[340] Of OPEC and gas prices in Ann Arbor

The gas prices here are crazily high. The last time I checked, it was around $1.95 per gallon. The lowest was probably $1.85 per gallon and that was in Ypsilanti. I can’t imagine the gas price in California; it has probably long passed beyond the $2.00 per gallon benchmark. I believe the cheapest gas price would be in Indiana, somewhere near Michigan City.

Earlier this week, Reuters reported that the OPEC President Purnomo Yusgiantoro believed there is an oversupply of oil in the market. Of course, Saudi Arabia and a few others oil producing nations have been saying the same thing in the past few months.

I on the other hand am not so convinced. Seeing the rising gas price certainly signals shortage of supply. Saying otherwise is anything but the truth unless the traditional downward sloping demand and the upward sloping supply curves are somehow wrong.

There are only three ways price could go up; the increase of the generic demand curve while everything is constant, the fall of the generic supply curve while the demand curve is unchanged or when both of the previous cases happen at the same time.

At the same time, despite the talk of inflation, I believe inflation has nothing to do with this; the only explanation is the supply and demand graph.

Therefore, OPEC is not telling the truth, or at least they are not telling the whole story. In my opinion, there are only two viable explanations and one conspiracy theory.

One, the quantity of crude oil is fast declining and they do not want to alarm the world. And thus, they are keeping saying the opposite of the obvious – there is an old saying that goes if you keep telling a lie, it becomes the truth – there is an oversupply of crude oil.

Second, OPEC is simply trying to capitalize on its monopoly power by charging the consumers above its marginal revenue. Before the rise of price, I am sure OPEC charges the consumers above its marginal revenue. Right now, if the second scenario is true, I am sure that they are increasing the distance between their marginal revenue and demand curve and thus, gaining great profit.

The conspiracy theory is that the Muslims countries, which make up the majority power in OPEC, jack up the price in order to punish the US. Yet, this sounds too fictionous if you ask me.

In any case, we the environmentalists are laughing our ass out seeing those SUV drivers pumping up the increasingly expensive gas into their tanks. And hey, it is fun to utilize the economic theory that describes the income and substitution effect of these SUV drivers. It is economics at work for us and cruel humor to savor by us.

Alternative energy now!