Tuesday, April 25, 2006

Gouging the truth

From the Washington Post:
Bush Orders Probe Into Gas Pricing

By Jeffrey H. Birnbaum, Steven Mufson and Debbi Wilgoren
Washington Post Staff Writers
Tuesday, April 25, 2006; 10:03 AM

President Bush has asked the Energy and Justice departments to investigate whether gasoline prices have been illegally manipulated, White House press secretary Scott McClellan told reporters this morning.

The White House is also asking states to guard against unfair pricing. . ."


I know it's not popular to say this . . . but high gas prices are a good thing for us in the medium to long-term. High prices are a signal that a commodity is scarce, and that signal tells producers to make more of it, or to find substitutes. Trying to artificially drive prices down discourages producers and suppliers.

There are a number of well-known factors for the rising price of gas, such as the high price of crude oil (due to political tensions and rising demand elsewhere). And I know the oil companies are juicy targets, but their profits are not extraordinarily high in percentage terms. Their profits are big in absolute terms because they are large companies.

Exxon Mobile, for example, has a profit margin of about 11 percent and an operating margin of 16 percent. That's substantially lower than the media business. For example, Gannett has a profit margin of 16 percent and an operating margin of 27 percent. Just imagine where gas prices would be the oil companies had Gannett's porcine profit margins.

This is just basic economics. But when the public gets mad, especially in an election year, politics intrudes. Bush is acting politically to head off political attacks from Democrats. He has to appear to do something -- whether or not the idea of "gouging" or "unfair" pricing has any real marketplace meaning.

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