I’m not an economist, and I don’t play one on the Internet. However, in the debate over gas prices and what to do about them, there is one point that I haven’t seen made.
Prices reflect supply and demand. But this is not limited to current supply and demand. Prices also reflect anticipated supply and demand. For example, if a freeze hits Florida, orange juice prices go up, even if the current supply does not suffer. Prices are not determined only by acquisition costs, but also by replacement costs.
The reason for this is that prices are the means by which scarce resources are “rationed.” Those who most highly value a resource are willing to pay a higher price. And when that resource will be in lower supply tomorrow, they are often willing to pay a higher price today.
In regard to oil prices, if the government had allowed the Keystone pipeline, opened up ANWR, and in general was more favorable to domestic drilling, I suspect that the market would reflect this anticipated future supply. Prices may not plummet, but much of the uncertainty about future supply would be reduced.
An article on CNN.com confirms this:
The industry has studies saying that if it was allowed to drill off both the East and West coasts, on all federal land that isn’t a national park and in Alaska’s national wildlife refuge, it could produce another 10 million barrels of oil a day by 2030 — double the nation’s current oil output.
Eighteen years is a long time to wait. But the industry says that if Obama merely announced such a plan, oil prices would drop overnight in anticipation of this new production.
”Markets are driven by expectations,” Jack Gerard, president of the American Petroleum Institute, said on a recent conference call.
Of course, politicians don’t think long term. But the market does.