Why Is Gas So Expensive? Economics 101 ~or~ Look At My Cute Kitty-Kat

Pop Quiz! The price of oil at the gas pump is inordinately high. What is the cause of this?

(A) It’s more expensive now because there isn’t any Russian oil available during the war.
(B) Joe Biden is an evil Communist who hates oil companies and canceled the Keystone XL Pipeline.
(C) Oil companies are evil greedy bastards and are just raising prices to steal money from us.
(D) Complicated economic shit I don’t fully understand.

While there are multiple influential factors, the real answer is, of course, (D). I’m an avowed Leftist, but that doesn’t mean I’m completely ignorant about economics. That being said, I know that many of my political allies and friends really don’t care a great deal about economics, especially because the jargon is primarily used by obnoxious right-wingers and hedge fund managers and Crypto-”bros”, many of whom don’t really understand it themselves, either.

So, this is to you: If you consider yourself generally left-wing, but you’re not really comfortable explaining why it’s not (B) above (in case you get into an argument with some right-wing douchebag), here’s my best attempt to help you out.

Let’s start with what is actually meant by Supply and Demand. The “Law” of Supply and Demand is something we’ve observed in any open market. I think most of you know this, but let’s just imagine a really basic example to illustrate the point. Let’s say that wheat generally costs $10/bushel. Now, imagine that one year, there are 100 bushels of wheat, but the citizenry only needs 80 bushels. As such, the wheat-producers are stuck with a surplus. Storing it would take up valuable space, so they say to the citizenry, “Take it off our hands — I’ll give it to you for free if I have to, it’s costing me money just to keep it!” This, of course, sets up a frenzy, like Crazy Eddie slashing prices, and citizens offer $8, $7, $6 per bushel of wheat. Oh no! At these prices, the wheat producers will go bankrupt! So what do they do? They stop this silly price-slashing and say, “Actually, we won’t go lower than $8, even if we have to burn the wheat,” because if the citizenry gets used to paying $6/bushel, then next year the wheat producers will all go bankrupt trying to keep up with that lowered price.

In the inverse situation, the citizenry ran out of supplies last year, and they need 120 bushels now. Suddenly, there’s not enough to go around. Like auctioning off the last house in a game of Monopoly, the wheat producers hold all the cards! They can sell that last bushel to the highest bidder, and this “drives the price up” overall. But eventually, both of these effects will cancel each other out, and the “equilibrium” price will be met once supply and demand even out.

So, the first lesson is: This is not at all what happens in a modern economy. Like, not even a little. There’s plenty of wheat, and plenty of oil, and plenty of storage space. We haven’t faced a real scarcity of anything in generations. However, the expectation of increased or decreased supply or demand has an impact on investors, through the Markets. Basically, it works like this:

1. Something affects Supply (such as a strike, or a hurricane, or a pandemic), driving it, let’s say, down.
2. It becomes, according to Computer Algorithms, more likely that supply will be down. As such, these Computer Algorithms funnel investor money into speculative investments on the price going up. [Exactly what this means is really complicated, but for simplicity’s sake: speculative investment is exactly like gambling on the outcome of a football game, except one of those activities is an addictive pastime that causes heartbreak and destruction to everyone around you, and the other one is gambling on the outcome of a football game.]
3. Like a self-fulfilling prophecy, the price of the commodity, that is, the price of a bet that the price will go up, goes up. Investors are encouraged to continue to buy it more, and the cycle continues.
4. Eventually, the price is too high, and no new investors are willing to pay that much for the commodity. Whoever made the last/highest bet, like the sucker in a game of Bridge, is out of luck, and sells for as minimal a loss as they can muster. However, having sold for a loss, the price has now gone down, and the Computer Algorithms take note.

What’s currently happening with the price of oil is just this. The price of oil on the Market has gone up, due to speculative expectations.

I need to reiterate just how much this goes against our intuitions about prices. Let’s say you run a small mom-and-pop oil company. I bet you imagine you calculate your costs and pricing using the following factors:

• Original (sunk) costs of finding the oil and drilling for it;
• Ongoing lease of the oil fields from the government;
• Kickbacks to corrupt government officials to keep them off your back;
• Slush fund, especially in case of oil spill and environmental/pr disaster;
• Cost of refining the crude oil into gasoline;
• Cost of shipping it across the country to all of the gas stations.

Then, you add a little extra for Profit, and you sell it to the individual gas stations for that total price. You make money, everyone gets their gasoline, and the world keeps spinning, until of course we all die from running-out-of-fossil-fuels or cataclysmic-global-warming or just good old fashioned exhaust-fumes-induced-athsma.

Once again, it’s important to note that this is not at all how anything works in a modern economy. No Big Business sets prices by thinking “costs + profit = fair price.” Rather, the “price” is set by the Market, and they’d better hope that the Costs are less. Or, rather, they don’t; it doesn’t matter, because no one makes money by revenue anymore, anyway.

