Markets

Having taken not a single economics class in my lifetime, I feel a bit presumptuous commenting on market theory.  Nevertheless, over and over again, I cannot help but wonder:  why do so many have so much difficulty comprehending the laws of supply and demand?

The Captain has a fine post on gas prices, and the President's promise to "investigate" why the cost at the pump continues to escalate.  As the Captain explains, "DUH - what is not to understand?"

Bush can call for all the investigations he wants, but all he will find is a ridiculous American energy policy that practically guarantees our inherent risk of market manipulation and foreign extortion. With the price of crude oil topping $75 a barrel, it doesn't take an economics genius to understand why the price at the pump keeps going up. China's demands on worldwide production have contributed mightily to that increase, and it will continue getting worse as China expands its industrial base.

Until we find ways to produce more crude in order to get more oil onto the market, the prices will continue to increase. Oil is, after all, a commodity -- a free-market product that will fetch the best price possible in trade. The more oil produced, the cheaper it will become. That mechanism does not rely on cost, either, except to the extent that high production costs would lower the amount of oil in the marketplace until prices rose high enough to cover the overhead.

I might add that, in addition to the simple fact that production of more oil will cause prices to fall (or not rise so quickly), so will the addition of other forms of energy.  Both known sources (like nuclear) which are underutilized and yet-to-be discovered possibilities can have radical impact upon oil prices.  Are there downsides to nuclear and other forms of energy?  Of course.  Still, other avenues are there.  If we must have an alternative perfect solution, we will search for a long, long time.

As for the profits of energy companies....  what do we want?  Unprofitable companies, so they can continually be in danger of going bankrupt, like our beloved airlines?  I don't think so.

And, if anyone wishes to rail about the compensation of the top management at oil companies - or at some of the other companies recently in the news, feel free - and I shall join you.  Somehow, some way, I do believe that a top CEO can be found, even if he/she is paid less than a billion dollars a year.

But.  That is another post, for another day.

Enjoy yours.

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