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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 Game

Moreover, 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.
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