gimme-five | The blog of a busy guy.

TAG | prices

Apr/08

10

High Gas Prices and Speculation

I’m writing this article for the primary purpose of getting my thoughts onto a page.  I always hear all of this talk about how the only reason that oil prices are so high is because of speculation.  But that argument does not sit well with me because it ignores the underlying reason for speculation.  The argument runs that oil/gas is not really as expensive as it is, because the prices are only high because of speculators screwing around in the market.

There is some truth to the speculation argument.  Sure, speculators are buying oil, and the more demand to buy a commodity, the higher the price goes.  But, this begs the question: why are they buying oil?

Speculators in this case are people that predict the price of oil will be higher in the future than it is now, so they, in the simplest case, buy oil now so they can sell it later when it is more valuable.  If the price of oil goes up, it is because lots of people believe the price will go up in the future.  That begs the question: why do they think oil will go up in the future?

And then we’re back to square one: why do commodity prices rise?  If the only answer to that question is that prices rise because people think speculators will drive them up, then aren’t we just in an infinite cycle of inflation?  Obviously, the answer to that question has to incorporate something other than whether speculators plan on buying the commodity or not.  So I’ll give the classic, broad, economics answer: prices rise when the commodity becomes scarcer.

Scarcer can mean less supply, more demand, or a combination of both.  And I don’t think there is a clearer example of scarcity today than oil.  The world supply of oil is finite.  Sure, we find new sources of oil every now and then, and we develop new technologies to extract oil from places we couldn’t get it from before, but no matter what, we have to deal with a finite supply on planet earth.  Thus, every day, the supply of oil shrinks, and that contributes to a decrease in supply (along with occasional shocks from OPEC).  Additionally, world demand for oil is ever-increasing.  And not just in America.  When the Tata Nano, that tiny $2000 car from India is released, and it puts hundreds of millions of new drivers in and around Asia on the road, gas prices will skyrocket [this is undoubtedly on the speculators’ minds].

So the high gas prices you’re paying may be technically due to “speculation.”  But there must be reasons for speculation.  I believe the primary reason is anticipated increased demand and anticipated decreased supply of oil.

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Food Prices

Check out this graph. I haven’t checked out the underlying data, but based on everyday experience, I would say this graph is accurate. Not only is it more convenient to eat unhealthy food such as pre-packaged sweets, but it is less expensive as well. So, a rational person has two factors telling him to choose unhealthy food over healthy food. The question is, why is unhealthy food cheaper?

I do not have a personal underlying theory as to why unhealthy food is cheaper. The cynical person in me says this is because of lobbyists in the unhealthy food industries. The uncynical person says maybe it’s economies of scale of producing packaged foods, since they are more produced than grown and those costs are easier to bring down.

Regardless, this is interesting.

Hat Tip: Photo Basement

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