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A Rite of Spring

Contributed by mm | April 4, 2004 7:33 AM PST

William L. Anderson shows us how we should understand the high gas prices we are seeing today.

First, he cleared some popular myths:

Myth #1: Gasoline prices are at record levels.

The reality is: they are at record levels only in nominal terms. The high prices we experienced in early 1980s is $2.30 in today's dollars, which makes our current gas price level shy.

Myth #2: Oil Companies are gouging consumers

The reality is they cannot in a highly competitive market. In fact, William is referring to a research showing the profitability of oil companies has been below average compared to other firms in the S&P 500 index.

Myth # 3: OPEC is to blame

The reality is they don't. If OPEC has a commanding power of gas prices, it will be hard to explain why the crude oil price actually declined by more than 50% in inflation-adjusted terms. We should see OPEC is simply responding to the market demand instead of deciding the market demand.

William then went full length to demonstrate that it is actualy our domestic problem by several reasons:

First, our foreign policy actually made the oil supply worse: our Iraq occupation failed to bring the oil production increase we expected, and our (likely) involvement in Venezuela is another direct cause of oil market uncertainty.

Second, the Clean Air Act Amendments that kicked in in 2000 created a lot of economic inefficiency because we are asking oil companies to add additives to the gas, and asking them to add different additives to different areas, putting pressure on refineries and making price arbitrage nearly impossible.

I found this article to be very educational and persuasive. I recommend everyone to read it to have more perspective on this popular matter.

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