Thursday, November 17, 2005

Price Gouging According to Those Who Know

Thomas Sowell said in yesterday's column entitled Ignoring economics: Part II:
When hurricanes knocked out both oil drilling sites and refineries around the Gulf of Mexico, there was suddenly less supply of oil. That meant higher prices and higher profits.

What do higher prices do? Force people to restrain their own purchases more so than usual. What do higher profits do? Cause more money to be invested in producing whatever is earning higher profits, and this in turn expands output. Isn't a larger supply of oil and a reduced consumption of it what we want?
I said nearly the same thing in as simple terms as I could last week Thursday:
Basic Economics 101 Lesson: on a price-quantity graph with supply and demand curves, when supply (sloping upward from the origin) shifts to the left, equilibrium in the market goes up along the demand curve (sloping downward). As price is on the Y-axis and quantity on the X-axis, this leftward shift in supply and move upward along the demand curve will equate to a lower equilibrium quantity and a higher equilibrium price.
As you can see, the conclusion reached by both myself and Thomas Sowell (who is much smarter than I will ever be) didn't take that much brainpower. Anyone who payed attention in Econ 101 should be able to figure out that price gouging was not the cause of the large profit margins for the oil companies in the last quarter. The cause was simply an adverse supply shock brought on by the events of late August and early September, namely hurricanes Katrina and Rita. There's really nothing else to it.

But by all means, let's allow the circus freak show to continue as "Dingy" Harry Reid is demanding the oil execs re-testify under oath. What are they expecting, another answer? The answer was already given in the same terms mentioned above by Exxon Mobil chairman Lee Raymond in recent testimony when he said, "...if we kept the price too low we would quickly run out (of fuel) at the service stations."

Price controls in the '70s that kept gas prices low during a similar supply shock as the one a few months ago caused miles-long lines to form at the pumps. Mr. Raymond recognized that to repeat this mistake would have resulted in devastating consequences, so he followed the logical path and raised prices which in turn forced consumers to economize and buy less fuel. In the end, this stretched out the shelf-life of the gasoline supplies and allowed these supplies to catch up to demand and return the market to equilibrium, which we are approaching now as gas prices near $2.25/gallon nationwide.

It's simple; there was no price gouging. Any investigation into the matter will only produce the results that we've seen in the past: no conclusive evidence supporting the "gouging" theory.

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