Rise in fuel costs based on demand
March 12, 2011
Price gougers are evil executives who harm us at the gas pump. They set outrageous prices that are approaching $4 a gallon. They hold their conspiracy meetings in the Land of Make Believe, among the unicorns and spaghetti monsters. Despite the ranting of pundits and politicos — from Bill O’Reilly to Nancy Pelosi — price gougers do not exist.
In his book “Lights Out,” former U.S. Secretary of Energy Spencer Abraham described widespread fuel mythology that results from price spikes.
“Congressmen and senators of both parties would call demanding (that) I take action” against gougers, Abraham wrote.
When new chaos erupts in the Middle East, fuel prices spike. Politicians trip over themselves trying to be the first to yell “price gouging” and blame greedy oil executives. Why, there ought to be a law. They act as if prices are set unilaterally by sellers. The sellers, we must assume, are normally quite charitable. When the sellers are in a good mood, they sell gasoline to Americans at a bargain price of about $2.50 a gallon. When the sellers enter their greed phase, the price moves toward $4 a gallon and up. This is how the sellers gouge the buyers.
It’s as if oil executives have a smoke-filled room and the power to set whatever prices they want. If that’s the case, we must ask ourselves why they don’t set prices much higher. Why are they so kind? Furthermore, why do they set their greedy price in the United States several dollars below the price they use throughout Europe?
Even OPEC, a foreign oil cartel consisting of members who hate the United States, has never pulled off a price-gouging racket. The wannabe monopolizers have learned that oil seeks its own price. When the price is high, producers drill and deliver at a frenzied pace. That creates supplies that are abundant relative to demand. As a result, prices drop and oil producers have less incentive to drill and produce. Supplies become scarce relative to demand. This allows prices to rise, which pays for exploration and production that results in more oil and lower prices. As long as humans consume and trade, commodity prices will spike and retreat. No workable alternative has been discovered to ration and distribute this finite resource.
When new conflicts arise in the Middle East, buyers fear diminished production. Trucking companies, airlines and governments — organizations that need low-cost oil — invest in future supplies at today’s prices. It’s how Southwest Airlines has stabilized air fares. Other investors buy oil futures with a hope of selling them when demand peaks. It’s no different than stocking up on frozen fish when it goes on sale, in order to avoid next month’s higher price.
The speculative buying, presented as an evil conspiracy on TV, is demand. The demand drives the price up, which stimulates exploration and production. The resulting abundance leads to affordable fuel. The system works.
A price is a valve that maintains the supply of any good, service or commodity. The valve is controlled by the decisions of billions of individual consumers — decisions that compose market forces. Central planners and greed heads are just no match, even though they make for great conspiracy theories and fairy tales.