More great thinking from politicians and others

This from a New York Times article on House Judiciary Committee hearings on the price of petrol in the US.

At another point, Ms. Waters [Maxine Waters, Democratic Congresswoman from California] brazenly suggested that perhaps the American oil industry should be nationalized, acknowledging that it was an “extreme step” but one that might be necessary if outsize profits and exorbitant gasoline prices continued.

Now that will help! But our own Prime Minister doesn't trust the oil companies either

But the PM is still wary when it comes to the oil companies.

"I'm a bit suspicious of big companies in the oil field where everything seems to work synchronised rather than have competition...I'm reflecting the suspicion of the ordinary punter," she says.

But bad thinking on petrol price doesn't occur just in the government. This from the consumer.org.nz mediaroom on the 9th May 2008;

In April BP hiked the prices four times (from $1.779 to $1.889). The other four major oil companies usually followed almost immediately, which Consumer NZ says shows a lack of meaningful competition in the market.

Acually no. Even if the market was perfectly competitive prices will still move together. Simultaneous price movements tell you nothing about how competitive a market is. Obviously price movements will be simultaneous in a monopoly, as there is only one firm, but it is also true that prices will move together in a perfectly competitive market as the single market price is determined by supply and demand, not firms, and in an oligopoly, as in the oil case, the market price will move from one Nash equilibrium to another simultaneous. So if we see simultaneous price movements we learn nothing about the nature of competition in the market.

Perhaps politicians and those at the Consumner Magazine should read the Washington Post more (and take Econ101). In a recent article it is noted that

"The basic story that has brought oil from $20 to $130 dollars is that world demand is growing robustly when world supply is not," argued Jeffrey Rubin, chief economist of CIBC World Markets. "As a result, we need ever-higher world oil prices to kill demand in the [industrialized countries], which is exactly what's happening."

While U.S. demand has leveled off, Rubin said, demand in China is growing at a 12 percent rate, more than the 8 percent rate he forecast. While the extra increase in China is probably because of short-term factors, such as the earthquake or hoarding by the government in preparation for the Olympics, Rubin said even the lower rate would keep world demand growing briskly.

But as Thomas Sowell has pointed out the problem with the supply and demand answer is that it isn't emotionally satisfying. As Sowell asks

Is there anything complex about the fact that with two countries-- India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply?

He goes on to point out that

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

And all round the world oil companies make great villains.