“High gasoline prices also could be playing some role for people weighing lower airfares against the costs of driving.”, he said. This quote was in an article in the Albany Times Union. When I read it, a light above my conspiracy theory filled head came on. Before I get to that, though, let me give you some completely unnecessary background information on my life. While I cannot promise I will not get sidetracked, I do have a point and I can link it to this personal anecdote… maybe.
August 2001: I flew back to Florida, from New York. Visions of world travel in my head, I debated taking some time off from college, and becoming a flight attendant. Perks of the job include: great pay, free travel, and no school for a while. Flying back and forth between Florida and New York every time I got a little home sick was getting very expensive, and having no idea what to do with myself career wise, school was seeming more and more like a waste of time and money. What could be better? This was the perfect job for me. I had convinced everyone I knew that it was for the best.
September 2001: I was getting settled back into my apartment and searching the papers for training programs when three planes were hijacked and crashed in the Northeast.
You know to what I refer. After September 11, airlines suffered major losses, people were afraid to travel and invest in the market. Without travelers, especially international tourists, the airlines were going broke. Poor, poor mega million corporations, don’t you just feel for them?
After a couple of months people began to fly more and more, and airlines were back up to pre-9/11 business. Did they make up for the months when business was bad? Probably not.
This makes perfect sense. With rising gas prices, it is true, you must way your gas costs against ticket prices and ease of flying. It is no longer economically logical to make that 10 hour drive to go on vacation. I myself, make long trips in the car often, but do consider the option more now that a tank of gas hits my wallet for almost twenty-five dollars (I have a four cylinder, not a gas guzzling SUV, so this is a lot). Wow what a way to boost the business!
Ok Mel Gibson and Julia Roberts fans, get on board with me here. What do you do when business is bad? Whatever it takes to compete in the market, right? Well, what if you could influence that competition? Doesn’t our government do that everyday by regulating the market and prices. For all you eye rollers right about now, think about it. Why are we paying more for gas? Is there a shortage? For some reason that seems to be the general consensus; but check into the profit margins of the oil companies. While we are paying record high prices, aren’t they making record high profits?
So I ask again, why are we paying more? Well, usually the best way to find out why, as I learned from the movie JFK, (Does anyone else think I watch too much TV?), is to find out who benefits. Albany airport is seeing an influx of fliers, so many in fact that they are having trouble finding parking for them. Seems to me that the air travel business, is back in business. Do the math, I don’t want to. I took calculus in high school and have never looked back.
Maybe I am on to something, or maybe I am upset that my plans were foiled by 9-11. I have a college degree, a nice apartment downtown and a job that pays my bills, but have yet to go out of the country, you decide.
I wrote this in response to a April newspaper article, during Spring Break travel rush. Anyone know how air travel has been lately, with gas rising to almost $3 a gallon? Anyone have any other suggestions as to why we are paying so much, because I just don’t get it?
There are three pieces to the puzzle, but first, you have to remember that gas, oil, and other consumables are priced based on the replacement cost.
1) If your local gas station got the gas that’s in his underground tanks for $0.50/gal, the price he’s charging is based on what he needs to shell out to refill those tanks, not what he paid for it to begin with. This is not unlike the function of any other supply-driven market. He needs to cover his costs of replacing the gas he is selling. Otherwise he is ultimately selling at a loss, because the inability to refill the tanks will push him out of business.
2) The second piece of the puzzle is how the energy markets function. The main price driver is the futures price. This is a very volatile market that can see dramatic shifts during the day. All you hear about is the closing price, but in a given day the price can easily vary between, say, $20 and $200 per barrel. Energy markets are similar to the stock market, but are much more volatile by nature. Again, a major driver of the futures price is replacement cost, driven by such variables as supply, geopolitical events, supply fears, refinery shortages, and so on. Basically, it boils down to supply, and therefore, replacement cost.
3) The final piece of the puzzle can be understood by examining the price breakdown of the resource (in this case, gasoline). There is an $0.184/gal federal tax. In addition, the state taxes very greatly. In NYS, we pay $0.426/gal, the highest in the nation (even higher than California and Hawaii, as far as I can tell). Those taxes add $0.61 to each gallon of gas. In addition, local governments can levy additional taxes. It’s easy to see how just federal and state taxes make up 20-25%+ of the price.
And yes, the electricity market functions the same way. The only insulating factor is that you pay monthly for your electricity, which allows your supplier to average out their wins and losses before it hits your pocketbook.
Let’s hope ethanol, hybrids, and fuel cells come sooner rather than later.
What would be interesting is if someone did something similar for gas - say, you put the number of gallons each time you fill up on your card, and once a month you are given an averaged bill. Could end up saving a good amount of money.
It’s all well and good to look at the causes of the price increases, and what can be done to reduce that increase - however, it is also important to look at the whole picture, taxes are only one piece. The oil companies have been making out like bandits (one company made 6 billion last quarter alone), because every time the price at the pump goes up, they make a larger percentage, but their cut also keeps getting bigger, not smaller as you would expect.
As with most things, the taxes are only one part of the pie, large companies with unreasonable profit margins must also be held accountable – especially if they are engaged in illegal price fixing or other anti-trust violations. It is inappropriate to always pin the blame on the government, which does provide very important social, and infrastructure benefits to society, like public schools, roads and police departments – and could provide even more – like perhaps a police force for corporations, or cheap universal single payer healthcare – modeled after successful government/private sector based healthcare systems, like those of France and Germany, and not after under funded ones, like Canada’s or just broken ones like in U.K., but that’s another issue ;-).
I agree that those alternative energy powered vehicles are very much needed as soon as possible, and look forward to using them. The exception may be ethanol, which according to at least one study may actually take more energy to produce ethanol than is gained from it. According to that report ethanol is only cheaper because of the huge farm subsidies that go partly into its production. Without those subsidies, it would actually cost more to create ethanol, than you could sell it for.
That last thing about averaging out the gas is an interesting idea that I haven’t heard before :-).