Say It With Me: Supply and Demand
By Charles Krauthammer
WASHINGTON — If you thought the Dubai port deal marked a record high in Washington cynicism, think again. Nothing can match the spectacle of politicians scrambling for cover during a spike in gasoline prices. And this time, the panderfest has gone all the way to the Oval Office. President Bush has joined the braying congressional hordes by ordering the Energy and Justice Departments and the FTC to launch an investigation into possible gasoline price-fixing.
What a disgrace.
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Today, every time an Iranian mullah opens his mouth about nukes, the risk premium for Persian Gulf supply interruptions jumps again. Crude oil prices alone account for about $1.70 of what you pay for a gallon at the pump. So 10 years later, I’ll wager again. Here’s what the Bush search for price gougers and profiteers will find:
(1) Demand is up.
China has come from nowhere to pass Japan as the number No. 2 oil consumer in the world. China and India — between them home to eight times the U.S. population — are industrializing and gobbling huge amounts of energy.
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2) Supply is down.
Start with supply disruptions in Nigeria, decreased production in Iraq and the continuing loss of 5 percent of our national refining capacity because of Katrina and Rita damage. Add to that the mischief of idiotic new regulations. Last year’s energy bill mandates arbitrary increases in blended ethanol use that so exceed current ethanol production that it is causing gasoline shortages and therefore huge price spikes.
Why don’t we import the missing ethanol? Brazil makes a ton of it and very cheaply. Answer: The Iowa caucuses. Iowa grows corn and chooses presidents. So we have a ridiculously high 54-cent ethanol tariff and ethanol shortages.
Other regulation requires specific (”boutique”) gasoline blends for different cities depending on their air quality. Nice idea. But it introduces debilitating rigidities into the gasoline supply system. If Los Angeles runs short, you cannot just move supply in from Denver. You get shortages and more price spikes.
This article explains precisely why government should remove itself from the oil business. Needless regulation, fears in the Middle East, and high gas taxes add to the ever increasing problem of rising prices of gasoline.
The issue with high gasoline prices is not about price gouging or the greed of oil companies. High gasoline prices have been given to us first, by supply and demand, with demand rising all around the world (especially in India and China) and on concern of political happenings in the Middle East. Second, government has given us high gas prices by restricting the oil industry with needless regulation, Clinton-era taxes, and obstruction in giving oil companies more places to drill for oil. This regulatory mindset must change in Washington if consumers are ever to see cheap gasoline prices again.
April 28th, 2006 at 9:01 am
Sure supply and deman is the major factor, but the supply has been artificially depleted by the oil companies themselves. Their own internal memos admit this. They have committed fraud, not “gouging,” but FRAUD.
http://www.pbs.org/now/printable/transcriptN0W145_full_print.html
“SEN. RON WYDEN: What they did is look at how to limit production in order to boost their profits– not my words– the words of the oil industry.”
we have no free market anymore
April 28th, 2006 at 10:55 am
I respect your comments, but I disagree with the basis for them. Though it seems (in this article) that oil companies want more of a hand in controlling the market, it’s not the only factor in the price of gasoline. Clearly, it would only be logical for Congress to build more refineries, cut down on unneeded regulations, and allow drilling in ANWR and other coastal areas to reduce dependence on foreign energy and drop prices. I think it would be to the advantage of any company to raise prices when a commodity is in short supply. That’s how the market works right?
Another thing to think about - increased demand for a product is going to raise prices if supply is low. It only makes sense that oil companies have their largest profits ever - because there is more demand than ever (think India and China).
Another thing to think about - the Congress could investigate and penalize companies by raising taxes on them or taking away tax breaks. But guess what - companies aren’t gonna pay those additional taxes. Consumers of gas will pay those taxes in the form of higher prices.