We (read economists) like to rely on supply and demand to explain fluctuations in prices. Case in point--later this week, I will use supply and demand to explain why a boycott of ExxonMobile won't lower gas prices. That's what we in the business like to call a teaser. Sometimes--and others would argue always--you have to examine the governments role in influencing prices. Here's a good example from CNNMoney:
As gasoline prices spiral upward ahead of the high-demand summer season, some traders and consumer advocates are laying at least part of the blame squarely on the doorstep of the federal government.
At issue is the gas additive MTBE, a (potential?) carcinogen. For years the feds have been tossing around legislation to ban MTBE. The Energy Bill last summer finally included the ban--effective early this year. Refiners have argued that they were caught off guard, didn't have enough time for the switch, were offered no liability to lawsuits and therefore the feds are partly to blame for the sudden gas price increase. The feds are arguing 'nonsense...refiners knew the ban was coming for years and should have been prepared.'
But Bob Simon, the Democratic staff director for the Senate Energy and Natural Resources Committee refused to take the blame, saying the change has been in the works for years and that energy companies should have been prepared.
"The refineries were betting that they were going to get MTBE liability protection, and they placed a bad bet," said Simon, noting that the committee's chairman said publicly last year that there was no way the product would ever get liability protection. "I don't know how much clearer it could have been."
I would argue that this is irrelevant. Although I don't have numbers to back me up right now, markets are amzingly adept at smoothing anticipated shocks. Even if the refiners were caught off-guard--which I doubt--I would bet the market wasn't. I would be surprised if it turns out that any of the recent gas price increases were caused by the MTBE ban. That shock was anticipated and incorporated long ago.
