San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Monday, December 14, 2015

Why Don't Those Evil Oil Companies Just Raise Prices?

Those evil profit-seeking oil companies, collectively called "big oil" by socialists, are at it again.  As they have consistently done in the past, they continue to do today.  What are they doing?  They are trying to destroy the economy for their own benefit.  Since oil prices have dropped by about 70% in the last year and a half those fiends who control the price of gasoline have resorted to desperate measures to keep themselves in power.  What are they doing?  Oil producers in the Socialist Democracy of Amerika are going toe to toe with producers in the Middle East, creating an oil war that is driving down the price of oil and, concomitantly, destroying trillions of dollars worth of wealth in the stock market.  I guess they figure that if their stock prices were going to drop, so were the share values of every other company in this greedy land.  Watch out!  These evil rogues will not stop until they have destroyed the economy.
Having finished that first paragraph you no doubt think I have lost my marbles.  That may be true but that does not deter me from making an important economic point today.  You are correct, I don't believe anything I wrote in that first paragraph.  I only wanted to get your attention and calling "big oil" evil is a simple and commonplace means of doing so.  No doubt everyone is well aware of the fact that when the price of gasoline goes up there is a cacophony of shrill screaming that comes from the collective voices of the socialists among us about how "big oil" is just raising prices willy-nilly in order to increase their profits and deliberately hurt the poor people who are forced to buy their gasoline to be able to drive their cars to their minimum wage jobs.  Why do they allegedly raise gas prices, you might ask?  Because they can, we are told.  So as I consider our situation today, and the painful losses oil companies are suffering with oil under $40 barrel,  I wondered.....why don't those evil oil companies just raise prices ?
The notion that oil companies can control the price of gasoline, or the price of oil for that matter, is economic nonsense.  Isn't it strange how anytime the price of gasoline goes up all of the people in this country, or at least the majority of them, cry out to their government-god and ask him to make a law to make it illegal to raise the price of gasoline, but when the price of gasoline drops to rock bottom levels nobody says a word about how the "big oil" companies are being hurt by the low prices? Where are the cries for government intervention, by means of gasoline price supports, when the price of oil collapses?  There are none.  From that truth I conclude that socialists don't really care about the economy, they just want to use the coercive power of government to get cheap gas for themselves.  That makes them, rather than "big oil,"  the greedy monsters in this little drama we know as the price of gasoline.
Today we need to consider the price of oil and the price of gasoline.  The superb graph below does a great job of showing the economic and political causes impacting the price of oil over the past 45 years.  The graph is inflation adjusted to 2010 dollars to eliminate any misrepresentation of the oil price that is the result of the profligate monetary policy at the Fed.  Take a moment to examine the graph with an eye to how volatile oil prices naturally are and how quickly they can change.
(Graph found here.)

 In 1973 the price of oil quadrupled because the OPEC nations made the decision to dramatically reduce supply.  Richard Nixon, a Republican who created the EPA by Executive Order by the way, decided to initiate socialistic price controls in a vain attempt to mitigate the impact of the OPEC embargo.  As any two-bit economist could have predicted, establishing a price ceiling (seen above in red) for oil only created a dramatic shortage, even worse that it had been under the embargo, that resulted in millions of people waiting in line for hours just to purchase a couple of gallons of gasoline.
Prices stayed remarkably stable from 1986 until 2002 when a dramatic upturn in price took place.  The primary reason for the rapid increase in prices this time was not an OPEC embargo.  Rather, it was a simple case of supply and demand.  As many countries throughout the world adopted semi-free market practices they began to experience solid economic growth.  This was especially true for China.  As demand for oil rose the supply of oil was limited due to difficulty in finding sufficient refining capacity as well as the time lag necessary to ramp up new production.  The free market responded as it always does, with great efficiency and in the best interest of the consumer.  New technologies, primarily fracking, allowed oil companies to greatly increase production and, for the first time in our history, the SDA became technically self sufficient in oil, with domestic production exceeding domestic demand.  Sadly, what should have been heralded as a momentous achievement, namely oil independence, was labeled as evil by the Greenies because fracking allegedly destroys the environment and extra cheap gasoline brings about more global warming.  What a bunch of hypocritical idiots they all are.
The Great Recession had a significant impact upon demand and a short term price decline occurred.  As things improved, however, prices went back up and stayed there for several years until we come to the position we are in today.  The higher prices of the past five years stimulated more production which increased production and lowered prices.  As I write this I can purchase a gallon of gas for $1.79.  Because of the efforts of domestic oil producers we have gas prices that are lower today than at just about any other time in history, measuring from 1919.  Look at the graph below.  This graph ends in 2011 when prices had spiked and does not include the collapse that started in mid 2014.  Compare today's price for a gallon of gas with prices from the past.  You should be thankful for the free market in oil.  You should be thankful for "big oil" and "small oil" as well.   And you should take a moment to thank a big oil company executive for what he has done for you today.  They are the real heroes in our twisted and demented society.

 (2012 Dollars, Graph found here.)

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