Is gas “price-gouging” to blame for high gas prices?

President Obama raised this question a couple of days ago during a “town hall” meeting in California. The MSNBC article entitled “Obama says new task force will examine gas prices” quotes him as saying, “”We are going to make sure that no one is taking advantage of the American people for their own short-term gain.” This article also quotes the President as saying that “The task force will focus some of its investigation on “the role of traders and speculators” in the oil-price surge”.

An article which appeared in the The Globe and Mail entitled “U.S. launches probe into energy prices”, notes that “U.S. Attorney-General Eric Holder made no allegation of wrongdoing against companies or speculators on Thursday. But the multi-agency Financial Fraud Enforcement Working Group will play a key role in identifying fraud in the energy market, he said” (italics added for emphasis).

While the notion that “high” gas prices result from “price gouging” by a cadre of unsavory and greedy oil companies, energy traders, and speculators makes for a provocative political narrative, it’s really bad economics. As canards go, this one is particularly favored by the political elites; indeed, as Tim Evans, energy analyst with Citi Futures Perspectives, told Reuters news service, “You can almost set your watch on these kinds of things.”

I can think of several reasons why gas prices are high compared with historical norms and likely to remain so for some time:

  1. Rising demand from emerging markets (particularly China and India)
  2. Risks of supply chain disruptions due to the ongoing political upheavals in Libya and the Middle East
  3. Domestic supply constraints due to the ongoing deepwater drilling moratorium in the Gulf of Mexico
  4. The ongoing depreciation of the value of the US dollar vis-a-vis foreign currencies. The Federal Reserve’s major currencies index (which measures the foreign exchange value of the U.S. dollar against a subset of currencies in the broad index that circulate widely outside the country of issue) currently stands at 20–year lows. Since this past January, the value of the US dollar compared with other major foreign currencies has fallen by nearly 5%. Since trading in the global oil markets is dollar denominated, some of the rise in gas prices can be attributed to this factor alone.

Therefore, in order for gas prices to become cheaper for Americans, this will require some combination of 1) a slowdown in the global economy, 2) a favorable resolution of political risks in the Middle East, 3) a credible commitment on the part of the US government to rescind its deepwater drilling moratorium, and/or 4) a recovery in the value of the US dollar vis-a-vis other currencies.

Print Friendly

Leave a Reply