Oily Witch Hunt

by Don Boudreaux on May 12, 2011

in Economics, Energy, Hubris and humility, Politics, Prices, Reality Is Not Optional

Here’s a letter to Washington, DC’s, WTOP Radio:

Mark Segraves reports today that Maryland Attorney General Doug Gansler, having received complaints about rising gasoline prices, “sent a letter to [gasoline wholesaler] Empire requesting documentation to justify the spike in prices.”

Here’s how I hope Empire will respond to Mr. Gansler’s letter:

“Mr. Gansler: We’re in receipt of your request for us to justify our decision to raise the prices we charge for our products.  Because Empire is a private firm with no government-granted protection from competition, our pricing policies are none of your business.  But we’ll humor you this once: our ‘justification’ for raising prices is that we believe the market will bear these higher prices.

“Being experienced in this industry (unlike you), we believe that over the next few days, weeks, or months, gasoline supplies (relative to demand) will be unusually low and, hence, unusually valuable.  If our belief is correct, we’ll earn profits for helping to bring gasoline prices into line with these prevailing market conditions.  The higher prices will give oil producers and gasoline refiners incentives to work extra-hard to bring more supplies to market.  These higher prices will also prompt consumers to conserve today on their use of gasoline.  You would agree, no doubt, that both of these responses are appropriate when gasoline supplies are tight.

“If our belief is incorrect, however, we’ll lose market share – and, hence, lose profits – to rival gasoline wholesalers who are better than we are at reading prevailing conditions in the market.

“Either way, we gain nothing at the expense of consumers who (especially if our assessment of market conditions is correct) are made better off than they would otherwise be over the long-run by having prices rise today so that gasoline will be more abundant tomorrow.”

Donald J. Boudreaux

FYI, I defend oil “speculators” tonight on Stossel (Fox Business; 10pm EDT).


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