Who's Pumping You?

Do you ever sit back and wonder how this country has been able to sustain itself economically throughout this "calamitous" rise in the price of gasoline? Many of us, I am sure, have taken great pains to find someone, or something, to blame for the $3.00 per gallon gasoline. Someone has to pay, right?

Yep. We do.

Americans will pay the going rate for gas no matter if it is 79 cents or five dollars. We will pay it. Do I have any evidence of this? Of course. But, before I make the case that gas prices have not had the affect of modifying our behavior in any quantifiable way, let me ask you this: has the rise in gas prices changed the way you live your life? Have you cancelled a vacation or called off that day trip to Shipshewana? I doubt it.

Let's look at the numbers: According to AAA, 4th of July travel on our roads was actually UP this year by one per cent or more. All that means is that in spite of the price of gas being up more than 70 cents since last year at this time, more than 40 MILLION people still took to the roads.

So, the question remains: How have Americans dealt with this crisis?

It's simple, really; there is no crisis.

Adjusted for inflation, gas prices in this country are not at all-time highs. According to the United States Department of Energy, the price of gas is still significantly lower than it was back in the 1980s and, beyond that, actually cheaper than it has been for the greater part of the 20th century!!

As author John Stossel points out in his new book, gas is actually a bargain when you compare it to other goods. Have you checked the price of bottled water lately? 16 fluid ounces of Aquafina will cost you $1.29, and that wouldn't turn a single cylinder!

And what do you think costs more to produce?

The problem with gasoline in this country, as an issue, is that most people really don't understand it. Yes, the energy magnates at Exxon, UNOCAL, and Citgo will screw you and do screw you. But do they screw you anymore than anyone else? Probably not. Consider for a minute who the big winner actually is at the pump. It isn't Exxon, though they are pretty big winners; it isn't the station owners, though they get theirs as well; and it isn't consumers like you and me, though we get access to a commodity that we could not refine ourselves; the big winner is government, state and federal.

Let's look at the numbers. According to the American Petroleum Institute, the average tax burden on a gallon of gas is approximately 42 cents in the United States. Compare that to the four to seven cents that Exxon takes in as profit for every gallon of their gas that you pump into your Hummer H2.

So who gouges us more? Big oil or big government?

Sure that money goes into the treasury, but where does it go after that? The last time I checked, the interstate system in this country was in disrepair. In other words, the difference between gouging for profit and gouging for pork barrel spending is negligible.

Something further that you need to understand about gas, as a commodity at least, is that it is an inelastic good. In economics, these are the goods that are still consumed in relatively the same quantity irrespective of the price. The price is basically irrelevant based on our consumption patterns.

What has changed and led to an increase in the price of gas--at least nominally--is the size of the demand. The demand per person in this country has not fluctuated very much; however, the demand on the global scale has. For instance, in countries like China and India, the consumption of petroleum-based products has been relatively low until recently. Since these two countries have liberalized their economies, they have quickly become players in the global economy--a transition marked by rapid industrialization, the opening of new economic sectors and the rise of consumption in consumer goods. And, as you might imagine, one consumer good that appears to be becoming popular in China and India is the automobile.

In other words, as Americans our per capita demand for gasoline has remained relatively unchanged; but on the global scale, there are vastly more people demanding it now than ever before.

And what happens when you see a steep incline in the aggregate demand of a commodity? The price goes up.

Demand is not, however, the only thing that drives prices up or down. There are also vast networks of speculative capital flows that can have an affect upon prices--futures trading is a good example of this--in addition to the geopolitical anxieties that make speculators squirm.

In sum, what you see on that sign outside of your local Speedway Station is not always what you get. There are a lot of factors that influence the price you pay for gasoline.

In effect, governments are pumping us, the Petro-Potentates are pumping us, the global finance system is pumping us, and austere despots in the Middle East are pumping us.

And we don't seem to mind.