The editors of the Wall Street Journal are unhappy about President Biden’s expressed view on oil prices:
Business leaders have chalked up President Biden’s attacks on oil companies to political cynicism, but maybe they’re too generous. His tweet over the weekend ordering gas stations to lower prices betrayed a willful ignorance about the private economy.
“My message to the companies running gas stations and setting prices at the pump is simple: this is a time of war and global peril,†Mr. Biden tweeted Saturday. “Bring down the price you are charging at the pump to reflect the cost you’re paying for the product. And do it now.†Had Donald Trump issued such a command as President, the left would have cried “authoritarian.â€
It’s embarrassing for the leader of the free world to sound like he’s channeling Hugo Chávez. A Chinese state media flack praised Mr. Biden’s tweet: “Now US President finally realized that capitalism is all about exploitation. He didn’t believe this before.†Or maybe he did, and nobody wanted to believe it.
You’d think that the President’s Ivy League-educated economic advisers would have informed him that large refiners own fewer than 5% of all gas stations in America. More than 60% are operated by an individual or family that owns a single store, and the rest are independently owned chains or grocery stores that sell fuel. Many license brands from refiners.
Refiners largely exited the retail business in the 2000s because of thin profit margins. The Energy Information Administration says distribution and marketing made up about 5% of the price of gasoline in May, or about 22 cents a gallon. This covers the cost of freight, labor, utilities, real estate and credit-card fees (which can average more than 10 cents a gallon).
Most gas stations make a few cents a gallon in profit and stay in business mainly by selling food and cigarettes. The National Association of Convenience Stores says its members are struggling amid high gas prices because customers are making fewer stops and buying less.
More than a quarter of gas stations have closed since the 1990s because they couldn’t make the economics work. If retailers were to sell fuel at cost, most would go out of business. Perhaps those owned by large refiners would survive, but they’d be accused of predatory pricing by Mr. Biden’s antitrust cops.
The President’s economic ignorance isn’t a one-off. In recent months he has accused oil and gas companies of price gouging and demanded that they increase production even while his Administration threatens to put them out of business. Mr. Biden doesn’t understand that businesses make long-term decisions based on demand expectations and policy signals. Jeff Bezos called the President’s weekend tweet “either straight ahead misdirection or a deep misunderstanding of basic market dynamics.†They aren’t mutually exclusive.
I post on this because it connects so neatly with a conversation going on in comments.
For a briefing on convenience service stations, read this at the National Association of Convenience Stores, the trade association of convenience and retail fueling stores. Tight margins are very typical of retailers at all levels these days. 2 cents a gallon is pretty tight. That’s about 30 cents per vend.
The margin for refiners is better—it’s a bit less than $1 per gallon (“margin” defined as the price of gasoline less the price of the oil used to make it). That’s got to cover labor costs, maintenance of facilities, amortization of facilities, financing, etc.
The Federal Reserve Bank of Dallas broke down gas prices like this:

They comment:
Given that crude oil accounts for 59 percent of the cost of gasoline, a 34 percent increase in the price of oil should imply a 20 percent increase in the retail gas price. Likewise, a 22 percent decline in the price of oil should translate to a 13 percent decline in the pump price. However, that did not happen at the national level.
As Chart 2 shows, the spot price of gasoline (the price of gasoline at the refinery gate), as proxied by the prompt contract for New York Mercantile Exchange RBOB gasoline, generally rose and fell with the price of West Texas Intermediate crude oil. However, the response of U.S. pump prices has been highly asymmetric. While the price of retail gasoline cumulatively rose about as much as expected following Russia’s invasion of Ukraine, recent national retail gasoline prices dropped only 6 percent from the March peak, far less than the expected 13 percent.
This indicates that retail gasoline prices remaining persistently high was not the result of an oil shortage or high oil prices. Rather, the elevated retail gasoline prices must be attributed to events in the U.S. retail gasoline market beyond the control of oil producers.
Moreover, the asymmetry of the response of retail gasoline prices need not be evidence of price gouging. One potential explanation is that station operators are recapturing margins lost during the upswing, when gas stations were initially slow to increase pump prices. The reluctance to lower retail prices also likely reflects concerns that oil prices—and, hence, wholesale gasoline prices—may quickly rebound, eating into station profit margins.
Not only that. They are probably anticipating continuation of the increased price of oil. That’s undoubtedly going on at all levels.
Oil economist James Hamilton who posts at Econbrowser has documented how responsive the global price of oil is to supply and demand factors.
A final factor that should not be ruled out in evaluating the forces responsible for the increasing price of oil is the role of the low cost producer. Presently, the Kingdom of Saudi Arabia is the low cost producer of high quality crude. Their production and reserves effectively allow them to set floors or ceilings for prices.
So, let’s recap. President Biden was empirically wrong in pointing at retailers as the culprits in high oil prices. The effect of retail price controls will be to drive some retailers out of business but probably won’t reduce the price of gas at the pump since that’s already decided before it reaches the retailers. Oil producers are unlikely to be the culprits. However, there is some evidence that refiners, trying to hedge against past and future changes, may be raising their prices more than strictly justified. I’m not sure how we’d go about determining that.
Where I disagree with the editors is in their use of the phrase “willful ignorance”. I prefer just plain “mistaken” since it doesn’t attribute motives. Why would President Biden make such a mistake?
The editors present one reason: there is a strong temptation among progressives to believe in the immiseration thesis. If things are bad there must be an exploiter somewhere. It’s a form of magical thinking. I don’t believe the empirical evidence is as strong as they do. In addition I suspect that President Biden suffers from a malady common in those who’ve spent too much time in Washington: he believes in the competence, power, and reach of big companies. I think that competence in big companies is quite rare and, as noted above, “Big Oil”, i.e. Exxon, Shell, etc. isn’t a likely culprit in the high price of gas at the pump.






