Necessary Roughness

There is one gas station near my highway exit that seems to govern the price of all three gas stations. When consumers see it jack prices up in the morning, they have until lunch time to get gas at the other two stations before their prices go up.

Why the other two gas stations merely follow the one gas station’s lead instead of remaining low to undercut remains a mystery, but let’s examine the behavior: given one piece of information, consumers rush to the lower price gas stations because they know the price will go up. Failure to do so would cost the consumer money when they are forced to fill up at the higher price. They in fact are speculating.

Speculators are getting flack for driving the price of oil up. A speculator, gathering information about the availability of oil in the future, seeks contracts with oil suppliers to buy at a certain price. If the price goes down and they hold those contracts, they lose money. If like Southwest Airlines they lock in at a low price while everyone is forced to buy higher price fuel, they win. Their contracts are attempts to reduce risk and generally stabilize markets.

Speculators are trying to secure contracts at record levels because they believe prices will go even higher. Why wouldn’t they expect prices to go higher, with both Republican and Democratic presidential candidates looking to penalize oil companies for their “unfair” profits? While demand increases from China, India, and other countries, political forces try to hold our supplies down. The prohibition of alternative power generation such as nuclear is an unnatural push on petroleum demand. The weak dollar directly drives up the prices of oil.

If we desire speculators not to bid up oil supplies, we need to throw off our shackles and drop the restrictions on supply and demand. Speculators need a reason to believe prices will go down.