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Thursday, April 27, 2006

Oil: Demand Just Exceeds Supply

Do I like paying close to $3 per gallon of gasoline? No.

But my anger over the price is directed towards those who have artificially increased the price of this product.

As we all know, price is information about what the market deems the value of a commodity to be. The owner of the commodity will direct inventory to locations paying the highest price. He wants to maximize his profits. However, the seller cannot randomly choose a price. When the commodity is in surplus, the buyer has many options and will normally choose to purchase from the seller with the lowest prices. That is why Wal-mart does so well.

With gasoline, the world market through its pricing is telling us that the demand is great and the supply cannot keep up with it. The supply is down because of a number of issues. Again, that is where my anger is directed---to those who have artificially kept down the supply.

Thomas Sowell discusses this issue and the chutzpah of many of the whiners (including many politicians) who are largely responsible for the reduced supply:

Ironically, the people who are making the most noise about the high price of gasoline are the very people who have for years blocked every attempt to increase our own oil supply. They have opposed drilling for oil off the Atlantic coast, off the Pacific coast, or in Alaska. They have prevented the building of any new oil refineries anywhere for decades.

They have fought against the building of hydroelectric dams or nuclear power plants to generate electricity without the use of oil. They love to talk about their own pet "alternative energy sources," without the slightest attention to what these would cost in terms of money, jobs, or our national standard of living.

Even when one of their pet "alternative energy sources" -- windmills -- is proposed to be built near them, suddenly it is not right to spoil their view.

Sadly, many Republicans who are supposed to understand much better than their opponents the basics of economics have joined in the demagoguing. Instead of carping at Big Oil executives, they should be educating the public about he supply problems.

Meanwhile the attorney general in Florida was on CBS with Harry Smith this morning mentioning the various anti-trust laws that may have been breached by the Big Oil Companies in reaching these current prices. he claimed that the mergers of oil companies created monopolies. However, he then mentioned the American oil companies. There were more than 1. There were more than 4. But, he wants more competitors.

Do we ever get more competitors anywhere when industry is heavily regulated? Government regulations generally result in decreased competition---look at minimum wages (reduced employment), labor unions (fewer openings for newcomers), licensing (fewer new businesses), and on and on...

Back to Sowell:

No matter how big American oil companies are, there are other oil companies around the world and the price of oil is determined in international markets. As for investigating Big Oil, that has been done time and again already, with nothing to show for it.

Is it rocket science that, when huge countries like India and China have rapidly growing economies, their demand for oil goes up by leaps and bounds? Is it rocket science that, when demand shoots up but supply doesn't go up as much, prices rise?

Prices are a symptom of an underlying reality. Politicians can seize on the symptom and even pass laws dealing with it, without changing the underlying reality.

Last, the price of the gasoline is inflated largely by taxes. If politicians truly cared about the cost to the public, they would temporarily reduce the taxes per gallon. That could drop the price down by 45 cents per gallon. Here in NJ do not expect Governor Corzine to budge on the NJ and fed combined 33 cent tax per gallon (as of 2003). BTW, Florida pays a 50 cents in combined taxes and NY pays 63 cents in combines taxes. If only I could fill up in Alaska (26 cents in combined taxes).

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