Federal Reserve economists debunk popular dem narratives of record high gas prices

Federal Reserve economists debunk popular dem narratives of record high gas prices

Economists at the Federal Reserve of Dallas this week released an analysis refuting a popular claim Democrats are making against oil companies.

What are the Democrats claiming?

As gas prices soared to new record highs this week, Democrats’ favorite talking point – that oil and gas companies are making a profit – was brought back into the national discussion.

The New Yorker published an essay titled “As Gas Prices Reach New Highs, Oil Companies Are Profiteering.” The publication includes quotes from various Democrats, including President Joe Biden, who accuse oil companies of not investing the resources necessary to increase oil and gas production because they care more about their profit margins.

Next week, the House of Representatives will even vote on legislation promoted by the Democrats to combat the oil industry’s alleged exploitation of consumers.

But what do the economists say?

Garrett Golding and Lutz Kilian, senior economic analysts at the Federal Reserve of Dallas, explained that greed and price gouging are not contributing to skyrocketing gas prices.

Two facts in particular refute this myth. Golding and Kilian explained:

  • Petrol station operators set prices: “Gas station operators set retail prices based on their expected purchase cost of their next delivery of fuel from their local dealer, federal and state tax rates, and a mark-up that covers operating costs such as rent, delivery fees, and credit card fees.”
  • Almost every gas station is owned by a non-oil company: “With only 1 percent of gas stations in the US owned by companies that also produce oil, US oil producers are unable to control retail gasoline prices.”

Meanwhile, they explained that in March 2022, when the average price of gasoline was $4.22 per gallon, 59% of the costs were directly related to the price of oil, while refining the oil accounted for 18% of the costs, with 12% of the costs being accounted for Sales and Marketing, and the remaining 12% was tax expenses.

The economists also addressed the asymmetric nature of gas price changes.

[T]The asymmetry in retail gasoline price response need not be evidence of price gouging. One possible explanation is that gas station operators are recouping lost margins during the upswing, when gas stations were initially hesitant to raise pump prices. The reluctance to lower retail prices also likely reflects concerns that oil prices — and thus wholesale gasoline prices — could recover quickly and eat into stations’ profit margins.

Another possible reason for this asymmetry is the tendency of consumers to seek lower pump prices more intensely when gasoline prices are rising than when gasoline prices are falling. This reduced search effort gives gas stations further pricing power, causing prices to fall at a slower rate than they have risen. This has prompted researchers to compare the reaction of gasoline prices to higher oil prices with a rocket – and the reaction to lower oil prices with a feather.

Gas prices hit another record high on Friday, according to the AAA, when the national average for gas hit $4.43 a gallon.

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