When oil climbed close to $45 yesterday, we heard a litany of excuses: fire in a US refinery, sudden demand from China, uncertainty over terrorism, but nothing about the more fundamental problems that have somehow prevented markets from responding to higher prices the way they should: high taxes, drilling and refining restrictions, absurd regulations, and war. Looking back at the Spring of 2001, it is incredible to think that crude was half its current price. The oil-based presidency has achieved its goal of high prices (according to David Frum, he told his staff that he favored high prices); and yet nothing in Kerry’s much-heralded speech set for today is likely to drive down prices.
See the chart courtesy of INO.
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I have a related question about the way the link between crude oil futures and retail gasoline prices is explained on NPR’s Marketplace and other mainstream media outlets:
It is always said that restrictions of supply of oil produced lead to higher crude oil prices (which makes sense intuitively), but then that somehow the higher costs are “passed on” to the final consumer in the form of higher prices at the pump. If, following the Austrian school, we want to say that costs do not ultimately determine prices but the reverse, how does one account for this apparent link between higher factor costs (due to reduced supply) and higher prices? Is the idea that when crude oil is bid up, less efficient producers are unable to continue producing as much or at all, which then leads to a smaller amount of gasoline on the market and thus a higher price? I’ve been thinking about this for some time and wanted to hear what the more scholarly among the Austrians have to say about that.
Thanks,
Dag Rowe
Dag, lower crude oil supplies means lower supplies of finished products, including gasoline. Assuming unchanged demand schedules, the gasoline must be cleared on the market by higher prices, so as to exclude the least valued uses. It is not that refineries pass on higher prices, it is that they produce less product. This is a subtle but important point in rightly understanding economics.
a point missing is the devaluation of the dollar. the lower the dollar’s worth, the more the internationals want for their oil.
Mohammed’s point is valid for gold as well. Its merits in the mainstream press are seen as an inflation hedge. The fact is it is extremely correlated to US$ movements. This is why we have seen gold AND bonds rallying simultaneously which I have never seen covered in the broadsheets.
Dag,
You reason justly; the Austrians do say that costs ultimately do not determine prices. The play is on the ultimately and not on the determine. Ultimately as not originary and praxeologically but not qua universally-brooking-no-other-input either. Determination that all final goods do not determine the prices of all factors of production gets a lot of long due focus especially in “Capitalism” by George Reisman and in a paper which he translated of Bohm-Bawerk’s that can be found in the Austrian Scholar’s Conference 8 titled “Value, Cost, and Marginal Utility” with an introduction and commentary by Reisman. I highly recommend the key clarification and elaboration these exegeses make to the Austrian, or marginal utility theorist’s, conception of value and prices in a market economy. But to relate this to crude oil futures and their causal relations to prices-of-gas-at-gas-pumps involves a serious confusion of how prices are determined as viewed by Austrians. I don’t have the time or I’d get into it now but Reisman (Capitalism, Chapter 2, Section 5) and Bohm-Bawerk, in this case, as in many others, brilliantly declaim those who accuse Austrians of ignoring costs in discharging value.
As a post-script, I’m using the newest version of Microsoft Internet Explorer at school and it works rather quite freaking horribly with this blog. I can’t open up the “comments” link and it will not allow me to post (the much beloved “this page cannot be displayed” error missive). If anybody has any clue why this is, feel free to e-mail me.
Have a great weekend,
Adam, most people with a clue are not using IE these days.
I suggest you try out Firefox. It’s faster, it adheres to web standards better, it has tabbed browsing (couldn’t live without that!), it blocks pop-ups, it doesn’t allow trojan horses and “browser help objects to run, and you can even block all ads with a little add-on called “Adblock”. It’s also free and continually improved. http://www.mozilla.org
There’s a fascinating artice, ‘Is ‘Peak Oil’ A Scam? Oil Fields Are Re-Filling Naturally And Rapidly’, on the ‘Current News You Need To Know’ page at SurvivalistSkills.Com.
Makes for interesting reading!
Jamie: George Crispin also discusses this topic and i agree it’s quite interesting.
http://www.lewrockwell.com/crispin/crispin-arch.html
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