NCPA - National Center for Policy Analysis

CREDIT MARKETS, NOT CONSPIRACIES FOR GAS PRICE DROP

September 21, 2006

With gas prices falling at the pump and crude oil trading at a six-month low, many have begun raising the specter of "conspiracy," claiming the trend is spurred by the coming election, says H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis.

However, in reality, nothing could be further than the truth.  "This is basic economics," says Burnett. "Markets, when not encumbered by foolish legislation to 'fix' a problem, work."

Burnett notes that the reason for the recent price drop can be attributed to several economic factors:

  • Previously high prices are bringing more oil to market, increasing supply. 
  • Drilling rigs and production are up, refineries are being expanded here and built in other countries for the first time in years, and new technologies are being applied to exploit traditional and non-traditional sources.
  • In response to high prices, consumers are conserving, decreasing demand; for example, sales of SUV's have fallen but increased for fuel efficient cars.
  • Also, the bursting of the speculative "risk bubble," as the Middle East has calmed. 

More Iraqi oil is reaching the market, Iran seems unlikely to face sanctions and Israel has left Lebanon. In addition, the hurricane season has been more mild than predicted.  This means inventories, which were built up as a hedge against future shortages, are high.

"Oil may never be $15 or $20 a barrel again," said Burnett. "But absent a significant political crisis, such as OPEC reducing supply, they will continue to fall."

Source:  "Credit Markets, Not Conspiracies, for Gas Price Drop; NCPA Expert Says Price Drop Due to Increased Supply, Bursting of the Risk Bubble," National Center for Policy Analysis, September 20, 2006.

 

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