out of the Gas Price Frying Pan...

White House logic: First we're addicted to oil, then we need an investigation of collusion and price gouging by oil companies despite the lack of any evidence of such behavior, and now we need to raise rederal fuel economy regulations, despite their proven track record of causing thousands of additional vehicle passenger deaths. On last night's Daily Show with Jon Stewart, one of the news analysts/cast members facetiously predicted that in pursuit of matching his father's lowest-ever approval rating of 29%, President Bush's next public move might be "to beat a nun to death with a tire iron."  As far as wrongheaded policies of the last few weeks go, reality is coming alarmingly close to parody.

--Richard Morrison

Scaremongering as Journalism

Time magazine’s “special report” on climate change is one-sided advocacy from start to finish. Scientists who are not “very worried” about global warming never get a word in edgewise. Neither do economists who view the costs of regulatory climate policies as out of all proportion to their supposed benefits, if any. If Time ever was a “news” magazine, it is no longer. My running commentary takes Time’s article apart brick by brick, exposing its many errors, biases, and distortions.
--Marlo Lewis.

“You just had to go be nice to Al Gore; now we’re trapped in a cave!”

So gripes Eric Cartman in the new episode of “South Park,” which takes on Al Gore’s crusade to save the world from some phantom scare—in this case an elusive beast called the “manbearpig”—“half man, half bear, and half pig” (Yes, I know that’s three halves; there’s no accounting for cartoon former Vice Presidents’ math skills). I won’t go any more into it, since this Saturday night, Comedy Central is rerunning all of this season’s episodes to date, and I don’t want to spoil it for those who haven’t seen it yet. Highly recommended.

- Ivan Osorio

The Push for Sugar Reform on Capitol Hill

A review of yesterday’s sugar reform briefing with Rep. Jeff Flake:

Yesterday the Sugar Reform Alliance – coordinated by CEI – held a briefing on Capitol Hill to discuss why changes were needed in the U.S. sugar program. Featuring Congressman Jeff Flake (R-AZ), a rare free-market advocate in the House, the program was moderated by Fran Smith, adjunct fellow at CEI, and included as speakers Kristina Rasmussen, director of government affairs at National Taxpayers Union, and Fred Oladeinde, head of the Foundation for Democracy in Africa and coordinator of the AGOA Civil Society Network.

Cong. Flake pointed out the public choice problem of the sugar program – the benefits are concentrated among a small group of sugar producers and the costs are diffuse among millions of consumers. Born and raised on a ranch in Arizona that his great-great-grandfather had started, Flake noted the problems of government control of agriculture and said that the sugar program was one of the most egregious.

Smith, who founded and coordinates SRA, focused on the pressures for sugar reform, which are increasing, and may increase the chances for changes through the 2007 Farm Bill. She referred to CEI’s new issue brief, “Is the U.S. Sugar Problem Solvable?” which gives examples of agricultural reform efforts that have worked. Smith set out principles for reform – a main one being that sugar program changes shouldn’t shift the cost burden from consumers to taxpayers.

Rasmussen highlighted NTU’s distribution of Peeps candies – with the slogan “millions for sugar producers and not one Peep for taxpayers” – to all of the Congressional offices that morning. She noted that the program acts as a hidden tax through raising the cost of sugar two times the world price.

Focusing on the developing countries, Oladeinde pointed out that U.S. import restrictions denied market access to poor countries that were efficient sugar producers. In particular he noted that such restrictions contributed to economic stagnation in several African countries.

In a lively question and answer session dominated by representatives of the sugar industry, proponents of the status quo for the sugar program said that even if the U.S. prices were decontrolled, the lower costs to manufacturers would not be passed on to consumers at the retail level. They challenged the Alliance to come up with specific alternatives to the current program, particularly if SRA participants did not want to use buyout programs similar to those used for peanuts and tobacco.

Smith agreed that specific proposals were the next step and noted that possible approaches would be to address the import quota systems where low or no tariffs applied to a limited amount of sugar and where prohibitive tariffs applied above those quota amounts. She noted that SRA participants would be interested in discussing ideas with the industry.

--CEI Staff

Jane Jacobs (1916-2006)

Yesterday, Jane Jacobs passed away. Jacobs was the author of the classic book The Death and Life of Great American Cities.

I had the pleasure of meeting Jacobs about five years ago when she was on a book tour for her book The Nature of Economies—at the young age of 84.

Although her politics leaned to the left, her work is distinctly Hayekian in theme.

In Death and Life, Jacobs criticizes the city Planners who “have gone to great pains to learn what the saints and sages of modern orthodox planning have said about how cities ought to work and what ought to be good for people and businesses in them. [But who] take this with such devotion that when contradictory reality intrudes, threatening to shatter their dearly won learning, they must shrug reality aside.”

For Jacobs, this reality is the spontaneous order that characterizes actual city environments: “a manifestation of the freedom of countless numbers of people to make and carry out countless plans” of their own.

The Death and Life of Great American Cities is a criticism of the hubris of the Progressive ideology:

the notion that social harmony can be achieved through the imposition of a grand plan made possible due to the Central Planner’s intelligence (he knows what is in the best interests of the people) and benevolence (he cares deeply about the welfare of the people).

Some attention was paid to the negative social consequences of Utopian planning during the French riots last fall. In Revolting High Rises (November 2005), and The Barbarians at the Gates of Paris (2002), the authors criticize the French-Swiss architect Le Corbusier for his vision of housing projects and city plans “drawn up by serene and lucid minds”.

--Isaac Post

Fighting for Freedom in A Hostile Environment

I had the pleasure yesterday of listening to and meeting Jaroslav Romanchuk, deputy chairman of the United Civic Party of Belarus and President of the Minsk-based Mises Center, who is fighting for liberty in one of the most difficult environments in the world to do so. At a talk at the U. S. Chamber of Commerce, he provided a good overview of why Lukashenko has been able to hold on to power for as long as he has—support from the Kremlin and high commodity prices. For readers in Washington, I recommend attending Romanchuk’s Cato Institute talk this afternoon—or if you’re outside of D.C., listen to the webcast. (Kudos to the Atlas Economic Research Foundation and to the Center for International Private Enterprise for organizing his visit). The Mises Center deserves the support of anyone in the West who cares about freedom.

-- Ivan Osorio

Bush's Gas Price Desperation

With his recently announced inquiry into gas prices, President Bush seems desperate to find someone to blame for continuing high demand, which is the result of high economic growth (presumably some of it due to his policies), and continuing supply problems.  He should be traveling across the country blaming the minority in Congress--Democrats and liberal Republicans--who continue to block policies to increase domestic energy production.  The president, still suffering under the sad delusion that America is addicted to oil, seems to have forgotten that his policies would, if enacted, lead to increased energy supplies and lower prices over the next few years.  These include opening ANWR and the Outer Continental Shelf to oil and natural gas production.

--Myron Ebell