The messed-up reality of the modern economy is that more money is made gambling on the prices of things than on selling the things. It really doesn’t matter what “thing” we’re talking about; this is just the reality of the power of the markets. If you run an oil company, you are rich because the stock price is high. It doesn’t matter if you make more or less money than your costs; it matters only that you gamble properly on your own business. That’s how come, when small businesses go bankrupt, the owners are broke, but when Big Businesses go bankrupt, the owners are millionaires (or billionaires). That’s why, when Mark Zuckerberg took Facebook public in 2008 and became a Billionaire, that same year Facebook’s total profit was negative 56 million dollars. Please wrap your head around that reality before going further. Mark Z. became a billionaire because he ran a business that lost millions of dollars every year, but that people gambled on making money in the future. (And the gamblers, it should be pointed out, make sure they can’t actually lose; when they gambled on Elizabeth Holmes, with Theranos, and lost, they threw her in jail. Imagine if you could throw the Rams in prison for failing to cover the spread in last year’s Super Bowl– they’d probably have gone for an extra score!)

This means that, instead of using the bullet-point list above, when you’re actually starting a business in America, your approach should be something along these lines:

• How much is this idea worth, in terms of how much capital investment I can raise?
• How much is it worth, in terms of how much I can borrow off its potential success?
• How much hype can I generate around it, such that it drives this value up, and I can then use that theoretical evaluation to raise/borrow more funds?

The end goal, of course, is to eventually go public, wherein you sell pieces of this potential out to the investing public (a very small subset of the actual American public, I might add), and then you have turned your idea and its estimated value in to actual $$$ that you can use to buy houses, yachts, politicians, etc. At no point does it matter if you are making any revenue relative to cost; instead, your wealth, and that of your business, is entirely related to its market value.

Back to Oil: Right now, the Market Price of oil is high. As a result, the oil producers can’t sell it to the gas stations for less. If they did, it would trigger a whole slew of Computer Algorithm-related investment disasters. To oversimplify: If it costs less to buy actual gas than to invest in gas, then either some smart schmuck could buy up all the oil in the world for cheap and then immediately resell it for a massive profit (no one’s going to actually do this, but the Algorithms are in place to make sure nothing bizarre like that could happen), or the current Market Prices would tumble and there’s no telling how low they would go.

But, even more poignantly, if they sell oil for less than it’s currently valued, the price of oil will go down, and therefore the value of the company will go down. Remember how I said that all businesses really make money on the gambling on the price, not on the actual sales? Well, in this case, here’s what it means: that the company will make itself worthless if they don’t sell the physical oil for the same amount that the oil is “worth” according to The Market, which is to say, according to the bets made by various gamblers (aka “investors”). The value of the oil is not calculated by how much it costs to produce, or even how much they could sell it for; it’s how much investors are gambling it should be selling for, and that’s a price that no human has the power to alter by will. The current value of the oil, on the commodities markets, dictates the only price they may sell it for. Selling it for less would be giving away the oil for less than it’s worth, which would actually be failing their fiduciary duty to their shareholders and is illegal. Again, remember that the value of the company (and the net worth of every shareholder) is not tied to how much revenue they can bring in by selling the oil to you at the gas pump, but rather to the value of the oil on the market today.

Furthermore,The Petroleum Exporting Countries (that is to say, OPEC) stand to gain nothing by helping us out with cheaper oil; they’re delighted that the Market is driving up prices, as are the shareholders of Exxon, and everyone along the way whose profits are going up now. Eventually, this bubble will burst, as they all do, but it will happen according to Market Forces, which again are the self-fulfilling prophecies that are based on observing people’s behavior in a free market, but are now actually built-in with the way investors behave, largely guided by Computers.

This is why there’s really nothing we can do, in the short-term. There is no way to force the price of oil down, except to go on strike and refuse to use it — which we can’t do, because it’s a necessity. Market Forces are really terrible when it comes to necessities, because demand is so constant and so high that it is way out-of-balance, and always will be. This is why it makes no sense to allow this silly little gambling-on-commodity-futures game to be used on things like oil, or water, or healthcare, or housing. Doing so creates, inevitably, a capitalist dystopia where our entire economy is built around a giant game to enrich the already-rich, at the expense of the vast majority of us paying more than we have for services we simply can’t do without. In other words, you know, the world we currently live in.

In the long-term? I don’t know what to tell you. We choose this dystopia because we’re led to believe it’s better than, like, Communism or Feudalism or any other economic system that isn’t built on gambling. The evidence is, indeed, that there are a lot more benefits to be had from this particular nightmare than from the other available nightmares. But the result of that compromise is exactly this: Speculative investment takes real-world events that don’t actually affect costs and uses them to drive up or down the prices or values of things, and because every large company’s only goal is to increase its value (not its profits), you will be overcharged for gasoline while the shareholders of Exxon make craptons of money off of you, and use that money to pay lobbyists to sway politicians to convince dumb Republican voters that the only way to stop you from turning all their kids Trans is to prevent environmentalists from saving the world from the various ways that we are slowly destroying our climate by the burning of all of this oil that’s too expensive for us to buy.

On the upside, look at my kitty-kat. Isn’t she cute? Thank God for beautiful kitty-kats.