Stan asks an interesting question:
If consumers are willing to pay higher prices for gasoline, why should we think that energy companies are going to do anything but charge those higher prices?
We should not think anything but that, except that we should acknowledge that producers of any good might be willing to trade off some short term profits for greater profits over the longer term. With gasoline, we are certainly not in that environment, whether or not we ever were. (Were low energy prices of past decades "teaser" rates? Did we get discounts on our first "hits" of petroleum?)
He then asks two other questions that come up in various guises when dealing with economic policy:
In other words, in what's supposed to be a market-driven economy, aren't we complaining about the market working?
[...]
Finally, are we starting to think of gasoline as a public good that the government should provide?
On the first of these questions, people complain about the workings of the market all the time. Well functioning markets allocate resources to those who value them the most--in the sense of being willing to pay the most for them. The end result of that allocation may strike some as unfair or unjust, particularly if endowments of those resources were initially distributed in arbitrary and unequal ways. It is my view--an opinion based on a reading of history and an observation of current events--that most interventions that might be done in the workings of the market (i.e., in the determination of the prices as opposed to the distribution of the initial endowments) make matters worse.
On the second of these questions, we absolutely should not think of gasoline as a public good. Public goods have a specific definition, related to being non-rival in consumption (my consumption of the good doesn't preclude your consumption of it) and non-excludable (the producer of the good cannot prevent consumers from consuming it). A gallon of gas has neither of these characteristics. High prices should lead, over time, to more supply. If government regulations or taxes are interfering with that expansion, that should be the principal focus of government activity.
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A public good... hmmm
"Well functioning markets" according to your definition can miss the mark in cases where those who are "willing to pay the most" are willing to do so over longer periods of time. For example a hypothetical farm field where harvest is a function of erosion. Humor me. Lets say you could get $50,000 each year for five years and leave the field worthless in year six. Or you could get 30,000 per year and have to field for 20 years. Or get 10,000 per year into perpetuity. The lower erosion farming generates significanly more money than high erosion farming but the high erosion farmer could pay more up front(Interest rates need to be considered to make this example complete but I hope you can see what is going on).
Worth thinking about... unless the world ends before the later farmers can collect.
factoring in the interest rate...
Lets say you could get $50,000 each year for five years and leave the field worthless in year six.
With a 5% interest rate, that strategy is worth $216,000
Or you could get 30,000 per year and have to field for 20 years...
And that's worth $374,000.
The lower erosion farming generates significanly more money than high erosion farming but the high erosion farmer could pay more up front
The low-erosion farmer can afford to pay more up front because he is buying something of greater value. Thus, land like this will be bid to low-erosion farmers. Happily so, for both production-maximization and the preservation of the Earth.
This is assuming, of course, that the economy is developed enough as to finance and property rights to have an efficient lending system for loans secured by such property.
One of a number of reasons why economic development is the friend of conservation, and conservationists should be pro-development.
Better terminology by economists could help.
"...we absolutely should not think of gasoline as a public good. Public goods have a specific definition..."
Yes, and whoever picked "public good" as the name for such things could have done a lot better choosing something else.
I can't tell you how many exchanges I've been in or seen where somebody insists, "Things that are good for the public, instead of just for individuals, like education and health care, are what economists call 'public goods' and economists tell us they should be provided by the government, markets can't do so".
Good for the public = public good. Who can blame them?
"No, no, a seat at a desk in a classroom is both rival and excludable..."
"What's wrong with you? Is the idea of something being for the 'public good' too difficult for you, you greedy, voucherizing, profiteer?"
Supply and demand
Current profit margins for the large oil companies are about 10%. So with $4 gas, we'll say ~$1/gallon in taxes (direct and indirect), they only have about $0.30 per gallon to play with and remain profitable at all.
Keep in mind that shareholders demand high returns for high risk, and one has to admit that the future of oil companies is risky - talk of windfall profit taxes, OPEC, civil war in Nigeria, nationalization in Venezuela, hydrogen economy, electric vehicles. 10% profit margin is not really that crazy.
Of course, there is a reason why oil companies can't just go out tomorrow and charge $10 per gallon for gasoline right now: competition with other oil companies. Thus the supply and demand plus a small amount of profit ends up determining the price.
We call this a "market".
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