8 secrets about gas prices every American needs to know

(Reuters)

Politicians and talking heads are doing their best to make us confused about gasoline prices. Here’s a little clarity.

Secret 1: Oil companies don’t control gas prices.

“Supply” is the willingness to sell at a given gasoline price--which is determined by the ability to make a profit at a given price. “Demand” is the willingness of consumers to buy at a given gasoline price.

Supply and demand are impacted by numerous factors--restrictive policies at home and abroad, growing numbers of oil users, uncertainty about the future of the Mideast, the prospect of future inflation. None of these factors are affected significantly by any private oil company.

Secret 2: We get a great deal on gasoline.

It’s easy to get angry when you see higher prices at the gas station but not higher prices other places.

But the reason gas prices can go up more rapidly than other prices is this: when demand for other goods goes up or supply goes down, it’s easy to substitute--you can buy apples if the price of oranges goes up.

But with gasoline and other oil-based fuels, the alternatives are way, way more expensive. So when demand goes up or supply goes down, we are willing to pay $5 a gallon.

Instead of being angry, why not be thankful we’re getting such a great deal?

Secret 3: Oil companies lower our fuel prices.

Since oil companies are producing the best portable fuel on the market, without them we would have much higher transportation prices.

So we should thank the oil companies for saving us money, not praise other industries, such as solar and wind, that can't come close to meeting our fuel needs.

Secret 4: “Windfall” profits mean windfall savings in the future.

The fact that oil companies make so much profit at current prices is great. Not only did they earn it by making the best product, but the more profit they make the more they have to invest in future production and the more incentive others have to get into the portable fuel market. This means more supply in the future.

If gasoline was barely profitable at current prices, that would mean less investment and higher prices in the future.

Secret 5: Oil companies are creating their own competition.

The most promising substitute for gasoline may well be natural gas--whether compressed, liquefied, or diesel-ized natural gas--since gas is at incredibly low prices right now.

Who produces much of that natural gas? Oil companies, aka oil-and-gas companies. Those “greedy” oil companies are the leaders in creating their own competition.

Why? Because you can't run from competition if the market is free.

Secret 6: Speculators are our allies, protecting us from the real enemy: government intervention.

Those "speculators" who “drive up” prices are really just fellow buyers and sellers of oil.

They only “drive up” prices by buying oil as an investment--which they do so because they are worried about a) restrictions in oil production around the world and b) future US inflation given the Fed's money-printing.

Good for them. The rising price is a signal that our government needs to end its interventionist ways. Why are we shooting the messenger instead of criticizing our government's policies?

Secret 7: Artificially lower gas prices would mean shortages.

There is no "right" price for portable fuel. There is only the price that reflects supply and demand.

Billy O'Reilly and others seem to think that if the oil companies wanted to, they could just lower gasoline prices by a dollar. But lowering the price artificially would signal consumers to buy more gasoline than the oil companies can produce.

In other words, 70s-style shortages. That means delays on moving everything, from food to medical supplies. "Cheaper" gasoline would be far more expensive in its consequences than today’s gasoline.

Secret 8: The best thing the government can do about gasoline prices is stop what it’s doing.

The only thing the government should "do" about gasoline prices is liberate energy production of every kind as quickly as possible, to maximize competition and lower prices. Instead, it is holding up drilling projects on the grounds that they will not immediately bring $2.50 gasoline.

This is exactly the kind of restrictive mentality that makes fuel artificially expensive. We can't expect politicians to think long-range, but we don't need them to; we just need them to get the out of the way of the energy producers who do think long-range.

Alex Epstein is the founder of the Center for Industrial Progress.