Free For All - The Free Liberal Blog: The Price of Gas, Again

July 2008

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Here come the regulators, once again. With regular gas topping $3 per gallon, the notion that "something must be done" about this "gouging" is in the headlines.

Last time this happened, it was due to Hurricane Katrina. That one was more easily explained away, as supply was temporarily curtailed due to Gulf ports being shut down.

This time, it's not so easy. For this time, it's more about FUTURE supply concerns, driven by geo-political risk. Review the "news" of the last month, and we begin to see why. Bush has said US forces will be in Iraq through 2008. And now the saber-rattling has intensified regarding the Iranian's desire for nuclear power and, potentially, weapons.

Radio pundit Bill O'Reilly likes to describe people as "pinheads." His call, of course, but I sometimes wonder where he gets the audacity. Yesterday, he correctly cited the commodities and futures markets as the "culprit" for higher gas prices. He called them "gamblers." Gas prices shouldn't be going up, he says, for current supply is bountiful.

Bill, I humbly submit, is confused. He doesn't seem to understand that "supply" and "demand" aren't simply calculated in freeze frames. Let's take a simpler example. When a big snow storm is predicted, say, a week out, grocery stores tend to "stock up" on ice-melting crystals. The snow may or may not hit, and customers may or may not buy the inventory, but all this is done IN ANTICIPATION of a storm. It is, to use O'Reilly's term, a "gamble" of sorts.

In a sense, that's what commodities traders are doing. They correctly see that geopolitical risks have increased in the oil-rich Middle East, and they have bid up the price of oil and gas. This mechanism, while not always correct, does tend to smooth out supply and demand, and in the long run is integral to the operation of the marketplace. It does so voluntarily, I might add, rather than through goverment force. Government is largely outside of the market, and intervening in the market almost always leads to unintended consequences, negative ones.

Demogoguing on the price of gas may win temporary points with the electorate, but it serves no one except the demogogue. Let's give peace in the marketplace a chance.

Environmentalists should view this all as a positive development. If such a basic stuff of life like gas is supplied in such a fickle way, consumers will start to demand more energy-efficient vehicles, or alternative means of power, like hydrogen-powered cars. Sometimes, change like this isn't pretty or orderly, but it does tend to work.

-Robert Capozzi