The price of oil has been rising in recent weeks purely as a result of supply and demand pressures. But news outlets have been sounding an alarm about the price increases and warning that, if unchecked, it might cause President Obama to lose the election. No doubt, there will be calls in coming months for Congress to hold hearings into oil companies' "windfall" profits.
The alarm over gasoline prices is largely misplaced. As the following graph shows, gasoline prices often fluctuate pretty wildly over time, and the rate of increase in prices only seems dramatic to the near past, when prices were relatively low. A best fit line would likely indicate that current prices are not much more than $1 per gallon higher than the average (inflation-adjusted) price since 1919. So, why all the ruckus?
Perhaps it merely reflects cognitive bias on the part of consumers and the media, who are more likely to compare present prices with recent prices, rather than prices over a longer period of time. More interesting to me is the possibility that public outrage over rising gasoline prices reflects notions of "moral economy" (stemming from medieval scholastic philosophy) according to which there is a "just" (very low) price of oil, any upward deviation from which is presumed to reflect profiteering by companies and/or political incompetence by government leaders.
Another interesting question is, why gasoline but not other important consumer goods, such as milk? Check out this graph:
Why doesn't the media respond to milk price spikes, like they do when the price of gasoline goes up? Why is no one calling for congressional hearings into windfall profits by farmers? Why do we simply seem to take for granted that the laws of supply and demand operate for milk, but somehow don't - or shouldn't - apply to gasoline?
Aside from the apparently disconnection of oil prices from general understandings of supply and demand, there is also a normative point to be made about the social cost of fossil-fuel use (which is certainly in excess of the current, relatively high, price) and the potential social value of rising fossil-fuel prices for spurring innovation in alternative energy technologies. Personally, I am not alarmed by rising gasoline prices but by the virtual certainty that they will soon fall again. I am, of course, an outlier. But I still think conventional price theory is a better guide to policy than the "moral economics" of medieval scholastic philosophers.