What’s supposed to happen?!

Gas at the pump is close to being a perfect commodity, where you have hundreds of readily available vendors selling essentially the same product. Like any commodity, this means that gas prices will be slashed to the point where the profits on gas are razor-thin. It’s always been this way; gas stations have almost never made any money on the gas they pump. That’s one reason that certain companies (shell, chevron) are trying to brand the gasoline they sell, so that consumers will pay a premium for it above and beyond the normal cost of gas.

Gas from the supplier side, however, has a really different model, because it’s a much scarcer resource. If the supply of gas outstripped demand, the way it does at the pump, there’d be hardly any profit b/c gas would be priced just above where it costs to get it out of the ground and process it. However, that’s not the situation; because demand is outstripping supply, the price of gas for the suppliers keeps rising, even though the cost to pull it out of the ground doesn’t. (This doesn’t factor in things like OPEC, who artificially constrain the market to keep gas prices high, but as I understand it the American gas companies don’t do that, though their prices are affected by this artificial scarcity.)

The obscene profits of the gas companies right now are the free market working as it should. Ditto the fact that gas stations are barely making profits. We’re seeing price cut into demand for American consumers for the first time ever in the last couple of months; perhaps as that trend continues we’ll reach equilibrium. However, with all the other nations ramping up their demand for gasoline, I doubt it.

What’s supposed to happen at this point is that rational companies will increase their capacity to produce gasoline until the price of getting it out of the ground is approximately equal to the price that they’re being paid for it. I think the reason we’re not seeing that as much is because a) the overhead for increasing capacity is so high that it would take a bigger increase in prices to make the decision to expand capacity economically feasible, b) regulations cut off some of the easier-to-get-at oil, by mostly c) the prices have risen so quickly, and the remaining oil so so hard to get at, that companies are slow to respond.

My economics is rusty, so if anyone wants to jump in and tell me where I’m wrong, please feel free to do so.