“Wall Street Altruism Fueling Low Gas Prices.” That’s a headline we’ll probably never see in any major publication, despite oil prices falling by more than 50 percent over the last six months.
Why not? Many people have claimed in the recent past that the greed of oil executives and Wall Street speculators was responsible for the then high oil prices.
Three years ago, Sen. Bernie Sanders, I-Vt., wrote a column for CNN titled “Wall Street greed fueling high gas prices.” Sen. Sanders claimed in the column that the greed of “Big Oil” and Wall Street was responsible for $108 per barrel oil prices and the nearly $4 per gallon we were paying for gasoline.
If that was true, then today’s low prices must mean the oil executives and speculators have become less greedy, even altruistic. Right?
I doubt that Sen. Sanders, or anyone else who made similar claims, believes that oil industry executives and Wall Street speculators are any less greedy today. In fact, I suspect they believe, as I do, that oil patch bigwigs and speculative investors have always been greedy. They were greedy six years ago when the price of oil topped $130 per barrel; greedy when prices fell to less than $50 per barrel during the recession; greedy at $108 when Sanders wrote his 2012 column; and greedy today at $45 per barrel.
Greed cannot explain price changes in the oil market, or any other market, because greed is relatively constant. It is always present.
Some other factor that is not constant needs to change to trigger price increases and decreases in oil or any other commodity.
What’s been generating the huge swings in oil prices in recent years have been the various external factors affecting supply and demand, such as the rapid economic growth of China and India. That increased demand and drove prices up. The great recession of 2008-2009 decreased demand and drove prices down.
Today’s even-lower prices are largely the result of supply increases. The world’s proven oil reserves have increased 62 percent since 2000. Nearly half of the total increase has occurred in the last three years for which analysts have available data. Meanwhile, hydraulic fracturing and other technological advances are making it cheaper to access these reserves.
The supply increases have not happened by accident, or in a vacuum. High prices led greedy business executives to invest in equipment and technology that enabled them to produce more oil. That, coupled with Saudi Arabia’s production, has been driving down prices.
Speculators, routinely demonized in Sen. Sanders’ fantasy world, are not responsible for the rapid price swings either. As energy economist Michael Giberson, a colleague of mine at Texas Tech, recently explained, oil consumption in June 2014 was near the then-existing short-run production capacity. The price at that time, therefore, reflected both the operating costs of current production and the capital costs of future production: that is, exploration and drilling of new wells. Since then, growth in short-run oil production capacity has exceeded consumption, so today’s oil price reflects only the operating costs of existing wells.
Speculation actually helps to moderate price swings. Speculators buy oil when they expect its price to be higher in the future and they sell oil when they expect prices to fall. When their forecasts are correct, this makes more oil available when it is most expensive and takes oil off the market when it is less expensive, limiting wild price swings.
Contrary to claims by demagogues and charlatans, greed (or lack of it) is never the cause of price swings in the oil market. The forces of supply and demand set prices.
So a headline claiming that “altruism” is responsible for today’s low oil prices is just as wrong as one claiming that “greed” produces high oil prices.
Benjamin Powell, a Senior Fellow with the Independent Institute in Oakland, Calif., is director of the Free Market Institute and professor of economics in the Rawls College of Business at Texas Tech University. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions for editorials, available at this link.
