Commentary: Prices change behavior
By Algenon Cash
A quick study of economics will inform us that “prices” lead to efficiency in the use of scarce resources. High prices is not the reason everyone is unable to live on the beach front, but instead the reality is that there is not enough beach-front homes for everyone and prices simply communicate the underlying reality.
When you take a moment to examine the cost of gasoline, you uncover a number of factors that influence its price. For example, geopolitical issues such as terrorism in the Middle East, stronger global demand for oil, lack of domestic refining capacity, federal and state taxes and a declining U.S. dollar: All of these factors determine the price we pay at the pump for the use of a scarce resource.
Our consumers’ addiction to oil has resulted in a number of lawmakers shouting for price controls and windfall profit taxes on oil companies. It’s true our oil companies have broken records with their revenue numbers in recent years due to record increases in the cost of oil, but as a business owner I focus on my company’s profit margin. Oil companies have traditionally operated within a single digit profit margin due to the large expenses incurred with researching and developing oil fields. In contrast, most restaurants achieve double-digit profit margins, but we are not debating windfall profit taxes for Applebee’s or Olive Garden.
The effects of higher gasoline prices have not been all too bad. Reduction in the use of foreign oil will go a long way in helping us to effectively fight terrorism and restore American independence. Higher oil prices lead to oil companies searching out resources in other parts of the world.
Drilling for oil in Canada may have been cost prohibitive at one point in time, but with energy costs rising significantly over time many oil companies now recognize the benefit of discovering new resources. Companies that rely on travel to operate are implementing measures to require greater fuel efficiency to maintain profit margins. More consumers are utilizing local public transportation to conserve fuel and money.
Our society is awaking to the gradual deterioration of the environment and acknowledges a change is required in order to sustain a high quality of life for our children. Governments are responding by providing subsidies for companies that produce alternative energy, credits for the use of energy efficient strategies and investigating the use of carbon credits to manage our impact to the environment.
In order for us to realize fundamental improvements in our environment, it will require a change in behavior on behalf of our businesses and consumers. The rise and fall of prices, which represent underlying realities about scarce resources, are the very force we need to alter behavior. Price controls by the Federal Government will only prolong these needed changes in behavior and negatively influence the competiveness of our domestic companies.
Algenon Cash is the managing director of Wharton Gladden & Company, an investment banking firm, he is also a national spokesperson for the oil and natural gas industry. Reach him at acash@whartongladden.com.
