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Monday, February 27, 2012

Gas Prices Rising in 2012

Source: http://community.nasdaq.com/News/2012-02/gas-prices-rising-in-2012-can-the-government-do-anything-to-stop-the-increase.aspx?storyid=122488

I will begin my first post stating I am not an economics major. I am pursuing a major in distributed studies that incorporates economics, politics, sociology and I am taking numerous business classes for my own purposes. I share this, because I believe the problem of regulating gas prices is a systemic issue, not a Cartesian one (i.e. Descartes approach of breaking something apart to see how it works).

Systems theory explains topics (people, problems, etc.) have interrelations with other topics. Affect one thing, and another is changed (positively, neutrally or negatively).  Economics attempts to make the best use of limited resources. To me, principles of management, politics, sociology, economics, technology (among a few) are at play. At times, I believe economists can be very Cartesian (possibly accounting for industry-wide nonconformity of opinion on specific topics).

I do not believe the U.S. government can do anything to regulate the prices of gasoline (with long term success). In a June 11, 2011 article, in the Colorado Springs Gazette (section B, page 11, titled “Saudis Ignoring OPEC, Will Up Oil Production”), the Saudi’s wanted to avoid a price crash (like the one in the second half of 2008 when prices were near $150 per barrel). Prices plunged nearly 70% from the record-high prices. The Saudi’s planned (against the judgment of OPEC) to release 1.14 million barrels (per day) into the economy (to make up for the shortages).

I believe gas prices are regulated by the OPEC monopoly. At times, rogue decisions are made (like the Saudi’s decision to self-regulate) for the successful continuation of business. In 2008, Americans chose to drive less (part of the reason for the 70% plunge in prices).

Economically, supply and demand issues are at play. In class, we covered negative externalities and corrective taxes (as a means of explaining gasoline pricing). Our equilibrium (intersection of marginal private cost and marginal social benefit) and optimal (intersection of marginal social cost and marginal social benefit) explains how a corrective tax can be used to derive optimal quantity and price for gasoline. With the OPEC monopoly, such corrective taxes do not exist (in as much as U.S. government intervention). OPEC’s economic models probably do not coincide with what the U.S. government can do to help regulate gasoline prices.

The article (top of this post) explains the U.S. demand for oil is about 80 million barrels per day. We can choose not to drive (indirectly causing regulation in OPEC policies), or be slaves to the prices set by OPEC. The government can play with tariffs and / or embargos, but who needs another Smoot-Hawley debacle. Gas prices, economically, are played out through supply and demand. Government intervention is, sometimes, more problematic than pragmatic.

Dan Baer

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