Who's to Blame for $4-a-Gallon Gas?
Gasoline costs a lot in the U.S. today, so it just feels like a good idea to blame the big oil companies with accusations of "gouging" and "windfall profits." But like most high-octane emotional reactions, this one is wrong, as you'd need to breach every tenet of capitalism to lay all the fault at the oil giants' feet.
And even if you still think they deserve a touch of anger, as investors you're better off joining them than fighting them.
The reason that gasoline costs $1 or more per gallon today than a year ago is simple: Hurricane Katrina kicked our supply lines down a crooked staircase, and a painful kink emerged in the commodity's complex worldwide distribution system.
Although it seems unfair at times, it's a fundamental principle of our great economic system that the most efficient way to allocate a scarce resource is through price. When there isn't enough of something valuable to go around -- whether it's caviar, Manhattan property or reliable home-run hitters -- in a market society, we let the item go to the highest bidder. This is eBay 101.In the case of gasoline, many consumers do not seem to yet grasp the difference between crude oil, the price of which is declining of late, and the stuff that they pump into their car, which is getting more expensive. One is the raw material, while the other is a finished good. It's the difference between the price of raw cotton and an Armani T-shirt. You wouldn't expect a sharp cut in prices at Bloomingdale's just because cotton futures prices fell, and neither should you expect a 1:1 change in the relationship between oil prices and gas prices.
The Shell GameMoreover, many don't seem to grasp the difference between the large, vertically integrated companies (such as Royal Dutch Petroleum (RD), which is the parent group of Shell) that are net buyers of oil in a hypercompetitive arena at prices that fluctuate on a world scale and the corner gasoline station that is a net seller of gasoline at prices set at whatever the market will bear on a local scale.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV