Another reason I’m not an economist

Posted on April 26, 2006 by Gene

I just don’t understand. Here we are in the midst of a gas crisis again, and it just doesn’t make sense to me. Oil is priced according to supply and demand. Demand is high, so the prices go up. Oil companies raise the price of gasoline… and yet, they’re making higher and higher profits. Simple math tells us that they are charging more and more per gallon than their actual costs. Common sense tells us that they are doing this because people will pay it. If they were just passing along the higher oil costs, they wouldn’t be making huge profits.
Ethanol has also spiked in price because it is in higher demand. All this doesn’t make sense to me, because it is at odds with another market truth: the more something is in demand and goes into higher production, the cheaper it becomes.
This is a mantra we’ve all heard when looking at some new product — that it will be less expensive once more people adopt it. So, for instance, why isn’t the price of computers going up when demand is high? Why, now that demand for writable DVDs or CDs is so high, don’t the blank discs cost $5 each?
An oil company making a billion dollars a quarter in profits could easily afford to price their product 10¢ cheaper per gallon and still make a record profit. Or do I just know nothing about business?