Thursday, September 22, 2005


It is depressing to hear Bill O'Rielly fuss about price gouging. I understand that news media folks must be controversial to attract an audience, however, talking about price gouging in this situation is like rubbing salt on wounds. It shows how little Bill O'Rielly and his audience appreciate free enterprise.

Even if all the oil was owned by one person, the market would still determine how much oil is consumed. The person might set the price at a high level but the laws of substitution, supply and demand would win in the long run. Folks would burn timber, coal, corn stalks, or do without if necessary. It takes a willing buyer to be gouged. In recent weeks there have been long lines to save a nickle and gasoline usage has dropped. The market is adjusting as common sense would suggest. Gavin Kennedy addresses the gas maret correction on his blog Adam Smith"s Lost Legacy

The reality is that there are many oil companies and the price is competitive. Indeed the price in real terms has been going down for the past 80 years or so. Oil companies are drilling 20 miles deep and supplying oil at a lower price than when the first oil was found at 60 feet deep.

It takes a buyer and a seller for price gouging to take place. Folks have memories. If any particular company takes advantage, they will lose a lot of future business. Yes, demand for oil is high. But, forces are at work to add supplies and to reduce usage. The planet earth uses an extremely small percentage of energy that is supplied by the sun. The available supplies have been building for millions of years; they will grow again this year!

We continue to make really dumb group decisions, such as tilling up acres and acres of farmland to grow corn for fuel, but the invisible hand of Adam Smith continues to work. The market continues to adjust. Laser technology now makes purification of uranium fuel cost 80% less than the old technology. Nuclear energy is clean. Since the last nuclear plant was built in the US, coal plants have been built that burn 400 million tons of coal each year. We are too smart a people to damage our environment this way. We have to get away from group thinking.

Markets work but we must allow them to work. One company is currently bidding over $40 a barrel for proved reserves. This is oil in the ground. This company is making a huge bet that the price of oil will stay about $65 per barrel for many years to come. If the price of oil drops back to $50 making this purchase unprofitable, Bill O'Riellywill not be crying the blues for the poor stock holders that just lost millions.