Most people never take a course in economics, nor do they ever start their own business. Unsurprisingly then, most people don’t understand how businesses works. The rising cost of gasoline or other commodities is a puzzle that they are tempted to explain by some sort of wicked conspiracy. Unfortunately, many of these people wind up in elected office.
This lack of basic economic understanding is well illustrated in the behavior of public entities such as municipal bus companies or the post office. Each year, the cost of riding the bus or mailing a letter rises. The reason this happens is because the bureaucrats in charge of these entities notice that the amount of money their company has made has declined. They then look at how many letters have been carried or bus riders moved, and divide that by the amount of money they need to get in order to break even. They then raise the rate of postage or bus tickets accordingly. The following year they are shocked when they once again fail to bring in enough money to balance their budget and they go through the same exercise again.
Oddly, the concept of supply and demand, a very basic part of economic theory, seems to have escaped them. As prices rise, the number of people who will purchase a product or service will decline. Thus, by raising the cost of their product, the post office makes ever more people decide to forgo using stamps. This is especially true when there are alternatives to the product being offered. So, people use email which is free, and online bill paying, which is also free, thus bypassing the post office altogether. Likewise, those who might otherwise ride the bus choose to walk, use a bicycle, or hitch a ride with a friend who has a car. Commuters look at the cost of a bus pass and compare that with the cost of carpooling and choose to carpool instead.
Certainly, I could open a restaurant and try selling hotdogs with a bag of chips and a soft drink for five thousand dollars each. Chances are, I would never sell a single meal. Why? Because hungry people would go to the restaurant next door and pay three dollars and fifty cents for the same thing. Why pay five thousand when you can get it for so much less? This is how supply and demand works in the midst of free competition. People seem shocked that businesses are “greedy.” As if they exist for some other reason than making money. Ask yourself a simple question. Why do you go to work every day? No matter how inspiring or satisfying or fulfilling your job might be, the reason you get up in the morning is because of your paycheck, you greedy thing you. Of course business tries to make money. That’s how it works. But businesses, just like individuals, are constrained by the competition from other businesses, both those that exist, and the threat of those that might arise. They are constrained by their expenses and by supply and demand.
So why is gasoline so expensive? Same reason. There is only so much gasoline available as compared to those who want it. In the last few years demand has grown enormously, thanks to the burgeoning economies of India and China. Where before, most oil products were purchased only by the Americas and Europe, now the people of India and China are becoming prosperous and need fuel for all their new automobiles, not to mention all their new factories and power plants. This added demand means that the Americas and Europe must compete with fresh customers for the same amount of commodities. Production of oil and gasoline has not risen significantly since no new refineries have been built and no new drilling is going on. The only way to lower the cost of gasoline is by either increasing the supply, or by decreasing the demand. Unfortunately, our political establishment has a tendency to interfere in this process, prohibiting or restricting sources of supply.
Why do gas stations raise their prices overnight? Because the gasoline they sell today pays for the gas they need to buy tomorrow to replace it. When a hurricane hits one of the primary refinery regions in the US, those markets in the US that get their gasoline from there will have to pay more the very next day to replenish the supply of gasoline that they sold today. Just because they paid 3.50 a gallon yesterday from their supplier won’t help them when they need to pay 4.50 tomorrow. So while the gas they are pumping into your tank today only cost them 3.50, and yesterday they charged you 3.53 for it, they’re still going to have to charge you 4.53 today so they can buy that 4.50 gasoline tomorrow. It’s not price gouging, it’s just basic supply and demand. If they charge you only 3.53 today, they won’t be able to sell you ANY gasoline tomorrow.
The capitalist system of economics is not perfect and the businesses and individuals who are a part of it (that’s everyone of us on the planet now, thanks to the collapse of communism– and the Chinese are capitalists now, despite the fact that they might call themselves something else–and it’s their capitalism that has made their economy boom) are not saints. But it has, nevertheless, worked better than any competing theory that has ever been developed.
And politicians in general have little to do with how the economy is doing (except for those things they actually run, like the post office and municipal bus lines, or the often unintended consequences of the regulations and taxes they might impose that can make it difficult for companies to make a profit or even get started in the first place), despite the tendency for so many to try to blame them for it. The economy runs in cycles, rising and falling as naturally as waves on the ocean. That can be very painful for some individuals during down times, but the down times are just as temporary as the up times. And the rising and falling of the economy, in general, is about as easy as trying to control the waves of the sea. And generally speaking, the more politicians try to fix things, despite how well-intentioned they are, the worse they are likely make the situation. Just look at the post office and the bus companies.