Thursday, April 27, 2006

Gas, gouging and profit margins

Hat tip to Cox and Forkum for the cartoon. You can read their related commentary and linksHERE.

As I've been blogging, I've come to realize that the education crisis in America is far worse than I ever imagined. The drama about Gas prices and perceived price gouging is a perfect example of what would seem to be total lack of understanding of basic economics on the part of the American public.

Do most people even understand what a "profit margin" is? We ran a restaurant for over 7 years in San Francisco. The overheads were enourmous, and the profit margins were tiny. We made more money in our former jobs, but we wanted to be self-employed. So we worked for much less than minimum wage, because we owned the business.

We made just enough to cover our business expenses, and a little bit to live on. Over the 7 years we were operating, we had to raise our prices many times. On paper, the amount of money we took in steadily kept rising. To look at only our raw profit, you would have thought we had an ever increasing income.

But it's just plain stupid to only look at profit, because every business has expenses as well. Our costs kept increasing at an alarming rate; even though our prices rose, our profit margin kept shrinking, because costs kept rising at a faster rate than profits.

By the time we closed our doors and sold up, we were starting to have to borrow against the equity in our home just to live. The business no longer had a profit margin, due to rising costs of goods and services, and a local government that was not only unfriendly to small business, but was actually strangling them. We closed our business because it was no longer profitable to continue it.

I see Bush is calling for investigations into profits of oil companies because of accusations of price gouging. I suppose it could be argued that he has to do this, because if he didn't, he would be accused of hiding something. Yet every time these investigations have occured in the past, they have turned up no wrong doing. And the press, who leads the charge in the accusations, fails to follow up the result, when it does not support their position. Nothing new there.

If people really want to understand the reasons for the rising price of gas, instead of just complaining and accusing, they need to make an effort to learn some basic facts. Ignorance isn't pretty, and politicians exploit it.

I won't go into all the facts here, many people have been explaining it even better than I can. But people ought be learning about much of this stuff, practical, basic economics, in school. We really need to question why they aren't, and do something about it.

Related links:


Those evil greedy oil companies

Oily politicians
by Thomas Sowell. An excerpt:

...No matter how big American oil companies are, there are other oil companies around the world and the price of oil is determined in international markets. As for investigating Big Oil, that has been done time and again already, with nothing to show for it.

Is it rocket science that, when huge countries like India and China have rapidly growing economies, their demand for oil goes up by leaps and bounds? Is it rocket science that, when demand shoots up but supply doesn't go up as much, prices rise?

Prices are a symptom of an underlying reality. Politicians can seize on the symptom and even pass laws dealing with it, without changing the underlying reality.

Prices are like a thermometer reading. When someone has a fever, it is not going to do any good to put the thermometer in ice water to bring down the reading. If you think the fever is gone, it may not be long before the patient is gone, if you don't do something about what is causing the fever.

Ironically, the people who are making the most noise about the high price of gasoline are the very people who have for years blocked every attempt to increase our own oil supply...

(bold emphasis mine) It's hard to choose an excerpt, there is so much good sense in this, it's really worth reading the whole article.

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