Why Gas Prices are High

Okay… I’m not an economist, but here’s what I think is happening, and yep… idiot politicians are to blame.

Here’s why…

Gas prices are determined by the old fashioned laws of supply and demand, right? Here’s the problem. Demand is rising about 6 percent worldwide per year. But if my calculations are correct, the price of gas has increased much more than 6 percent. What? 100 percent in a year or two?

The rise in gas prices have far outpaced the realities of the growing world economy. Experts guess that the price should really be about $60 a barrel, not $140 a barrel. Why aren’t we still paying $2 a gallon? Basic economics (minus political hot air) gives the clear picture. Here’s how it works…

Oil is a free market commodity. The beauty of oil is that this international commodity transcends the many kinds of governments in the world. No single government (or world government, for that matter) can truly regulate oil. Oil is going to do what oil is going to do. And the freer oil is to do what it’s going to do, the better.

The truth is, everyone is trying to point a finger at greedy oil companies for some kind of pricing conspiracy, but in a free market, that doesn’t happen. Why? Because when prices get too high, things naturally correct. It’s beautiful really. $4 a gallon gas promotes changes in driving habits and invention that GUARANTEES that gas prices will eventually fall back in line. $135 a barrel oil gives incentives for oil companies to explore in places they could never have afforded to when they were getting $35 a barrel. Oil, when left alone, can never destroy our economy. In a free market, it’s impossible for oil to get so highly prices that everything comes to a halt (which is the kind of doom and gloom some like to predict). Why, after all, would oil producers allow oil to sit unsold because they demand some ridiculous price? They want to sell oil! So when we stop driving… we start inventing… they LOWER the price. And eventually, the market produces a sweet spot we can all live with.

Since this isn’t happening, it must the fault of speculators, right? Well, if you chalk out the crime scene, the speculators have their fingerprints closest to the gun. They are the final actor in the oil commodities drama. But what are speculators doing, really? Are they hiding in a room somewhere conspiring to drive up prices just for fun? When people say this, they are forgetting that speculators are the ones paying $135 a barrel. Why? Not because it’s a “fair” price, or because that price falls in line with supply and demand. Nope. They pay that amount because, IN THE FUTURE, someone will pay them MORE for that barrel than they paid for it now. That’s why they call it the FUTURES market. It’s like a stock. You don’t necessarily buy a stock based upon the strength of a company, but because of what you think you’ll get at a later date.

So… let’s be a speculator for a moment. As a speculator, we are speculating about the future. We’re asking, “What will someone pay in the future for my barrel of oil?” You’re not asking what’s fair or what makes sense, only what you can get for it in the future. In a TRULY FREE MARKET, a speculator would run from $135 a barrel oil when it really should be priced at $60 a barrel according to current market realities. After all, at $135 a barrel, one would expect that oil production to rise, demand to decrease, and the barrel of oil to fall in value. Who wants to be holding on to a $135 barrel of oil when people will only pay $100 or less?

But, counter to basic free market rules, speculators only see the value rising. Why?

Because we don’t have a TRULY FREE MARKET. There are people who get in the way. And they are called politicians. When a politician says, “You can’t drill here.” “You can’t drill there.” “We want to take your profits.” “We won’t approve new nuclear plants.” “We want to get rid of speculators.” These idiots… these politicians… have stepped in the middle of the Indianapolis Speedway in the middle of a race and wondered why there are wrecked cars piling up all around them. So they turn and blame drivers and crew chief members and fans and announcers and officials for the reason the race has stalled, when THEY ARE THE ONES STANDING IN THE WAY. If they just got off the track, the race would resume with great precision!

If oil companies could drill… If power companies could build nuclear plants… If politicians just let things happen, everything would correct itself. That’s what a free market does. But as the Huffingtons of the world say in mocking fashion, “Those are just the ridiculous words of you free market crazies.”  And politicians are famous for saying, “But if we start drilling now, we won’t see the effects at the gas pump for ten years.”  Absolutely WRONG!  The second drilling commences in ANWR and the gulf and other places, speculators will drop their barrels of oil like hot potatoes and prices will fall with them.  Why?  Because once drilling begins, no speculator worth her salt will believe in a future of $200 a barrel oil.  There would be no future for high oil prices.  There wasn’t in 1980’s and there won’t be in the 2010’s.  Things will correct themselves.

But the good news is, even politicians get corrected once in a while. $4 a gallon gas doesn’t just drive people to alternative fuels or electric cars. It eventually drives them into voting booths to move out the human speed bumps and put in some “green flag” legislators.

We can only hope that McCain’s latest flip-flop… his sudden embrace of offshore drilling and the creation of nuclear power plants… is the beginning of a new free market correction. It’s time to “correct” our lopsided and outdated legislature who kisses the butts of environmentalists and 1960’s airhead liberals. It’s time for them to look at the majority of people with voting power who now are ready to rise up against ridiculous and radical environmentalists. It’s time to get this dead-heads off the track and let the green flag wave.