I had gotten a listserv email today from a legislature who wanted to have an investigation per price gouging on the price of gas.  Generally, there was recognition that the  price of Oil per barrel had dropped by half the original price. The logical thought that the  price at the pump should be relatively correlated to the price of the raw product was noted as not being true.

The notion that there is ‘gouging’ runs intrinsically around the idea that the market price ‘fairly’ should be determined by the price of production, or in this case extracted and refined.  But we generally do not look at food that way, or name brand blue jeans.  People accept as ‘fair’ as what people are willing to pay.  There are instances that there may be collusion to create a monopoly, and there area fuel taxes that restrict how diesel can be bought (for instance the diesel for your home cannot be used in your car in part due to the lack of transportation taxes).

But it is local demand that by and large will determine the price of fuel, and the more ‘inelastic’ or inflexible a change in demand is  to a change in price, the greater the possibility that the final product will not be in line with the price of raw materials and production costs- in the long term anyway.