Why Are Gas Prices So High?

Art Carden,

Release Date
February 22, 2013


Lobbying & Special Interests

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.

Speculators Are to Blame for High Gas Prices?[article]: Economist Tyler Watts argues that high gas prices react to the market signals of supply and demand, not to the greedy gouging of futures speculators
Gas Prices: The Latest Excuse to Reengineer Society [article]: Mike Van Winkle responds to an environmentalist who calls for government action in response to changing oil market conditions
Gas Prices and Greed [article]: Economist Steven Horwitz challenges the notion that rising gas prices results from greed, arguing that gas prices are determined by the laws of supply and demand
Lawrence W. Reed on Gas Prices [radio interview]: Lawrence W. Reed discusses the economics of gas prices, focusing on factors that affect consumer prices, such as government regulation and quantitative easing
Are High Oil Prices a Form of Exploitation? [article]: Anthony de Jasay argues that government policy curbing oil company profits is counterproductive to their goal of lowering oil prices
Gouge On: A Defense of Gas Profiteering [article]: Jerry Taylor makes a case for price gouging at the pump, stating that high prices are the only way to ensure that gas is being used by those who value it highest

Why Are Gas Prices So High?

Why are gas prices so high? Who’s responsible? Questions like these help keep news organizations in business. Popular outrage over rising gas prices will feed our apparent need for good stories involving victims—gas consumers—and villains, like oil companies and gas station owners. The popular explanation for high gas prices is they’re the result of unscrupulous oil companies taking advantage of poor consumers, perhaps while regulators are asleep at the wheel. It’s a politically popular explanation, but it’s also incorrect.
So what really causes high gas prices? Gas prices are explained by a “sad” story—supply and demand. Shifts in supply happen when it gets easier or harder to bring oil or gasoline to the market. Changes in oil and gas prices are explained by changes in demand conditions and changes in supply conditions in a globally competitive marketplace. It’s that simple.
What about exorbitant oil company profits? Shouldn’t these be taxed? No, because profits and losses play a crucial role in sending signals about what people want and what is possible to produce. Profits attract entry into an industry causing competition among firms, which ultimately decreases the cost to consumers while driving people to develop substitutes. This is the same reason we don’t want subsidies. They also distort the incentives people face, causing a misallocation of resources. If we really want green energy, for example, then we shouldn’t be curtailing oil company profits. Rather, we should allow the signals sent by high prices and profits to encourage people to direct their time, energy, and attention toward the development of substitutes for fossil fuels.
If there are legal barriers to entry, then that’s a problem with the politics, not with the profits per se. Gas prices would be lower if we removed barriers to the drilling for new sources of supply and barriers to the development of substitutes like nuclear power. They would also be lower if we didn’t artificially increase demand through war and other wasteful expenditures.