From: hopkins@gvlf9-o.gvl.unisys.com (Bill Hopkins)
Subject: Re: Energy industry being destroyed
Summary: free market, my foot
Reply-To: hopkins@gvl.unisys.com
Organization: Paramax Systems Corp (A Unisys Company), Great Valley Labs, PA
Date: Fri, 2 Oct 1992 12:51:33 GMT

In article <91299@netnews.upenn.edu> david@penndrls.upenn.edu writes
 [ of the gas price rise during the Persian Gulf crisis ]:
>This is called the law of supply and demand.  Iraq's actions caused a
>decrease in the future supply of oil, so prices had to increase to
>compensate.  This caused oil production to be more attractive, and
>increased the supply, resulting in lower prices.  By the February following
>the peak prices during the war (ie: one year later), gas prices were
>the lowest they have ever been, when corrected for inflation and taxes.
>In fact, pump prices hit 89 cent/gal briefly, even /without/ those corrections.

This analysis is incorrect in several ways.  First, the supply of oil
was not reduced, since Saudi Arabia among others increased production
to make up the loss of Kuwait's production.  (There is no long term
loss in a change of ownership of reserves, which is how a truly free
market would see Saddam's actions. ;-} )  The Saudi actions were
politically motivated, and were contrary to what they "should" do
in a free market.  Second, there has *never* been a free market in
oil; the OPEC cartel has controlled price and production (with varying
degrees of success) since they seized control of the market from the
big oil companies.  Finally, the price rise was caused by speculation
that the invasion would trigger a *short-term* disruption in production
and a *temporary* supply shortage.  Raising prices in response is usually
called "price gouging," and is seen as a benefit of free markets only by
a few theorists (and some plywood dealers in south Florida ;-} ). 

 [ and apparently about the gas crisis of the 70's ]
>The gas lines were caused by the government, which capped pump prices.
>Again, by the law of supply and demand, if you price something lower than
>the market clearing price, there will be more demand than supply, and thus
>the gas lines.  And since there were no high prices to encourage increased
>production, the crisis lasted for quite a while.  Compare this to the
>results during the gulf war, when prices were not capped.  Did you see any
>gas lines?

This, of course, conveniently ignores the fact that there *was* a
shortage then, and there *wasn't* in the gulf crisis.  And anybody
who knows jack about the oil business will tell you the lag between
increased price and increased production is measured in years.

But what good is an ideological bias if you have to limit yourself
to the facts?

	Bill (who grinds his axe on both sides) Hopkins

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