National Public Radio

February 28, 2003

Does Big Oil Exploit Consumers?
by Russell Roberts

Whenever gas prices go up, we hear about the power of oil companies to gouge us. We're stuck paying whatever they charge. After all, everyone needs gasoline. It seems big oil always raises prices whenever there's a convenient excuse.

There's only one problem with this theory of gouging. The facts don't support it.

Once you account for inflation, the average price of gasoline today is about the same as it was in 1950.

How can this be? After fifty years of increased demand? And after fifty years of population growth! Yet those greedy oil companies squeeze less money out of us for a gallon of gasoline than they did in 1950. There have been long stretches of time where the price corrected for inflation fell steadily, year after year.

I'm sympathetic to one part of the gouging theory. I think oil companies do try to make as much money as possible. So given that urge, why haven't they been able to exploit us?

It's the same reason you can't charge as much as you like when you sell your house. Even if you're a greedy monster. Even though it seems that every potential buyer needs housing. But even the neediest buyer is protected from your greed by the availability of houses other than yours.

The same principle applies to gasoline. The gas station on the corner would like to raise prices even higher. And some people might keep buying at those higher prices. But there's competition from other stations that keep prices down. What about the supply? Doesn't OPEC control the gasoline market through the supply of crude oil? It tries to. But competition among OPEC members and from other nations like Russia, outside of the cartel weakens OPECs ability to control prices. Outside of the glory years of the 70s, it's hard to see any evidence that OPEC has had much power at all. Otherwise, you'd think gasoline would cost a lot more today than in 1950.

There's one other twist to the gouging theory. If market forces and competition rule the gasoline market, then how can suppliers charge more for the oil they bought months ago when prices were lower? Again, think of your house. When you sell your house, you can't charge whatever you like. But you can charge what the market will bear. And that has nothing to do with what you paid for it If war comes and if there's no real disruption to oil supply, the price of gasoline will fall dramatically, just as it has in the past. And sellers who paid a premium for their supplies will take a loss. The fact that they paid a lot for their supplies will be irrelevant. Somehow, their alleged ability to exploit us will disappear overnight like the morning mist.