Federal Reserve Bank economists debunk Democrats' popular narrative of record gasoline prices

Federal Reserve Bank economists debunk Democrats’ popular narrative of record gasoline prices

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

What are the Democrats claiming?

As gasoline prices hit new highs this week, the popular Democratic talking point — that oil and gas companies profit — was recycled into the national conversation.

The New Yorker published an essay titled “As Gas Prices Hit New Highs, Oil Companies Profit.” The post contains quotes from various Democrats, including President Joe Biden, who accuse oil companies of not spending the resources needed to boost oil and gas production because they care more about their profit margins.

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

But what do economists say?

Garrett Golding and Lutz Kilian, senior economic analysts at the Dallas Federal Reserve, explained that profiteering and price gouging do not contribute to the staggering price of gas.

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

  • Service station operators set prices: “Gas station operators set retail prices based on their expected acquisition cost for the local distributor’s next fuel delivery, federal and state tax rates, and a markup that covers fuel expenses. operations, such as rent, delivery charges, and credit card charges.”
  • Almost all gas stations are owned by a company that does not produce oil: “Since only 1% of gas stations in the United States are owned by companies that also produce oil, American oil producers are unable to control retail gasoline prices.”

Meanwhile, they explained that in March 2022, when the average gasoline price was $4.22 per gallon, 59% of the cost was directly related to the price of oil, while 18% of the cost was the petroleum refining, 12% of the cost was distribution and marketing, and the remaining 12% was the cost of taxes.

Economists have also addressed the asymmetric nature of gas price changes.

[T]The asymmetry of retail gasoline price response is not necessarily evidence of rising prices. One possible explanation is that gas station operators are recouping lost margins during the recovery, when gas stations were initially slow to raise prices at the pump. The reluctance to cut retail prices also likely reflects fears that oil prices — and, therefore, wholesale gasoline prices — will rebound quickly, eating into station 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 they are falling. This decrease in search effort provides additional pricing power to gas stations, causing prices to decline more slowly than they have increased. This has prompted researchers to compare the response of gasoline prices to rising oil prices to a rocket and the response to falling oil prices to a feather.

Gasoline prices hit a new high on Friday, according to AAA, when the national gasoline average hit $4.43 a gallon.

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