Wednesday, May 25, 2016

It makes no sense?

Some weeks ago I was in a coffee shop when one of those who has to talk to the whole room was holding forth.  He repeatedly exclaimed “It makes no sense” with regard to gas prices rising after haven fallen so low.

Rather than going over to his table and joining the conversation, I just stayed where I was and kept quiet.

However, in the true free market sense, it does make perfect sense for more than one reason.

First, the number of producers of oil was way up.  When a commodity becomes plentiful the price goes down.  But when the price becomes too low for some to make money, they drop out.  The number of producers drops and the price starts to climb.

Two, traditionally the price of gasoline rises in spring and fall as refiners switch the blends to match the season.

Three, as the price dropped, more people drove more.  As they drove more, the demand for gasoline increased.  As demand increases so does price.  That’s the “free market”.

I don’t know whether this exclaimer was a “liberal” or a “conservative”, but this is the kind of view that some who call themselves “conservative" hold.  These “conservatives” are ready to blame anybody but themselves for almost any problem.

Ironically, these up and down gasoline price movements are one of the few really free markets we have in our “free market” economy.

There are many buyers and sellers.  Many sellers if we limit sellers to those extracting the oil.  It is not so with refiners where we have relative few; one refinery can be producing gasoline for an entire region.

Both buyers and sellers are free to enter and leave the market.  Many drivers can change their driving habits: make fewer trips or use other transportation.  Drillers do turn their rigs off and on and explore more or less.

Both buyers and sellers have all the information they need to make a decision.  For the most part, gasoline is a price-driven commodity.  Despite what the oil companies say, the product is the same from station to station.  For the station, it’s mostly is the credit card good.

All costs are covered by the transaction.  This is where gasoline fails miserably.  We don’t pay for the pollution and global warming caused by our “freedom” to drive when, where, and how much we drive.

I wish more of what happens made as much sense as the ups and downs of the price of gasoline.