Monday column - Blame the open market, not Big Oil, for price hike

September 15th, 2008 at 11:40am Thomas V. Bona

What’s the definition of gas-price gouging?
Apparently, it’s having to pay more for gas than you want to.
At least, that’s the impression I get from readers, whose complaints rise in proportion to the price at the pump. There’s no question it hurts our wallets when prices jump unexpectedly, or when they go up more often than down. But just because you don’t like the price doesn’t mean something illegal is going on.
Last week, we had a rare disconnect between oil prices and gas prices. We had — briefly, at least — oil below $100 a barrel and gas above $4 a gallon.
Gouging, right?
No.

When the largest Atlantic hurricane on record bears down on a big section of our petroleum-refining infrastructure — forcing most of those facilities to close in advance — it makes sense for gas prices to spike.
Scarcity drives prices. Oil may be cheaper, but evacuated refineries can’t keep turning it into gasoline, which is the cause of the problem.
Which is why the wholesale price of gasoline rose sharply last week, with retail gas prices following suit a day later. Because most people rarely hear about wholesale prices — they’re not as widely reported as oil and retail gas prices — this can be confusing. But when there’s a big price shift, there’s a reason. And this time, it was Ike.
I think many people have a misconception on how prices are set. They envision oil barons in a room (or, in the 21st century, webconferencing), smoking fat cigars and arbitrarily setting prices.

But oil is traded on the open market, with people who have no direct connection to Big Oil influencing whether it goes up or down. Same with wholesale gasoline prices — sure, oil companies buy and sell the stuff, but so do independent retailers. And in Rockford, our gas stations are generally owned by independent retailers, not the oil companies.
And certainly, oil companies are big beneficiaries of high prices for their products. But correlation does not mean causation. A friend of mine compared it with an eBay auction: if you put a $20 bicycle up for sale and people are willing to pay you $100, do you say no?

If oil companies and gas station owners were looking to gouge at every turn, why were gas prices at historic, inflation-adjusted lows from the mid-’80s to the mid-’90s? And why, except for two spikes in the 1970s and the spike of the 2000s, have gas prices generally risen more slowly than inflation in the U.S.?
Things are different now. And it’s not because Big Oil, Big Gas, or Road Ranger, Kelley Williamson and other local retailers have suddenly decided to overcharge. The open market has caused the price of energy to rise and be more volatile than ever. The fundamentals have changed.
There’s an answer for everything. It’s just not as simple as we want.
Contact staff writer Thomas V. Bona at 815-987-1343 or tbona@rrstar.com

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