By William B. Conerly, Ph.D.
Why have gasoline prices come down so much? Certainly global prices for crude oil have dropped, but why did the local gas station operator drop prices that you and I pay? A year ago I filled my tank for $3.32 and nine-tenths. If I was willing to pay that price last year, why does he charge me a dollar a gallon less this year? The answer is greed.
Yes, my gas station owner is a greedy man. If he had left his price unchanged in the past year, wouldn’t he be making an extra dollar a gallon profit? (The average markup of gasoline over wholesale costs and taxes is just 17 cents, so an extra dollar would be a huge gain.) Well, the gas station owner would like to leave prices high, but greed gets in the way of his profit.
Many politicians don’t believe that competition works. They think that businesses will always take advantage of customers. They think that businesses will raise prices when their costs increase, but not drop prices when costs fall. The politicians are right that business owners would like to charge higher prices, but they don’t understand the power of competition.
If gas stations charged last year’s price, all the station owners would be making fat profits per gallon of gas they sold. Their greed, however, would lead them to try to sell a few more gallons. They would cut the price by a few cents to try to take customers from other gas stations. But those other gas station owners are too greedy to let their customers drive down the street to a competitor, so they cut prices too. Pretty soon, everyone is cutting prices. The greed of the gas station owners leads them to drop the prices they charge us.
Adam Smith said:
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (Wealth of Nations, Book I, Chapter 2)
Our gasoline prices have dropped not because of government regulations, and not because gas station owners want to do us a favor. Gasoline prices have dropped because our economic system leads greedy business owners to drop prices down to just barely cover their costs. Let’s be glad it works that way.
William B. Conerly, Ph.D. is the principal of Conerly Consulting, an economic and financial consulting firm, and chairman of the board of Cascade Policy Institute, Oregon’s free market research center. This article was originally published on Forbes.com.