Gas Prices – Greed or Free Markets at Work?

Free market societies enjoy many benefits over countries that try to manage their overall economies in a top-down fashion. Free markets have been a major factor in lifting many people out of poverty across the globe. That’s not to say that other economic approaches don’t have some advantages because they do. Certain commodities, services, and industries should be regulated by the government for overall efficiency and general welfare. 

One deeply held belief of free markets proponents is that collectively, individual buyers and sellers know more than a small group of people at the top who try to set prices and regulate transactions between parties.

The collective, many over the expert few, is sometimes referred to as “the wisdom of the crowd.” For more on that concept, I suggest you look at James Surowiecki’s Wisdom of Crowds. For the most relevant, understandable, and very interesting resource on economics that I’ve come across over the decades I refer you to Basic Economics by Thomas Sowell. 

I share those opening paragraphs to set up the rest of the article which focuses on something that impacts all of us – gas prices. Right now, we’re feeling pain at the pump in unprecedented ways. Regarding gas prices, you may have seen the following posted on one or more of your social media sites recently.

It would be very easy to conclude Exxon is simply greedy, taking advantage of average Americans by increasing prices to increase profits. This begs the question: is Exxon operating out of greed or simply participating in the free market economy? If it’s not greed, then why would their profit in Q1 of 2022 be nearly double when compared to the same time the year before?

If you look at the chart below, you’ll see the top line represents gross profit margin. That percentage is figured out as follows: (Revenue – Cost of Goods Sold) / Revenue. The 5-year chart shows a very consistent percentage of 20 to 24 with the exception of 2021.

Why was 2021 so bad? People were hardly driving because of the pandemic so revenue dropped significantly. However, the cost of oil was relatively stable as were Exxon’s fixed costs (refineries, pipelines, salaries, etc.). With lower revenues and costs staying essentially the same, their gross margin dipped to a 5-year low when it hit about 17%.

In 2022, revenue rose significantly and that was primarily because people started traveling again. When revenue rises faster than cost of goods sold, the profit margin will increase. However, in Exxon’s case it only rose a percentage or two above their normal trend. You see the same phenomenon with their operating margin and net margin. 

Chart source: Macrotrends

Now another issue has arisen: refinery capacity. Oil companies and investors in oil have to make a choice: Do they pour more money into an industry that many people want to go away or do they do something else with their profits. If they could refine more oil without major investment and keep their profit margins at acceptable levels, I think they would. If they did not, it would work against the idea that they are greedy. After all, if they want more profit and can get it, why wouldn’t they go after it?

I don’t write this as an apologist for Exxon or the oil companies. I don’t own stock in oil companies and don’t have oil companies as clients. I cannot speak to their accounting practices, positions on climate change, or a host of other things. I’ve no doubt someone with a deeper background in economics or knowledge of the oil industry might challenge some of my assumptions. If I’m incorrect on some point(s) please feel free to comment below.

I wrote this post because it’s important that we understand more than a meme or simplistic stat. There’s always more to the story and we need to explore just a bit more. In this case, contrast (compared to what?) has to be considered. Just because a company doubled its total profit does not mean they are taking advantage of consumers. 

As much as I’d like to pay less for gas, in this case I don’t believe Exxon or other oil companies are gouging us. If you believe that, then next time gas falls below $3.00 or $2.50 a gallon are you willing to hold up the industry as good guys, champions of the average working person? 

Brian Ahearn

Brian Ahearn is the Chief Influence Officer at Influence PEOPLE. An author, TEDx speaker, international trainer, coach, and consultant, he’s one of only a dozen people in the world personally trained by Robert Cialdini, Ph.D., the most cited living social psychologist on the science of ethical influence.

Brian’s first book, Influence PEOPLE, was named one of the 100 Best Influence Books of All Time by BookAuthority. His follow-up, Persuasive Selling for Relationship Driven Insurance Agents, was an Amazon new release bestseller. His new book, The Influencer: Secrets to Success and Happiness, is a business parable.

Brian’s LinkedIn courses on persuasive selling and coaching have been viewed by more than 500,000 people around the world!