Fueling Innovation

Theories of supply and demand had their roots in the early 20th cent. theories of Alfred Marshall, which recognized the role of consumers in determining prices, rather than taking the classical approach of focusing exclusively on the cost for the producer as a determinant. -- Bartleby.com

No big mystery, the prices for gasoline at and above $3.00 gallon. It's probably even less of a mystery that government officials are scrambling to find the right political position. Their difficulty in finding one is as good an indicator as you need that there is no "correct" political issue. Fact of the matter is gas prices are reflective of the free market at work. Even the ridiculous state and federal taxes are no longer the dominant economic force in fuel prices.

Here is what is happening: The world's most populated country (China) is also the fastest growing market for automobiles. The global demand (which now includes that from China and other developing countries) has exceeded for the near term the ability of producers to supply. You can point to the government imposed challenges to the market, by restricting new drilling, or regulating the establishment of new refineries (did you know that there have been no new refineries built in the US since 1972?), and yes these have an effect. But it's $3 because it's worth it. And for most people it will continue to be worth it on up to $4, $5, or $6. But there's good news on the horizon. There is one thing that is going to stop rising energy costs (more about that shortly).

All the US refineries are running at near 100% capacity. That's nice for the refining companies, who show decent profits when the refineries are at full capacity. But the real supply issue is at the oil wells. Oil costs 70 dollars a barrel, precisely because thats what the markets will pay for it. It works in your neighborhood exactly the same way. You pay $3 a gallon, because it beats walking.

Fortunately, You as the all knowing and all seeing consumer will look for the most effective alternative to walking, which right now is a $3 gallon of gas. This is the good news, because at $3, the possibilities for alternative fuels expand greatly. If I have an alternative fuel or fuel technology that costs $3 to produce, I am silly to introduce it while the price of gas is $1.50. So, you just watch what happens next...at $3.00 a gallon, we may well be running our cars on corn squeezings or alfalfa extract. The technology that produce these fuels, and any other fuel technology for that matter, is much more attractive when the gas price goes up.

The oil barons know this. They probably realize that the high prices only hasten the mechanisms that put them out of business. So, they will soon have incentive to reduce their prices. The Wizer predicts a post-summer price drop of at least 50 cents; which will spawn all sorts of conspiracy theories and disinformation about how markets work....and it will stay just below what would trigger the avalance of alternative fuels.

I for one, am cheering the high prices, as potential opportunities for new sources of fuel. Competition is still king, and maybe now more than ever.