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The Bottom Line - Gas Prices

I am one of those people who remember when you could take a $5 dollar bill into a gas station, and get a few gallons of gas, and chips. I never thought that I would be one of those “back in the day” people, but as gas prices rise, I can’t help but remember the good old days.

Gas prices seem to shoot up and creep down. With the talking heads on television blaming everyone from the President to the uprising in the Middle East, it’s hard to get straight answers on just what you are paying for at the gas pump, and who is to blame for it.

To understand the price of gas, you first have to understand the way goods are purchased and sold. Remember Economics 101? The entire economy is built on the supply/demand law. As prices go up, demand goes down. However, once you start talking about Americans and their gas, that doesn’t always happen as quickly.

We Americans are an optimistic bunch. We deal with high gas prices, with the hope that eventually they will go down. A slower decline in demand means that the price can afford to stay artificially high, with no loss in revenue or profit.

Ah, profit. The “big mean oil companies” are reporting record profit, while the “fat cats” in Washington continue to give them tax breaks. O.k. here’s the deal on this. Not to stick up for “Faceless Corporation A” but, it’s not against the law to sell a product that has a high profit margin. Check out the profit margin on prescription drugs. Second, if the government did not give those tax breaks to the oil company, and “Faceless Corporation A” got a large tax bill, the CEO is not going to say he is sorry and pull out his wallet. The price of the tax on oil will be passed off to the consumer. Next time, you get a cell phone bill, look at all the taxes that you are charged. Every one of the major 4 carriers will tell you in writing, they are not required to have you pay those taxes.

Getting back to the root of the issue, Supply/Demand, taxes vs. profit, what else? Speculators, oh yeah, speculators have been getting a lot of press as of late. Basically, a speculator trades commodities like oil based on market trends and data. If the market trends upward, the price goes down, because more people are willing to buy. However, if something is poised to bring the market down, the price goes up. This year’s “Arab Spring” was just the reason needed for un-experienced speculators to flood the market with panicked actions that drove the price of oil up to the levels we see today.

Now, here is the interesting part, if the speculators are to be blamed for driving the price up, they should be celebrated for keeping the price so low. When every thing is humming along, and there are no spikes in oil prices, the non-experienced speculators stay clear and move to something more volatile. This leaves the pros to buy and sell based on historical data and real trends in the market place.

The bottom line is oil prices will never return to the prices from the mid to late 90’s. It costs more to find, more to refine, and more to transport than ever before. This is always the case with any non-renewable commodity. Taxes or the “blame game” will not drive prices down. The only true way to drive the price down, has been and always will be; competition. Until America gets serious about another form or energy, a viable competitor to oil, the price is left up to the weather, the whims of those who understand the market and those who don’t understand the market, but get a seat at the table anyway.

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About the Author

Brandon Byes, M&I Bank
1101 Walnut
Kansas City, MO 64106

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