Gas Price Gouge: Blame it on the Houston rain?

In the Greater Toronto-Hamilton Area, we've seen the gas prices spike over the past few days. As illustrated in this chart, prices when from about $1.05/liter to about $1.30/liter.

That's going to hurt the wallet.

I recall my dad commenting on how quick gas companies are to raise prices but slow to lower them. And my dad has a point: gas companies should be consistent with their pricing matching the price they charge to the inventories they bought. 

That being said, the bigger issue is to understand why the gas sold in Toronto, Canada is affected so much by the environmental chaos in Houston. This clip from Fox that gives shows how the markets are being impacted by this massive storm. 

Why is so much of the oil refined in Texas? 

According to WSJ,  "Texas coast is home to nearly 30% of the country’s refining capacity. Half of that is produced by plants in the Houston area." Another source, noted that the impact was greater:  "The epic storm has also caused the shutdown of about 25% of U.S. oil refineries accounting for about 4.4 million barrels per day in capacity"

But this gas-price-gouge it's not the rain's fault: so don't blame it on the rain. 

The problem lies in how Capitalism concentrates ownership in the hands of corporations and then reward these organizations to minimize overhead costs to maximize profits, share prices, executive bonuses and so on.

The cause of concentration of ownership lies in how private companies can amass capital, largely through the stock market, and monopolize a market as was discussed in this post

"Clearly, stocks are a key mechanism for the elite to control the economy... A good example of how a company used the stock market to dominate their industry is Tyson Foods.  Tyson Foods, who controls 24% of the beef market and leads "ready-to-cook chicken market", was able to dominate the food market by going public. As a private company, Tyson foods was able to survive the 1961 downturn in the chicken industry by burning through its operating capital and taking on debt. The company's owner, Don Tyson, feared that his debt laden balance sheet would end badly. His solution...[was to t]ake the company public and buy out the competition:

"Tyson couldn't get bigger just by adding more farms or slaughterhouses. If the company expanded its own operations, it would put more chickens on the market inevitably leading to oversupply. But buying a competitor neatly solved two problems with one move inevitably leading to oversupply. But buying a competitor neatly solved two problems with one move. Tyson could expand without boosting the overall supply of chicken. Tyson simply bought out its competitor's market share without adding one bird to the market. It was part of Don Tyson's new strategy, called “Expand or Expire."""

Whether it's meat or oil the point is to dominate the market and save costs by consolidating overhead and redundancies. For example, "[t]he number of slaughterhouses has drastically been reduced, from thousands to just 13 across the country [America] today." Similarly, when oil companies merge they can save costs by eliminating "redundant" refineries and focusing all production in one plant.

But why Texas?  

Refineries can benefit by locating in the same area as other refineries to leverage supply routes. For example, the same WSJ article cited earlier notes how oil companies in Texas fed into "pipelines and barges that move it across the southeastern U.S. and up the East Coast." That is, it is ultimately much cheaper for the oil  companies to put all their eggs in one basket and refine the oil from Texas so as to benefit from accessing these pipelines and shipping routes. The Fox segment noted earlier also illustrated how the jet fuel is largely supplied by pipelines that terminate in Texas. 

Theoretically, companies should manage such risks.

For example, when it comes to information technology company should have backup facilities to takeover in the event their main system goes down. However, only "30 percent reported to having a fully documented disaster recovery strategy in place".


Capitalism rewards you for short-term profits. So why worry about the future when you can put the cash in your pocket now? 

So the long term is really of no concern. 

This problem is worse now because large companies have a "moral hazard" to take on larger risks because they think the government will bail them out because the banks were essentially rewarded with bailouts for the bad business decisions they made that led to the 2007-2008 financial crisis . 

And to be fair, Islamically, it's not really the private sector's role to look after the society. In Islam, this falls to the ruler (as discussed below) who in turn regulates the private sector and society more generally.  But the problem with Capitalism it does not provide government with such a role as "there is no such thing as society" to quote a former right-wing UK Prime Minister Margaret Thatcher. Meaning the private sector does what they want, like coating buildings with flammable materials to make the building look better to fit in a ritzy neighborhood.  

So this efficient production system ends destroying a vibrant market and builds a monoculture that is not resilient to withstand shocks to the system. Computer researchers were critical of this phenomenon in the PC operating system market in the early 2000s:

"Microsoft’s dominance in PC operating systems has created a ‘monoculture’ that allows viruses to spread like wildfire over the Internet. This lack of diversity allows even simple viruses, created in minutes by so called ‘script kiddies’ to wreak havoc within hours of creation."

The lack of diversity is a key characteristic of Capitalist economics where you have "winner take all" approach to supply the goods within the market. 

Ironically, the monopolist/oligopolist reality of Capitalism mimics Communism where you end up with a monolith running the economy. In Capitalism it's the "private tyrannies" that run the economy, whereas in Communism it's the "public tyranny" that plays that role instead. 

How does Islam protect against such problems? 

The key is breaking up capital and preventing it from dominating the economy. In Capitalism, the partners-with-capital dominate a company and can even push out the original owners of the company.  In fact, 4 out of 5 company founders are forced out of their own company by the owners of capital.

Islam prevents this problem by giving each partner equal footing in charting the strategic direction of the company. Furthermore, in Islam because there are no bond markets, stock markets or collateralized debt obligations (yes they are baaaaack), so people with money will have no other place to put their money other than such partnerships. This makes them dependent on entrepreneurs to invest their money and evens the playing field by quite a bit. (See here for more on partnerships). 

Consequently, there is a lot more competition because the rules of partnering prevent the giant companies from forming and creating that monoculture. 

What about oil? 

With oil the story is a little different. 

In Islam, oil is a "commonly owned" resource that is administered by the state on behalf of the citizenry. The proofs for this are:

"The Muslims are partners in three, water, pastures and fire" [Ahmed, ibn Majah]

"Three are not prevented – water, pastures and fire" [ibn Majah]

The ijthihad of "fire" means that the energy resources must be shared. So this is not just oil, but also electric, coal, solar, wind, etc. 

On a side note, common or public ownership is different than state resources. An example of state resources would be the land taxes  (kharaj; that was previously discussed) collected by the state . But we will discuss this more in a future post in sha Allah. 

Consequently, in an Islamic society the government would be responsible for refining the oil and ensure that there is redundancy built into system. If there is a failure in the oil and gas supply the citizenry can hold the government accountable for such a failure, through special courts, the Court of Unjust Acts, solely designed to hold the ruler accountable for exactly such type of things

How did Islam attend to such issues in the past? 

Good example of this is the famine that took place in Madinah, when Umar bin al Khattab (ra) was the Khaleefah (Caliph).  This came to be known as the “Year of Ash” (Am al-Ramadah). Umar (ra) set-up tents around Madinah to house and feed those adversely affected by the famine. Furthermore, it is said that Umar (ra) went pale because he refused to eat fat, butter, and milk, until all were able to afford such food. 

In terms of alleviating the famine, Umar (ra) brought in food supplies from the surrounding provinces, specifically Egypt and present-day Syria, to alleviate the famine. 

If a 7th century ruler can re-route "supply chain logistics" using the technology of his day to address a supply glut, then imagine what can be achieved today. 

High gas prices are painful. But the real tragedy is that this no accident: it's part of Capitalism's DNA to build this type of brittleness into the system in the name of cost savings, profit maximization and shareholder value.