Notebook > Money

Fueling speculation

Money | Strong supplies and weakened demand caused gasoline futures to tumble more than 30 cents a gallon recently

Issue: "Nuke nightmare," Feb. 25, 2006

Good economic news rarely makes headlines, but U.S. consumers may notice something nice over the next several weeks.

Analysts say prices at the gasoline pump are likely to fall, and even dip below the psychologically important level of $2 per gallon in some parts of the country.

The reason: Strong supplies and weakened demand caused gasoline futures to tumble more than 30 cents a gallon between Jan. 30 and Feb. 13. "We should see gasoline at the pump drop 15 to 20 cents in the coming weeks as it catches up with falling wholesale prices," James Cordier, president of Liberty Trading in Tampa, Fla., told the Associated Press.

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The price of oil is also falling, dropping below $60 per barrel last week, with large supplies overcoming even traders' concerns about tensions in Iran. Overall prices are not expected to rise again until April or May, when spring demand for gasoline picks up again.

This is all textbook economics-with supply and demand driving price levels-but it may come as a surprise to some lawmakers on Capitol Hill. When the oil industry reported strong third-quarter profits last year, two Senate committees held a joint hearing to scold oil executives for ruthless price gouging. "With people being forced to pay $3 a gallon for gas and $2.50 for oil to heat their homes," said Sen. Judd Gregg (R-N.H.) at the time, "it is apparent that the oil companies have taken advantage of the trust of the American people."

This theory-that an increase in oil prices must be the result of a sudden surge of greed in the oil industry-has a strong enough hold on lawmakers that many are proposing a special tax on oil industry profits.

The problem with this theory, though, is that it has a hard time accounting for decreases in the price of oil, like the ones the markets saw last week. For if executive greed accounts for jumps in prices, then executive generosity must account for last week's price drop and must be what had oil trading for under $20 per barrel back in the 1990s.

A better explanation, say analysts, is that oil companies will always charge as much for their product as the market allows them to charge. As The Wall Street Journal put it, "if oil executives could pull a string and create $65-a-barrel oil and $3-a-gallon gas, that's all we'd ever see."

The issue, then, is why have oil companies been able to charge more in recent years. The answer is that demand for oil has been increasing strongly throughout the world, especially in China and India with their fast-growing economies.

No tax on oil profits will stem that demand, though such a tax might do a lot to discourage the kind of production necessary to increase supplies. "The worst thing for the economy right now," argues the Journal, "would be to have American oil companies in no better shape than Ford or GM."

If the Senate really wants to go after some unrepentant price gougers, a better target is out there: higher education. While oil and gasoline prices have been all over the map during the last few decades, inflation-adjusted tuition prices have increased every single year for at least the past quarter century (see "No way down," Aug. 27, 2005).

But don't expect to see university presidents paraded before Senate committees for a public tongue-lashing, or a special tax proposed on excessive campus revenues, any time soon.

Timothy Lamer
Timothy Lamer

Tim is managing editor of WORLD magazine.

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