All Commentary
Tuesday, January 13, 2015

All Hail the Tumbling Price of Gas

The people against the powerful at the pump

American consumers begin the new year with a beautiful gift: low gas prices. These days, you pay twice or three times as much for fancy bottled water from the convenience store as you pay for gasoline, which has to be sucked out of the earth, refined, and transported from all over the world. That’s impressive, a tribute to the marvels of the market.

Despite it all — and despite every effort by the world’s most powerful people — all the pressure is downward. It’s a shock, to be sure, but a glorious one.

This chart makes me emotional about market prices. They are blessedly surprising, defiant, and, in the end, benevolent.

If all you followed were the policies and the headlines, you would think prices would be 10 times higher. The low price comes about despite a vast and unrelenting barrage of policies and attempts to raise it.

Think for a moment of all the powerful interests in the world that have pushed for higher gas prices only to see their ambitions frustrated by a reality they despise.

The environmentalists are desperate for higher prices because they are against driving and internal combustion generally, which they believe spoil the planet. They want us pedaling around on bicycles as in Mao’s China or enduring mass transit, or slogging from place to place on foot. They’ve been hectoring us about this for decades. A high price for gas is the best way to bring about their dream to discourage consumption. They cringe with every penny drop. “Fracking” is their F-bomb.

And don’t forget about the gloom-and-doom industry. It was only some 10 years ago that “peak oil” theorists were explaining to us how oil was running out and prices were going to soar. We’d better start hoarding, they said, because soon the pumps will be dry. How wrong they were. The new gloomers are all about the supposedly terrible glut of oil.

The oil industry itself is similarly unhappy with lower prices because they devastate profits and make it impossible to fund more drilling, production, and exploration. When the oil industry was closest to the presidency, under the Bush years — both father’s and son’s presidencies — it worked to keep prices and production high. Even war for oil became part of this strategy. The industry’s benchmark price is $100 per barrel of crude. But it has no power to make that happen. That’s because the oil industry doesn’t finally control the price of its product.

Some of the world’s richest and most powerful states, from Saudi Arabia to Russia to Iran to the United Arab Emirates, consider high oil prices to be their lifeblood. A US gas price that is double or triple the current one could mint a slew of new billionaires. As it is, the rich and mighty just sit watching the price and weep with their heads in their hands. How pathetic was the statement by King Abdullah of Saudi Arabia who said in a speech that he would deal with a lower price “with a firm will”?

Will as much as you want, Your Highness, but it is not going to matter. Your will is not decisive. No one’s is.

In the United States, both states and localities depend on oil for their entire revenue stream. Politicians in places like Alaska, Texas, and Louisiana are actually in emotional meltdown about this price trend. If they could fix it, they would.

Then there are the urban planners — not to speak of legions of intellectuals — who loathe lower prices. They want prices to soar to punish all us drivers and get us to use their subways, buses, and taxi monopolies instead. That we keep insisting on sitting in our comfy bucket seats and driving these machines around makes them crazy. Low gas prices only encourage us to do more of what we love — and what they hate.

It’s been a huge priority for government generally to subsidize alternative energies, ones that don’t depend on fossil fuels. So long as gas remains affordable, alternative fuels will not get the boost that regulators want them to.

Then there are the central banks run by people who are convinced that falling gas prices are a bad omen of generalized deflationary trends. For five years, they’ve fought relentlessly against deflation, but there is a crucial thing they can’t control: the rate at which people themselves spend and borrow. There’s the rub. It’s because consumers haven’t cooperated that the Fed has not achieved its aims.

For now, Fed chair Janet Yellen is trying to calm people down by saying she is not worried about the falling price of oil. In a press conference, she actually made some sense: “It’s something that is certainly good for families, for households,” she said. “It’s putting more money in their pockets, having to spend less on gas and energy, and so in that sense it’s like a tax cut that boosts their spending power.”

Then again, she is there to put a happy face on all things economic so as not to spook anyone. Meanwhile, Keynesian economists swirling in the Fed space are losing it. They observe that recessions over the last 25 years have correlated closely with a falling oil price (and they thereby mix up cause and effect by looking at the data alone). “That 800 pound gorilla known as oil? … The Fed will have to address it. It needs to be proactive,” former Atlanta Fed director Dorothy Weaver told the Wall Street Journal.

But address it how? If boosting the monetary base by $3 trillion over five years couldn’t engineer a consumer-price inflation, it’s hard to imagine what tools the Fed has left to push the price of oil in one direction or another. The irony is intense: the Fed’s zero-interest-rate policy actually ended up boosting investments in fracking, leading to new supply and pushing down the price. In other words, the Fed’s policy, designed to inflate prices, ended up doing the opposite. Beautiful.

In fact, if prices could truly be controlled by government and special interests, gas prices would be the model case. What we see is the opposite: the forces of globalization, production competition (demonstrating that cartels are impossible to maintain!), technological improvements from the shale revolution, and the unstoppable invisible hand have prevailed. Not even the world’s largest producers can cartelize this market. Competition is too intense, and cheating on collusive agreements is too rewarding on the margin.

The gas price seems to have a mind of its own. People are notoriously ignorant about this fact. They imagine that there must be someone, some powerful cabal, behind the scenes that is setting it. When prices rise during natural disasters, people assume that there is someone acting to take advantage of the situation by boosting the price. Gas-station owners are routinely hauled before legislatures to testify.

The populist opinion about this matter is cringeworthy, but so is a large part of educated opinion. The “common knowledge” is unaware of the great truth about global market pricing: No one in particular is in control of it. It is formed by the countervailing forces of supply and demand and is set by the nonstop testing of millions and billions of consumption decisions, innovations, trades, and speculations.

The price is the culmination of countless factors at work. It represents a consensus of the global community in response to realities and values people actually hold. No single will can prevail.  There is no law but economic law. The price is evidence of an emergent, not a designed, order.

If the market price were a person, he or she would be the wisest, most clever, most powerful person on the planet, causing the multitudes, even the ruling class with enough weaponry to destroy the planet, to submit and bow down in awe. The simple and unassuming price — so humble and yet so decisive for human decision making — is this concise point of data, a mere number, that actually causes nations to rise and fall, topples the mighty, and humbles the arrogant with its truth-telling, rational, and yet unpredictable movements.

Those who want to rule the world fear the market price for this reason, but peaceful people experience it as a gentle force that grounds our daily lives in reality in the midst of artificiality, pomp, and phoniness. The powerful can shake their fists at it, the intellectual class may curse it, and the moralists can denounce it, but no one can make it obey the dictates of those who purport to stand above it, much less make it go away.

The market price is our salvation from the despotism of those who would rule us. The price of gas is a lovely example. And who benefits in the end? You and I. All the activities of the market are ultimately directed toward pleasing the consumers, the 99 percent who are the real rulers of the world. The 1 percent have no power in the face of global forces of competition, supply, and demand.

Take comfort from the gasoline price. It indicates that the powerful aren’t really what they believe they are. In the long run, decentralized markets always outpace and outwit the ability of elites to dictate and manipulate them. Every penny by which the price drops signals to the world: freedom can prevail even in a world in which the powerful are conspiring to destroy it.