(T)he only reason that traders are willing to pay those prices for crude oil is because they believe that individuals are willing to purchase fuels refined from crude at prices that will enable those original purchases to be profitable. In fact, the price of crude oil cannot rise independently of the value of the final products into which it is refined. Even though we are seeing a pattern in which the price of crude oil increases, which is followed by increases in retail gasoline prices, one must be reminded of the economic processes that are occurring.
I've been doing a bit of thinking about this and I think I may have over-reacted, at least economically, at what appears to be blatant price gouging. At some stations here in Rock Hill, SC, gas prices went up about 70 cents in one day. I began to consider this a little more and I'm not so certain that now we should be asking our government to intervene in putting price caps on gas. The solution that we do need is for America's dependence on foreign oil to be reduced or nearly eliminated. If you are complaining right now about gas prices, you should also be in favor of America drilling at home and building more refineries. Independence is a first step to lower prices!
Remember the oil crisis of the 70s (I don't....lol). This was partly due to our government imposing restrictions! Secondly, why is there a sudden shortage of gasoline from Katrina? It's simple - two major pipelines have been taken offline due to the hurricane. After thinking some more, I had to drop my perspective as a consumer and had to put on my Economics thinking cap. I remembered back in college the principle of J.B. Say, that "supply creates demand." This can be true in a shortage in a paradoxical format. We are seeing that we have less oil coming in (about 20% of imported oil comes up through the gulf) and this is somehow making it more valuable for the short-term (hopefully). I then decided to go to Mises.org (an "Austrian" economics website) to see if their writers had said anything about the oil crisis. I found the following excellent article by William Anderson that deals with the shortage issue and related price increases (the quote at the beginning of this blog was from this article). Dr. Anderson was my economics professor in college. I will not quote the entire article, you can read it for yourself if you have about 5 minutes.
"How to Create A Shortage" by William Anderson.
People are not happy about this latest round of gas price increases; and, not surprisingly, they are demanding answers — and "solutions" — from the wrong people: the political classes. At the cutting edge is Hawaii, where gas prices will soon be controlled by law, not markets.
Hawaiians are about to find out in the near future that the "solutions" they have supported are going to have the opposite effect of what supposedly was intended.
People in the Aloha State pay more for gasoline than anyone else in the United States, and anyone with even a basic understanding of economics understands why this is so. Hawaii is a group of islands located thousands of miles from the continental US, and Hawaiians who purchase gasoline must be willing also to pay for the high transportation costs of bringing fuel to that state. (At more than 57 cents a gallon, Hawaiians also pay the highest gasoline taxes in the USA, a penny more than their California counterparts and about 13 cents more than the national average, according to the American Petroleum Institute.)
Hawaiians believe this to be a most unfair set of circumstances and have turned to their legislature for what they believe to be relief. Yes, even though the high prices that people in Hawaii pay for gasoline are due to that pesky thing called the Law of Scarcity, citizens of that state are convinced that the politicians there can do away with scarcity by fiat. They are about to discover just how wrong they really are.