Saturday, April 29, 2006

Gas prices - Supply and Demand

My Senator Maria Cantwell is after price gouging oil companies. When you are chasing a demon you pay no attention to evidence the demon doesn't exist. Mary Katherine Ham asked Cantwell some questions about economics and oil prices and Cantwell pleads -- no, shows - ignorance.
ME: Do you recognize at all that high prices might simply be caused by the fact that Gulf Coast refineries have been wiped out, thereby depleting production, thereby depleting supply while demand stays the same or increases, which inevitably means that prices have to rise? Cantwell: But you see, we're going after price-gougers. ME: I understand that. What I'm suggesting is that it could be that none of the gas prices are price-gouging; they're just a natural market reaction to the depleted supply of gas brought on by Hurricane Katrina, which wiped out oil refineries in the Gulf Coast. And, if the prices are lowered by the FCC or Congress, we'll end up with gas shortages because the higher prices are an incentive for oil companies to produce and deliver a sufficient amount of gas even under conditions that are not ideal. If the profit incentive is taken away, they won't produce the gas and no one will have gas. Cantwell: (Furrowed brow) Could you say that one more time? ME: See, here's the deal. The supply of gas went down and demand stayed the same or increased. Therefore, prices went up. I'm suggesting that the rise in prices is NOT evil oil companies gouging anyone, but a natural market adjustment, which allows us to have plenty of gas even in rough times. Now, if gas prices get lower.... Cantwell: Who did you say you work for? Cantwell's Assistant: (pulling her by the elbow) Senator, we've got to move on. You've got a meeting.
We have a big job instructing that midget. Also. Charles Krauthammer observes: Less supply and more demand = higher prices