Don't Blame Gouging for High Gasoline Prices

The price of gasoline is perhaps the one price consumers notice more than any other. They see it prominently displayed every time they drive by a gas station and they feel it right in their wallet every time they fill up their tank. So when gasoline prices are on the rise, it isn’t surprising to hear consumers complain. In recent weeks, they have been doing a lot of complaining.

According to the AAA’s Daily Fuel Gauge Report, the national average price of regular gasoline is currently $3.87 per gallon. That’s up from $2.85 a year ago and $3.58 just one month ago. Never mind that gasoline prices are still much cheaper in the U.S. than in most other countries, or that gasoline prices are not out of line when adjusted for inflation during the past several decades. The recent rapid rise has consumers crying foul and state attorneys general warning gas stations not to price gouge. Attorney General Martha Coakley of Massachusetts has been at the forefront of these efforts to scare gas station operators. She recently cited a provision in the law that prohibits the selling of petroleum based products at “an unconscionably high price,” whatever that means.

While some price gouging might be occurring in certain markets, in general, gouging is not nearly the universal problem some politicians would like us to believe it is. The fact of the matter is that gasoline prices are up for a number of valid economic reasons.

First, supply has been disrupted. Gasoline is made from crude oil and unrest in the Middle East, particularly Libya, has disrupted supply causing crude oil prices to rise. The Obama administration’s reluctance to allow more drilling in the U.S., especially after the BP oil spill in the Gulf of Mexico, is also having a negative impact on supply.

Second, in an attempt to stimulate the economy, the U.S. government has debased the value of the dollar. A cheaper dollar increases the price of imports. Not coincidentally, oil is our biggest import. In addition, when investors fear a falling dollar, they pile into commodity-based futures contracts, contributing to rise in prices.

Third, demand for gasoline is on the rise. Recessions soften demand for all kinds of goods and services, including gasoline. But when economies recover, demand strengthens. While the U.S. recovery has been lackluster, the fact is that jobs numbers are improving. Gasoline demand has strengthened as more people have begun commuting again to work.

Price gouging is an unlikely explanation in highly populated markets where there are several gas stations within a three or four mile radius. If you think the price is too high at one station, it is easy to go to another. For gouging to take place in such areas, gas station owners would have to be colluding with one another. Unless someone conducts a thorough forensic audit of their books, it would be impossible to prove they are gouging. On the contrary, most gasoline retailers typically make only about a nickel per gallon. While it’s true that some stations charge more than others, the difference is usually explained by higher costs. For example, a station located in a prime spot such as a busy intersection is probably paying more for its lease than one located in a more remote part of town.

If politicians really want to reduce the price of gasoline, they should get off the backs of gas station owners and focus instead on taxes. State and federal taxes add about 43 cents per gallon on average to the price of gasoline. Yet this doesn’t take into account the additional revenues they generate by taxing the profits of all the entities involved in the petroleum business. The truth is that the government makes more money when gasoline prices go up. Politicians will lend a sympathetic ear to complaining consumers, but the last thing they want is lower tax revenues.

Click on WBUR in Boston to listen to my interview on this topic.

Poor Governance at Berkshire Hathaway is Not a New Problem

Corporate governance has long been a topic of interest to financial researchers in academia. Law schools, too, have spent a lot of time on the issue. The issue of corporate governance arises from the separation of ownership and control at large publicly traded companies. After all, governance is largely irrelevant at closely held companies that are managed by the owners. If the CEO owns all the stock and shirks his responsibilities, he hurts only himself. But when there are many shareholders with only a few actually working at the company, governance becomes a big deal.

With Berkshire Hathaway's shareholders' meeting coming up next weekend, there has been much talk about governance. Warren Buffett is famous for having a hands-off approach to management. He says he buys good companies with good managers and then stays out of the way. He does not want to get involved in the operations.

However, David Sokol's recent resignation from Berkshire Hathaway has a lot of observers wondering if Buffett should not be more hands on. They are also wondering if Berkshire's board of directors is paying sufficient attention to governance.

I find this sudden attention to corporate governance at Berkshire long overdue. In fact, I devoted an entire chapter to the topic in my 2008 book, Even Buffett Isn't Perfect. Yet when the book came out, some critics wondered why anyone would worry about governance at Berkshire. With Sokol's sudden resignation and with the SEC investigating his stock trades, I suspect the critics have finally figured out the answer to that question.

Sokol Tarnishes Buffett's Reputation

Until just a few days ago, David Sokol was a star manager at Berkshire Hathaway. He was CEO of NetJets and Chairman of MidAmerican Energy Holdings. Now he's caught up in a stock trading scandal involving Lubrizol, a company Berkshire Hathaway is in the process of acquiring. I did a two-part interview on CNBC yesterday about this issue. Here is Part I, and here is Part II. In addition, here is an article I wrote about the situation for The Fiscal Times.