Thursday, March 8, 2012

Liberals and Gas Prices

My apologies for posting a re-run but what follows is an Op-Ed piece I wrote on December 7, 2005.  Given the latest hysteria over gas prices I thought I would dust it off for your consideration.

One of the first requirements of being an economist is that you must be - by nature - a curious person. You have to want to understand things and you must be willing to ask questions that other people might not ask, even if it offends people to ask. So here goes.

I would like to ask my readers who are liberals for some help with a problem that I am having. The problem is figuring out what you want to happen to gasoline prices.

I recall when gas prices fell below $1 a gallon a few years ago that many of you liberals were complaining about all of the SUVs people were driving. You griped about how big the SUVs were getting and you said that cheap gas had encouraged us to not only ruin the environment by belching out air pollution but had also helped pay for terrorist activity in the U.S. and abroad.

This makes sense on many levels. As the price of gasoline falls, it naturally follows that people will buy more of it - often by purchasing bigger cars. You liberals are also right that burning gas causes air pollution and if we buy things that burn extra gas, nastier things will go into the air in larger and larger quantities. Finally, you are economically correct that the more fuel we buy the more money we unwittingly send to nations that use oil revenue to finance people who want to blow us up in our SUVs. So, on all counts, your economics is airtight. Congratulations.

Now we come to 2005. Gas prices rose to more than $2 per gallon and stayed there. After the hurricanes, the average price of unleaded gas topped $3 per gallon, but did not stay there. Today, gas prices are inching below $2.25 per gallon in many parts of the country and you are mad about gas prices again.

Why are you mad this time? Oh, I understand. Now that prices are going up you are upset that the greedy oil companies are reporting record profits. You are mad about the perceived price gouging that has taken place, and you are frustrated that poorer Americans now have a tougher time making ends meet because more money for Exxon-Mobil means less money for food.

In two out of three areas your economics is solid. Yes, higher prices for a product with an inelastic demand means higher profit for the seller. Yes, the law of opportunity cost and scarcity means that if I spend more money on one thing I have less money for the other thing. The price gouging claim is a poor one. If they can gouge us because we have no choices over what we put in our car and must buy gas, why have prices fallen by 80 cents per gallon this fall? Why not keep prices at $3 since we would buy it anyway?

Every economist knows that the demand for oil is increasing due in large part to our growing economy and the appetite for fuel in China and India. We also know that supplies are tight because new refineries were last built in the 1970s and government-mandated additives has made it more expensive to make gas. Plus, the hurricanes set aside a big part of supply.

Getting back to your economics, I want to applaud you for being right about what happens when prices fall and what happens when prices rise.

What I don't understand is this. If lower prices makes the air dirty - which is bad - won't higher prices make the air cleaner? If high prices hurt the poor and line the pockets of oil company fat cats, don't lower prices help the poor and deny those fat cats more money?

I am suggesting that you liberals pick your favorite gas price argument and stick with it. You cannot complain about the environment and the budgets of the poor and the profits of greedy corporations all at the same time without sounding like a bunch of idiots.

It is time to choose whether you want lower prices or higher prices.

Thank you for your time.


  1. Good post...I just find is funny or weird that Fox News is now criticizing the President about gas prices when they use to defend the the President (Bush) about high gas prices. i guess its just politics as usual. To tell you the truth I don't really understand why the prices are up. I get the whole supply and demand thing, but one person says the prices are up because demand is down and another says prices are up because demand is up. So which one is it? Or is it really Wall St playing with the price?

  2. Wall Street has no ability to "play" with the price. Here is what is going on...

    First, the tensions in Iran have led commodities traders to expect supply disruptions in the future. Thus, when these oil futures contract traders believe prices will rise in the future, they withhold their contracts from the market at lower current prices until someone from the buying side of the floor offers them a higher price today for oil delivered in the future.

    On the demand side, China and India are still growing which pushes up global demand. The U.S. economy is picking up a little bit of steam as well.

    It has not helped that the Obama administration refused to allow a beneficial pipeline to be built to easy some of the supply pressures we are facing. Oil is flowing through Cushing, OK (the heart of domestic supplies) faster than it can be sent off to refineries in the Gulf of Mexico. This supply backlog hurts the supply of gas and pushes up prices even more.

    So.....get ready for this summer to be the highest prices for gas we have ever seen. At least $4.25 by July 4th, I think.

  3. OK you say "wall street has no ability to play with the price." However, I can clearly remember back around 2008 CNBC reporting that traders were hoping or betting that the oil prices would top $100 a barrel when they were in the high 80's low 90's. Then when it went over $100 they were cheering like we did it we did it! Now you're telling me these traders who were betting big bucks on oil topping $100 had NOTHING to do with the price going up?

  4. If they could "play with the price" and were cheering when it topped $100 then why not play with it until it hits $200 or $900? In August 2008 oil was $147 per barrel. By March 2009 it was $36 per barrel. Why couldn't they play enough to keep it from collapsing? CNBC - like the rest of the "We never studied economics but we look pretty on t.v." journalists know as much about supply and demand as I know about particle physics - which is nothing. The traders buy and sell contracts based on real economic factors but have no control over prices. That is why prices rise and fall and they either benefit from it or get hurt by it.