gas prices

Gas Prices.

They are a hot topic these days, as they have been for the past year or so.

As I write this, Hurricane Ike has blasted through Texas, leaving 4 million people without power, and leaving the oil rigs and refineries in the area shut down. If oil can’t be refined into gasoline, there will be a shortage of gasoline, and as any first year economics student will tell you, a shortage of supply will increase prices.

Of course, as we now know, we are long past the point of Peak Oil. There have not been any new significant oil discoveries for decades. Oil is a finite resource. We are running out. It is projected that within two or three years Mexico will no longer export oil; they will need all they can produce for internal consumption. The giant Saudi Arabian oil fields are long past their peak. There is still lots of oil underground, but unfortunately a lot of it is in hard to reach places, or trapped in shale, so it will be difficult and costly to extract.

Practically speaking, we are running out of oil, and as the emerging economies of India and China switch from bicycles to cars, demand is increasing while supply is reducing. Oil prices will continue to increase.

So why, then, when I turn on the radio, do I hear the talking heads talk about how “consumers are being gouged” by the oil companies? Yes, it’s very frustrating that in advance of hurricane Ike the price at the pump in my part of Ontario, Canada jumped from around $1.20 per liter to around $1.35 per liter overnight. Does that mean consumers are being gouged? Perhaps, but as a consumer, I have a choice.

I don’t have to buy gasoline. Or, I can reduce my consumption. I don’t have to buy an SUV. I can buy a smaller car. I can drive less. I can car pool, or take public transportation.

Of course the talking heads want government to regulate the price of gasoline, so that we poor consumers won’t be gouged.

Not surprisingly, I believe that government regulation is a very bad idea.

First, how can you regulate the world price of a commodity? How can the Canadian or American government decree that the price of oil will be $X per barrel? They can’t.

Of course the government could pass a rule that the price of gasoline at the pumps can only increase by 1% in any given week. Or they could put a tax on the profits of oil companies. (Of course in Canada and the USA the price at the pump is largely made up of taxes anyway, so the government is already regulating the price; they are making it higher). But how would that help us?

In the short term, the price would go down, or at least not go up by as much. In the long term, explorers, refiners and sellers would make no money, so they would no longer explore, refine or sell, and there would be no gasoline.

Here’s a more bizarre way of looking at this: the average person pays, let’s say, $1,000 per year for gasoline. A doubling of the price will increase the cost of gas by $1,000 per year. The price of a new car, is, let’s say, $20,000. If the car lasts for 5 years, the cost of a car is $4,000 per year. If the government really wants to save consumers money, perhaps they could regulate the price of a new car; perhaps cap it at $1,000. That way instead of a car costing $4,000 per year, it would only cost $200 per year, so consumers have saved $3,800 per year. That’s a lot better for consumers than legislating the price of gasoline.

Of course that idea is idiotic. If car companies could only get $1,000 for a car, they could not sell cars. They would only sell bicycles, and eventually there would be no cars.

Alas, that’s the slippery slope we walk down when we let the government run the economy. So, next time you hear a commentator or a politician talk about how the oil companies are gouging consumers, remember that the solution is NOT to let the government regulate them, which will only serve to gouge us more. The solution is to take care of yourself: buy shares in oil companies if you think they really are gouging us, and drive a smaller car, and drive less. It’s better for you to be in control; it’s not good for the government to have more control.