Essay: What Is it Worth?

Jan 13, 2016

Have you filled up your car at the gas station recently?  Really, if you’ve filled up any time in the last few months, the trip feels like a walk down memory lane, at least when you pay the bill.  But Lake Effect essayist Avi Lank says gas prices need to be viewed in a larger context:

Oil is a bargain. The price of crude has fallen by almost two-thirds since it was more than $100 a barrel in May 2014. There are many reasons for this -- soft economies in Europe and China have slowed demand, vastly increased production of petroleum products in the United States has greatly increased supply and the geopolitical goals of large Middle Eastern producers --  in particular Saudi Arabia – are furthered by lower prices, at least for now. American motorists and car companies are reaping the reward.

Gasoline prices have fallen, boosting the sale of highly profitable if relatively gas-guzzling models such as pick-up trucks. When is the last time you saw a dealer advertise a Prius? In the global oil market, with plenty of sellers and lots of buyers, the invisible hand of Adam Smith’s capitalist system has spoken. But there are exceptions. Consider U.S. airlines. When the price of crude was high, a lot of airlines added so-called fuel surcharges to tickets. Costs have gone up, they explained, so we need to charge more. So now that that price of crude oil has fallen dramatically, so have air fares, right? Well, they have, a bit.

But recently, most U.S. airlines raised ticket prices by a flat $4 a flight. Why? Because they could. Unlike the multi-headed crude oil market, sellers in the US airline industry have become concentrated. If the major carriers – Southwest, Delta, American and United – do not undercut each other, then ticket prices can rise. Cost has nothing to do with it. Smith knew this. In his seminal work, the Wealth of Nations, the bible of free market ideologues, he wrote: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Back before airline deregulation, such meetings did not matter.Washington absolutely controlled the industry. No new route or fare could be instituted without government approval. Since deregulation, the industry has become free-wheeling, with fares and routes moving more quickly than traffic at O’Hare. In the process, airlines have become masters at varying the price of tickets depending on how they forecast demand, not on the cost of fuel. The result has been full planes, with each ticket sold for the most a traveler is willing to pay at the time of purchase. Unless we want to go back to an era of more regulation, there is not much the government can do about this.

Other industries have copied the variable pricing model pioneered by airlines. Take a look at the seating chart for Miller Park. It tells you the name of each section of seats, but not their prices. That varies depending upon the opponent, the date of the game, and when a person wants to buy a ticket. The seat price has no more to with the salaries of players on the Brewers and Dodgers than the price of an airline ticket from Milwaukee to Los Angeles depends on the cost of fuel. Instead, both the Brewers and the airline charge the most they can. Remember this when oil prices go up and airlines begin to whine about inflated costs. Or if the Brewers ever get good again.

Essayist Avi Lank is a former reporter for the Milwaukee Sentinel and later the Journal Sentinel.  He’s also coauthor of the recent book, The Man Who Painted the Universe.