Oil: Cost vs Price

Fire of Liberty
Yesterday, I brought to your attention Thomas Sowell's column which noted that the folks in the media and in the halls of Congress are calling the current rise in gas prices as an ever growing crisis but continue to put up blocks to prevent any domestic drilling or seem to create policies that are intended to solve the problem of but only makes the situation worse. Well today, Sowell continued his discussion on the rise in gas prices in yet another fine piece. This time, Dr. Sowell gives his readers a little economics lesson on the difference between the cost of oil and the price of oil especially for those people cheering on the government to do something to reduce or keep the price of oil at a moderate or even low price. Just look at what Sowell has to say about the whole confusion over prices and costs amongst the American public:

Even at $60 a barrel, most of the oil that is known to exist is too costly to extract. How much will be extracted depends on how much higher the price of oil goes -- and how much new technology can recover more oil at lower costs.

What if the government did nothing about oil prices? Rising prices would lead people to reduce their use of oil and lead producers to drain some of the more costly oil out of the ground.

Many people in politics and in the media seem to be alarmed about the rising cost of gasoline and of the petroleum from which it is made. But they only seem to be. What they are really alarmed about are the prices -- and prices and costs are very different things.

Prices are what pay for costs. The government can impose price controls on gasoline or petroleum tomorrow but that will not have the slightest effect on the cost of oil exploration or the cost of extracting and processing the oil that is found.

When the costs are no longer being fully covered by prices, production is likely to be cut back, whether it is the production of oil or anything else. This is not speculation. This is what has been happening for literally thousands of years, going back to price controls in ancient Rome and Babylon.

Yet price controls have always been popular politically, despite being counterproductive economically. After all, how many votes do economists have and how many voters know economics?

I just wished more people in Congress and the media would have a better understanding of economics than what little bit they seemed to have learned. My best advice for everyone is to pick up Henry Hazlitt's Economics in One Lession or Thomas Sowell's Basic Economics: A Citizens Guide to the Economy as an essential tool to tackle or understand the world of business and commerce.