High Gas Prices:
Companies Laugh All the Way to the Bank

Mar 7, 2011

The oil companies are blaming turmoil in the Middle East for gas prices shooting up to close to $4 per gallon.

In fact, there is no shortage of crude oil, as increases in oil production in other countries make up for whatever oil production has been lost.

Instead, the oil companies are quietly creating gasoline shortages by slashing production at their oil refineries here in the U.S. A recent report by CNBC entitled, “Are U.S. Gasoline Refiners Holding Back as Gas Prices Rise?” uses statistics from the U.S. Energy Department to show that U.S. refiners are running at “extraordinarily low levels of operation.... The industry seems to be holding back on productive capacity....”

CNBC naively concludes, “It is hard to understand why more capacity is not being utilized to get more product to market.”

It’s not hard to understand at all: the oil companies reduce supply and demand higher prices.

Companies in other industries also use the excuse of higher fuel costs to raise their prices, as well. The airlines, for example, have all added huge fuel surcharges to ticket prices. On overseas flights, these surcharges amount to $400 on a ticket.

That doesn’t mean the airlines are actually paying higher fuel prices. The airlines often brag to their stockholders about how they insulate themselves from big fuel price increases by using hedges, that is, by signing contracts to buy fuel years in advance at a much lower fixed price.

So, higher fuel prices spell higher profits and wealth not just of the oil companies, but big stockholders in other companies, also.