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Tuesday, March 22, 2005

Gasoline Prices and the Free Marketplace

Adam Smith’s invisible hand still does the best job writing the economic script.

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In Forbes.com’s Jump Start, Rob Wherry reports:

“High natural-gas and oil prices, turmoil in the Middle East and increasing worries over power outages have sparked a renewed interest in funding clean energy, say the authors of a report released today.”

The still valid observation of the real world is that the free marketplace responds to economic needs, and it does so more effectively than liberal-socialist state-planners. 

What the Forbes article illustrates is that there is a huge, still untapped pool of energy sources around the world.  When petroleum prices rise to high enough levels, many new energy sources and techniques become economically feasible. Despite the gloomy predictions of environmentalists and other liberal-socialists, the world will not run out of energy sources.  If the market prices are high enough, it will always be feasible to produce energy from some source or other.

The typical liberal-socialist prescription - price controls and government subsidies - is entirely counter-productive.

Most people are unaware that the oil companies’ estimates of their producible reserves increase in tandem with increases in world oil prices.  It’s simply that, at low oil prices, reserves exist, but the costs to extract them are too high to make production profitable.  When prices rise to high enough levels, existing but high-production-cost reserves become producible reserves.

In Gasoline Prices and Short-sighted Liberals, I wrote:

“ANYTHING that ANY President does to control gasoline prices will be harmful to the economy.? Doing anything to fix prices at a lower level would just limit or reduce the available supply of gasoline.?

What our forebears understood in 1776 was that the public welfare is maximized when individuals are as free as possible to pursue their own goals, without arbitrary government interference.”

“...... We got into a similar situation in the late 1960s and early 1970s, when the inflationary effects of President Johnson?s Great Society explosion of entitlement benefits led to hyper-inflation.? President Nixon nearly wrecked the economy with price controls.? When price controls could no longer be maintained, prices shot up even faster.

That?s what happened when President Carter tried the same approach.? The result was hours-long waiting in lines at service stations, which often had no gasoline at all.? When President Reagan took office, he immediately removed President Carter?s restrictions; production boomed, gasoline became readily available, and prices dropped.”

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Posted by Thomas E. Brewton on 03/22 at 05:05 PM
Economics • (0) Comments
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