When supply > demand, prices SHOULD fall

Oil and gas prices, that is.  The U.S. is full of oil:

US commercial oil stockpiles hit a new record last week on the strength of continued growth in oil and gas production in the world’s biggest oil-consuming country.

Commercial stocks rose 3.5 million barrels to 397.7 million barrels for the week ended April 18, according to US Energy Information Administration data released Wednesday.

That is the highest level of inventories since the EIA began releasing weekly data in 1982. It is highest level of commercial stocks since 1931, according to monthly data kept by the agency.

“It’s a real renaissance for the US oil production industry,” said John Kilduff, founding partner at Again Capital.

Domestic oil production has risen to 8.4 million barrels per day compared with 7.3 million a year ago, driven by new production from oil shale deposits.

In Econ 101, you should have learned that when supply is greater than demand, the price of the good should fall.  So why are gas prices so high?  For one thing, supply and demand theory taught in Econ 101 assumes a competitive free market system (which hasn’t existed in the petroleum market since John D. Rockefeller monopolized it 100 years ago).  But there is another reason for high gas prices:

Kilduff said infrastructure for storing crude in the US Gulf Coast refining and distribution hub is nearing capacity.

Oil is the resource that gets refined into gasoline and other petroleum products.  So while we have a lot of oil in the stockpile, it has to sit there untouched because the existing refineries don’t have the capacity to refine it into gasoline.  There hasn’t been a large-capacity refinery built in the United States since 1977 (thanks, eco-nuts), and while a new refinery is being built in North Dakota, it won’t be finished for almost two years.  It will be some time after that before the refinery is tested and approved for refining oil.

This is what happens when the guy in charge of the Department of Energy states that “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.”  The problem isn’t the supply or demand for oil; in fact, the supply of oil has been greater than the demand for oil since 2007.  The problem is that unelected government bureaucrats want your life to be nasty, brutish, and short and they will stop at nothing to ensure that you are made worse off by their policies.

UPDATE: apparently, states have gotten in on the action with ‘minimum gas prices‘.



Categories: Good News Everyone!

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1 reply

  1. Google what Walter Williams has written about mandatory minimum gas prices in many states. The Wawa chain was sued for giving free coffee with a fill up. State of MD said it was illegal, because it in effect lowered the price of gas below the mandatory minimum.

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