How many times this past year did you hear some expert make some variation of the following statement: “We’ll never see gas prices below $X again.”
And yet, over the Christmas holidays, prices as low as $1.34 per gallon were spotted, and prices around $1.50 per gallon are typical at the time of this writing.
Ain’t a functioning market wonderful?
Back in August when gas prices were in excess of $4.00 per gallon, the cries were loud for government intervention.
The most popular among these proposals were windfall profits taxes on the oil companies and anti-gouging or caps on the price of retail sales. And it is remarkable how many otherwise intelligent people climbed on board. But whether by good sense, political reality or just plain dumb luck, these price-distorting policies were not enacted.
Prices matter. The price of a commodity conveys important information about supply, demand, and all of the factors involved in the production and distribution of that commodity. When government distorts the price, government distorts the information.
Distorting the price also distorts the market. When a de facto price cap is set the marketplace will usually allow or push prices to whatever the cap is. In other words, regardless of the competitive circumstances or the pressures of supply and demand, the price will settle at or close to the level at which it is capped. And distorting the price mechanism also affects the ability of a price to move back downward when market conditions change.
What has happened since those $4.00-per-gallon days has demonstrated the market’s ability to react quickly to changes in market conditions when free of government distortion.
Ironically, with prices low we may now hear calls from the environmental lobby that gas prices are too low, and that prices need to be distorted upward.
In a functioning market economy, prices should move. Movement is a sign of life. In fact, it’s usually evidence of government price distortion when prices don’t move.
So whether it was good sense, political reality or just plain dumb luck, government didn’t take steps to distort fuel prices this year.
Often the right thing for government to do in a panic is . . . nothing.
And sometimes it’s better to be lucky than smart!