When gas prices were high, every freshman activist was shouting for the heads of oil executives, quoting the profits of ExxonMobil, and talking about the “obvious price gouging” at their dinner parties. But what about now, with gas prices lower than they were through most of the past century (adjusted for inflation)? Are consumers ripping off the oil companies now? Of course not, no one was ever gouging anyone, because prices aren’t determined by historical cost, they’re determined by supply and demand. Meaning it doesn’t matter what something used to cost, only what the demand is and how much there is of it. Historical cost never matters.
Gas prices were high because people were buying a lot of it. And now they’ve dropped like a rock because less people were driving and buying gas. In fact, Americans drove 4.4% less in September than they did during the same period last year, that equals 10.7 billion fewer miles. That’s why gas prices have fallen so sharply, and it illustrates how the market works.
But what about those big profits the oil companies had back when gas prices were high? It wasn’t the high profits that were causing the high prices, it was the other way around: the high prices were causing big profits. And the irony is that those high prices actually stabilize naturally, since oil companies scramble to produce more gas when the prices are high, to capitalize on those high prices, which flood the market with more product, which lowers the price.
(chart via the WSJ)