Myth #1: Speculators Are to Blame
Ah, speculators. Nobody worries about pesky market investors when gas prices are rising from $2 to $3, but when prices hit $4 they are the only people to blame. But the economics of supply and demand don’t back up the argument.
Heritage energy expert Nick Loris explains: “Speculators could marginally increase the price of gasoline if it led to oil inventories building up while sellers waited for higher prices—but even then it would be only in the short run, because businesses have to unload these inventories.” And those inventory build-ups do not appear to be happening.
The Cato Institute’s Jerry Taylor and Peter Van Doren explain: “While crude inventories in the U.S. are increasing, they always increase at this time of year, and this year’s increase is well within the normal range. More important, gasoline inventories are decreasing and decreasing much more rapidly than normal. Hence, there’s no evidence that speculators are reducing the supply of crude or gasoline through increased storage.”
Craig Pirrong, a finance professor at the University of Houston who specializes in commodity prices, told Fox News: “This is a transparently political fishing expedition that insinuates that fraud or manipulation is distorting oil prices without providing even the flimsiest factual basis for such a suspicion.”
Myth #2: Price Gouging Is to Blame
Price gouging certainly sounds menacing. Who wouldn’t be against someone “gouging”? But it’s not the reality of markets. As Reuters White House correspondent Steve Holland recently tweeted: “Presidents typically stage fraud probes when gas prices spike. Fraud is almost never found.”
Heritage expert Diane Katz explains: “In the case of oil and gasoline, higher prices induce producers to increase supply—precisely what’s needed to alleviate shortages. But, with the threat of fines and jail time if they charge ‘too much,’ producers will be reluctant to respond to the higher market prices. Consequently, the shortages persist or worsen.”
This type of government price control, via heated presidential rhetoric, usually makes the situation worse, not better—as we saw in the Carter Administration, when artificially low prices caused shortages and gas lines. Yes, consumers need to be protected, but price gouging is not the cause of the high gas prices, and the President knows it.
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