Why Are Gas Prices So High?

Rising gas prices fuel public outrage, and the popular explanation is that unscrupulous oil companies are taking advantage of helpless consumers. This makes a good story but, as Professor Art Carden explains, it’s not accurate. Instead, gas prices can be explained by the laws of supply and demand. Supply shifts occur when it becomes easier or more difficult to bring oil to the market.

So what about exorbitant oil company profits? Profits and losses send important signals to the market, attract entry to a market, and ensure resources are allocated effectively. They also can encourage more research and development in alternative energies. Taxing or otherwise curtailing oil industry profits will actually reduce those key market signals and won’t lead to any reduction in prices at the pump.

Many of the barriers to entry in the market are actually the result of political problems. Gas prices would be lower if there weren’t barriers to drilling for new sources and barriers to the development of new energy, like nuclear power. They would also be lower if demand were not artificially increased through war and other wasteful expenditures.