May 11, 2022

It’s the Market Stupid

By Glenn

One year and 4 months after Donald Trump took occupancy of the White House, gas price averages rose from $2.46 to $2.99 per gallon.  Two years later, in May 2020, the average price per gallon had fallen to $1.96.

What causes these wild swings?  What had Donald done in office? Nothing.

Oil companies, not the government set prices.  Oil companies prefer higher prices to lower prices.  Oil companies are run by capitalists.

Capitalists make decisions to earn a profit.  They invest their money and want their sales price to exceed their production costs. This is called a profit.

Chief Executive Offices (CEOs) and Chief Financial Officers (CFOs) have a fiduciary duty to investors.  They must act in the interests of investors before anything else.  Before workers.  Before consumers.  Before America.

CEOs raise prices when demand is high and supply is limited.  Under normal market conditions they rig supply to match demand.  This allows them to set prices at a profitable rate.  Investors expect this special treatment.

In May 2020, oil companies would have preferred a price of $3 per gallon.  Unfortunately, they couldn’t have predicted the world-wide impact of Covid-19.  The pandemic caused an abrupt change in driving habits as people stayed home.

For nearly two years, oil companies lost potential revenue.  They looked for ways to cut costs below the revenue coming in.  They needed to make a profit.

CEOs saved money by simply shutting down wells and not drilling new wells.  Less oil coming out of the ground meant a smaller supply.  Another place to save money was in the refineries.  During the pandemic oil companies reduced refinery capacity.  A smaller supply commands higher prices even with the limited demand. These decisions created higher profits.

“There is a tremendous amount of muscle memory from Covid and the dramatic drop in prices,” said Ben Shepperd, president of the Permian Basin Petroleum Association in Midland, Texas. “If we were convinced oil prices would hold at levels of $75 a barrel or more for another three years, you would see a higher level of capital deployment.”

“Why U.S. Oil Companies Aren’t Riding to Europe’s Rescue,” NYT, 04 26 2022

Over the past year the United States and world economies recovered rapidly from the Covid 19 pandemic.  In the first year of President Joe Biden’s term, the US economy added a record 6.4 million jobsIn the first five months of 2022, over 400,000 American found employment ever month.

More Americans are enjoying the fruits of their labor.  They are driving more.  They are eating out more.  They are shopping more.  High demand drives up prices.

This is how capitalism works.  Investors demand a profit.  Companies fix prices to generate a profit.  Capitalists are not patriotic.  They are not charities.  They redistribute wealth from the consumer to the investor.

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