Why Are Gas Prices So High?

from Mar 03, 2012 Category: Articles

There are ultimately only two ways by which prices are determined, by market forces of supply and demand, or by government forces imposing themselves in markets. When the nation experiences the pain of rapid price increases it does not take long for people to grow angry at the oil companies. They become the scapegoat. Those slightly more sophisticated may give the oil companies a pass, but blame oil speculators, or futures traders. Neither, however, are to blame.

Prices are determined, ultimately, by the consumer. When prices go up, and we don’t change our behavior, we end up paying more than we’d like (which we always do. We’d all like everything we buy to be free) but not more than we are willing. When prices go up and we change our behavior, whether by car-pooling, fewer or shorter trips, or driving cars with better miles-per-gallon, we are decreasing demand. We demonstrate our unwillingness to pay x for y amount of gasoline.

In between prices set by the market and prices set by the state, are prices set by the market, where the state is interfering. Right now prices are rising because of geo-political issues in the middle east. Iran rattles its sword at Israel. Washington rattles its sword at Iran. And those trading in oil futures think there is some chance that the result of all this will be decreased supply, which will create higher consumer prices. They then are willing to pay more for futures contracts (agreements to buy oil at a given price in the future) which makes prices rise now. In like manner, when Washington refuses to allow drilling in its vast holdings, or refuses to allow an oil pipeline to cross our border with Canada this too suggests less supply in the future, pushing prices up.

Doesn’t this mean the speculators are to blame? By no means. Speculators are not economic vampires sucking the life out of us. They perform an important economic service in spreading risk. Oil producers begin exploring a given region, looking for oil. They don’t know what they will find, nor what what they find will be worth when they find it. A futures trader, however, can guarantee a specific return on their investment by buying the contract. The futures trader also cannot predict what gas will be selling for when the gas is delivered. He is taking a chance, shouldering some of the risk. Sometimes he wins; sometimes he loses.

Why is it, I wonder, that those who complain against the oil companies or futures traders when gas is going up in price never sing their praises when prices are going down? When consumers grumble about greed, at least in a free market, they don’t realize that their own greed is showing. We are not owed gas, at this price or that price. No one is cheating us or gouging us when we freely buy their goods, whatever the price. Our calling, at all times, is to give thanks. There is one who knows not only today’s and tomorrow’s gas prices, but knows that we need food, and clothing. And He told us to stop our fretting, to seek first His kingdom and His righteousness. Would that we hungered for these more than we hunger for lower prices.

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