The Oil Drum has a very good post on the current run up in oil prices. I also have now doubt it will leave many of the commenters here upset…which is one reason why I’m posting on it.
We strongly feel that the leaders of both political parties are not only headed in the wrong direction with respect to gas prices, but we also worry that they fundamentally misunderstand the factors behind the current situation at gasoline stations around the US. Public statements by political figures over the past several days would seem to suggest that oil companies and their record profits are the sole factor determining the price of gasoline. Not only is this untrue, but it is dangerous to give the American people the impression that only oil companies are to blame. The American people need to understand that the phenomenon of high gas prices cannot be attributed to a single source. They also need to understand that no one political party will be able to fix our current woes.–emphasis added
This is precisely right. For example, commenter Herb asked me who set oil prices. Herb’s view is that the price of gasoline and oil is set by the oil companies. In a trivial sense this is true. A guy at the local gas station with a suction cup on the end of a long stick does put up the numbers for the price of gasoline on the sign. However, the price is ultimately set by the market and the aggregate behavior of those in the market. If the guy with the suction cup sets the price too high he’ll not sell any gasoline; if he sets it too low he’ll run out before the tanker truck comes to refill his tanks (this is one reason why gasoline stations have prices that are either identical or close together). In fact, the market for oil is an international market and there are a whole host of actors that have an impact on the price.
Also we have to bear in mind that countries like India and China are growing and demanding more oil. If oil supply does not expand along with the increase in demand then the price will go up. An increase in the price of oil will translate into an increase in the price of gasoline. This can be seen with a very simple supply and demand analysis.
If the problems outlined at the Oil Drum are some of the main factors for the increases in prices that we are seeing, then attacking oil companies isn’t really going to solve the problem. In fact, it could make the problem worse. A per unit tax on barrels of oil sold over $40/barrel is going to translate into the oil companies selling less oil here and quite possibly resulting in a shortage. Such a tax would basically work very much like a price ceiling.
The current discourse is wrong. More discussion on how the oil markets work is needed. The idea that oil prices are determined by greedy men in boardrooms while comforting in the sense that it gives the false hope that there is an easy solution (stop the greedy men), it is misleading and dangerously so. The oil market is a global market and it is more complicated than the current discourse make it out. I grant that oil companies may indeed have market power that raises the price of oil, but this has been true for decades. Thus, whatever price increases that market power translates into has already been in prices for decades. The current problems are not simply due to price gouging.
Update: See also this article at the Reason Foundation. Also, this article by Walter Williams on the windfall tax.
Some related posts below the fold.
