Forces of Supply, Demand Drive Gas Prices

Strongly worded editorial shoots down "the ranting of pundits and politicos" who allege gasoline price gouging.

March 17, 2011

WASHINGTON - A forceful editorial earlier this week at QCSunonline.com shot down "the ranting of pundits and politicos" who allege price gouging as fuel prices increase.

"[P]rice gougers do not exist," the piece said, laying out a typical fuel pricing scenario:

"When new chaos erupts in the Middle East, fuel prices spike. Politicians trip over themselves trying to be the first to yell 'price gouging?? and blame greedy oil executives ... They act as if prices are set unilaterally by sellers. The sellers, we must assume, are normally quite charitable. When the sellers are in a good mood, they sell gasoline to Americans at a bargain price of about $2.50 a gallon. When the sellers enter their greed phase, the price moves toward $4 a gallon and up. This is how the sellers gouge the buyers."

The piece notes the free market nature of oil, stating that it "seeks its own price":

"When the price is high, producers drill and deliver at a frenzied pace. That creates supplies that are abundant relative to demand. As a result, prices drop and oil producers have less incentive to drill and produce. Supplies become scarce relative to demand. This allows prices to rise, which pays for exploration and production that results in more oil and lower prices. As long as humans consume and trade, commodity prices will spike and retreat. No workable alternative has been discovered to ration and distribute this finite resource."

The explanation is all the more frustrating, as politicians at the highest levels continue to ignore these free market basics. Indeed, President Obama earlier this week noted the following at a news conference:

"I??m asking the Attorney General and relevant agencies to work with state attorneys general to monitor for price gouging to make sure that nobody is taking advantage of working families at the pump," Obama said.

However, as QCSunonline.com noted, "A price is a valve that maintains the supply of any good, service or commodity. The valve is controlled by the decisions of billions of individual consumers ?" decisions that compose market forces. Central planners and greed heads are just no match, even though they make for great conspiracy theories and fairy tales."

Understanding these economic concepts should dispel much of the finger pointing that has developed as gasoline nears the $4 per gallon mark.

For a detailed explanation of how gasoline prices are established, see the NACS Fuels Report.

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