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Elections, Politics

Obama gives us a lesson in Supply and Demand

Posted: October 18, 2012 at 5:00 pm   /   by

It’s a dispositive lesson, but a lesson nonetheless!

For years, I have been of the opinion that if economics 101 was required at the High School level, liberals would cease to exist.  At the very least, all their cockamamie theories of economics would finally be left in the dustbin of history.  One of the defining qualities of the far political left is its lack of understanding for the most basic and fundamental elements of economics.  As it happens, there was an excellent lesson in this lack of understanding illustrated by no less than our president Tuesday night during the nationally televised debate, where Obama said something quite stunning:

CROWLEY: Mr. President, could you address, because we did finally get to gas prices here, could you address what the governor said, which is if your energy policy was working, the price of gasoline would not be $4 a gallon here. Is that true?

OBAMA: Well, think about what the governor — think about what the governor just said. He said when I took office, the price of gasoline was $1.80, $1.86. Why is that? Because the economy was on the verge of collapse, because we were about to go through the worst recession since the Great Depression, as a consequence of some of the same policies that Governor Romney’s now promoting. So, it’s conceivable that Governor Romney could bring down gas prices because with his policies, we might be back in that same mess.

This exchange was overshadowed by several others during the course of the debate, which I have already talked about elsewhere, but this may just have been the single most instructive comment to come out of the evening.

Obama seems to believe the price of a given commodity, in this case gasoline, is tied directly to prevailing economic conditions.  Or to put it more simply, he thinks that price is tied directly to demand, because what he is saying is that since we were in a time of extreme economic hardship, demand (presumably) was low, and thus the price of gas was low.  He actually underscores this correlation when he says that Romney could bring-back low gas prices by driving the economy down again.

There are several obvious flaws with Obama’s interpretation, the first and most obvious being that economic conditions are very little better today than they were at the time of the “worst recession since the Great Depression.”  In fact by many measures, they are worse.  Unemployment is higher, and per-capita income is lower.  But let’s set that aside for a moment.  If Obama’s theory that gas prices correlate principally with demand, that would mean that demand in 2008-2009, when we were on the precipice of economic calamity, must have been lower that it is today.  One might readily assume this is true, particularly if you buy into the “common wisdom” that we greedy, gluttonous Americans have an ever-increasing appetite for oil.  However, the statistics published by the U.S. Energy Information Administration on gasoline sales tell a different story.  Demand, as measured by average daily retail sales by refiners has steadily dropped every year from 2008 through today:

In order for Obama’s theory tying gas prices to demand to hold-up, either overall demand in 2012 should be higher, which it clearly is not, or prevailing overall economic conditions must be terrible, and I know he doesn’t want to go there!  Of course the alternative is that his whole theory isn’t worth a crock of beans, and as most of us who paid attention during Junior High Social Studies class know, prices are determined by more than just demand.  Well, for those who paid attention, and then did NOT go on to steep themselves in Marxist economic theory!

In determining the market price of any product, service or commodity, the missing part of Obama’s equation is of course supply.  It is commonly called the Law of Supply and Demand, because any human system of commerce will eventually always devolve to this basic dynamic system, and it is the principle reason what all planned economies have eventually failed.  The supply-of and demand-for any given item or service exist in dynamic tension with each other.  Any factors acting to either reduce the supply or increase the demand cause the price of a given item or service to go-up.  So while demand for gas, as measured by consumption over the past four years has gone down, supply-side factors, principally cost in the case of gas, have had even greater influence.  Oil of course is a world market commodity, and the cost of oil is one of the greatest contributing factors in the price at the pump for gasoline.  When our government’s policies act to force producers to obtain oil principally from the world market, as opposed to domestically, we are stuck with prevailing oil prices in that market.  If on the other hand we produce more of our own oil, we free ourselves from the world market, and have to ability to reduce one of the principle costs involved in production.

The overwhelming majority of Americans understand the Law of Supply & Demand.  They understand the basics of how market forces work, even if the specific details are sometime complex.  When Obama tries to tell us that low gas prices are caused by bad economic conditions, I think it’s pretty obvious to most of us that this is nonsensical.  I believe the real question is, is Obama just saying this as empty campaign rhetoric, is he just trying to avoid taking responsibility for the effect his policies are having, or is it a glimpse of his fundamental beliefs and understanding about economics?  If it’s the latter,if he really believes this, we all should be very concerned.

Greg Conterio

Gregory Conterio grew-up in the middle of the cornfields of central Illinois, spent 12 years living in the People’s Republic of Los Angeles, and another 15 in Miami, Florida, giving him a first-hand perspective on the rich variability of American culture.  Although formally educated in zoology, he saw opportunity in the then emerging Information technology field 25 years ago, and has remained there ever since, although he denies being an early pioneer in the now fashionable trend of pursuing useless college degrees.  Having an entrepreneurial background, Gregory has long been a staunch advocate of free markets and minimal government intrusion into our lives.  He currently runs a small IT consulting firm based in South Florida, where he resides with his wife of 25 years, his daughter, three Whippets, and an unknown but growing number of chickens, having discovered belatedly the rural lifestyle is not so bad after all.

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Obama gives us a lesson in Supply and Demand