torstaina, marraskuuta 10, 2005

Oil price fixing

This time another thing that people tend to forget. Oil pricing and price hikes in the face of Katrina caused people to wish for government to step in and to put a cap on the prices. Many arguments against this have been made - mine adds one that I have not seen before elsewhere.

The hurricane season was with us this year, it will be with us next year, and the one after that and so on. Each year Gulf of Mexico may see hurricane as bad as Katrina which may cause disruption to the oil refining industry.

If prices are allowed to fluctuate freely in the face of this disaster, companies and people will have confidence in the government not to meddle in the prices when the disaster strikes the next time. This allows people or companies to better prepare for that possibility. Some companies might decide to buy extra reserves for the hurricane season in order to sell the gas at a profit, if a bad thing happens. They are taking a risk, spending money to build gasoline reserves to gain a benefit, if the risk of a bad hurricane happens. These actions by companies and individual people increase the amount of gasoline in the market and thus mean smaller price hikes in the future.

Thus, for the benefit of the future, the right solution was not to commit to price fixing, but instead commit to allowing price mechanism to do its job.

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