Gas prices: The market doing what it does
I was just reading the news and saw that our illustrious President Bama is going to appoint a blue ribbon committee to investigate those EVIL oil speculators who are no doubt lining their filthy rich pockets by bidding up the price of oil for no reason..... other than of course the fact that the middle east is in turmoil, US oil production is still down from a 6-month moratorium on drilling in the gulf and the US dollar value, the main currency used in the oil trade, is at an all time low. Really, there is no reason at all for the price of oil to be up.....
The market is doing what it is supposed to do- indicating that there is a real problem and potential shortage of a valuable commodity. When the price of oil rises, that encourages entrepreneurs to do two things, to create alternatives to oil or to increase the supply of oil. With oil prices as high as they are the incentive for creating an electric car or vehicles that get far better gas mileage is substantially higher therefore encouraging people with money to invest in such ventures. In fact, Al Gore once suggested that the government should increase taxes on gasoline to the point that it was $5 a gallon to encourage the private sector to create alternatives. And he was right, that would be an effective way to reach his goal. Now that gas prices have naturally risen to such high levels, everyone is screaming about the greedy speculators.
Why do speculators pay inflated prices for oil? Because they believe it will go higher. If it doesn't, they lose a shitload of money. If it does, they can make a shitload of money. The reason oil is so sensitive to any random news from the middle east is because a true oil shortage would create an economic disaster and those who owned the oil would become extraordinarily wealthy. Suppose you drove up to a gas station and tried to fill up only to find there was no gas left for any price, what would you do? You would go to the next station and pay whatever price they were asking. You would probably also call anyone you cared about and tell them to fill up ASAP. If you are smart, you would get as many gas cans as you could and fill up. Our modern economy requires gasoline to work. Most people have to drive to work, most products are transported with vehicles that use gasoline, even our food supply requires substantial gasoline to be created. For these reasons, if a gasoline shortage occurred, people would be willing to pay $10, $20 even $50 a gallon, so the speculator that purchased the oil when gas is $4 a gallon would exponentially increase their investment in the case of a true shortage.
Now so far a true shortage has not happened. The price goes up, speculators bet and whoever has bought at the top price has been burned when the price goes down, losing their money. Speculators continue to do the same thing and continue to get burned because they believe that at some point there will be a real shortage, and when there is they will make good on whatever losses they suffered. (Of course, a good speculator tries to bail while the market is still going up by being the first to realize that a real shortage isn't going to occur and sell while others are still buying)
We should be recognizing the run up on oil prices as a symptom of a more systematic problem. Namely, our oil supply is not secure. Very smart people with a lot of money believe that someday there is going to be a shortage that will have devastating consequences to our economy. Rather than blaming the speculators for being greedy, we should be taking steps to solve the systematic problems. High oil prices will encourage the private sector to look for solutions. The government could help by getting out of the way. Paying high gas prices really sucks, but it is a heck of a lot better than having no gas. An attempt to artificially lower prices by controlling speculation or releasing the strategic oil reserves might be politically popular and nice in the short term, but would discourage the market from doing what it does best- ensure that products get supplied to people who want/need them. Take the high gas prices as an opportunity to encourage the development of gasoline alternatives and/or of our own local oil production. Drill baby drill.