Thursday, September 21, 2006

Gas Price Conspiracy? Not Likely, It's the Market at Work

With gas prices falling at the pump and crude oil trading at a six-month low (see chart above for Michigan gas prices), many have begun raising the specter of "conspiracy," claiming the trend is spurred by the coming election, says H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis.

However, in reality, nothing could be further than the truth. "This is basic economics," says Burnett. "Markets, when not encumbered by foolish legislation to 'fix' a problem, work."

Keep in mind that all of economic science can be summarized by this equation: P = D / S, and therefore the ONLY reason for prices to fall is for Demand to decrease, or Supply to increase, or both. Period. For oil and gas, both of those factors explain the drop in prices over the last 6 months.

According to
GasBuddy, gas prices in some parts of Michigan are now below $2 per gallon.

The reason for the recent price drop can be attributed to several economic factors:
o Previously high prices are bringing more oil to market, increasing supply.

o Drilling rigs and production are up, refineries are being expanded in the US and built in other countries for the first time in years, and new technologies are being applied to exploit traditional and non-traditional sources.

o In response to high prices, consumers are conserving, decreasing demand for gas; for example, sales of SUVs have fallen but increased for fuel efficient cars.

o Also, the bursting of the speculative "risk bubble," as the Middle East has calmed.
More Iraqi oil is reaching the market, Iran seems unlikely to face sanctions and Israel has left Lebanon. In addition, the hurricane season has been more mild than predicted. This means inventories, which were built up as a hedge against future shortages, are high.

"Oil may never be $15 or $20 a barrel again," said Burnett. "But absent a significant political crisis, such as OPEC reducing supply, they will continue to fall."


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