Why Gas Prices Are Going Up

Do big companies collude to set prices? Absolutely. More to the point, so do countries - think OPEC and oil. The chart to the left shows that oil usage is down to 1995-96 levels and gasoline consumption is down to 2001-2002 levels, yet prices keep climbing explosively. Something is rotten in Denmark, but what?

The traditional (and President Obama's) culprit is Big Oil and it would not surprise me that some gouging is going on. Speculators are also bidding up oil futures and the argument goes thereby running up prices. But speculators only make educated bets on supply/demand and certainly don't bet against themselves, so their behavior is more symptomatic of market conditions than determinative of them. Then there is OPEC. Did you know that only about 10% of the world's oil is controlled by private oil companies and the rest by governments? OPEC has been scaling back oil production since 2008 and has succeeded in a run-up of oil prices against falling demand. When Iran suddenly rattled sabers about closing the Strait of Hormuz the market reacted by spiking up and over the magic $4/gallon price in the U.S. that has really sent demand here into the dumper. Not surprisingly, OPEC has just ramped up production by 1/3 to try to stabilize prices and prevent an already weak world economy from hitting the canvas - it's tough to sell oil when there is no demand. Thus it is the usual suspect - Iran - that is probably most responsible. Iran's behavior, though, is pretty predictable in that oil is its only major export, its economy is in shambles, and it needs high oil prices to make it. The hidden suspect, however, is the West and the U.S. in particular.

Iran's ability to cause trouble exists only as long as the West is unable or unwilling to take effective action to deal with it. If Iran closed the Strait of Hormuz and its forces were immediately vaporized, the market would react with price stability, albeit with a short term blip during the actual hostilities. The West has dithered and done pretty much done nothing vis a vis Iran and the market has reacted by giving the Iranian threat more credence than it might otherwise. Once Iran goes nuclear the situation will get even worse. So the bottom line - there are a lot of players in the mix here but the biggest ones reside in Washington, DC, London, Paris, and Berlin.