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Gas price primer

Gas prices depend on supply and demand, and the biggest risks to supply are geopolitical

Issue: "A few good men," May 6, 2006

As gas prices surge past $3 a gallon in many parts of the country, on a path that could reach $4 by midsummer (depending on events in Iran, Venezuela, and Nigeria), some obvious facts stand out.

First, gas prices depend on supply and demand, and the biggest risks to supply are geopolitical.

Second, oil companies are often the victims of these geopolitical disruptions in supply. For example, companies cannot stop Venezuela's erratic strongman from taking that country further down the road to nationalization.

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Third, the world's economy is surging and along with it demand for oil, just as some of the key oil-producing states are experiencing instability. Prices rise in such situations.

Democrats such as New York's Sen. Chuck Schumer have used the price squeeze to call for breaking up oil companies, but that is decidedly irrational, since no oil company controls the supply; not even OPEC really does. Other politicians call for windfall taxes on oil company profits, not recognizing that the only answer to high prices is new supply, and that profits push exploration. The Democratic recommendations would-if adopted-push prices higher.

We're hearing murmurs about gouging, but if any serious price manipulation were underway, we can be assured that reporters would already be pointing it out. The Republican call to keep a close eye on possible manipulators is the equivalent of a police car taking a tour through a crime-free neighborhood: unnecessary but reassuring.


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