Oil

[jluetjen]

Originally Posted by EarlyPorsche

Just a hypothetical question: does the fact that oil is almost as vital as many other daily use items make the price gouging easier for the [whoever you think or want to think is behind oil prices].

No. A commodity is a commodity. By definition a commodity is an undifferentiated product, which means that my oil (corn/soy/wheat/coal/tin/gold/etc) is pretty much the same same as my competition's. That based on readily identifiable characteristics you couldn't tell them apart. It really doesn't matter if it is vital or not.

As a result deals are made on price. The low cost producers should be able make the largest margins, or discount their price the farthest thus ensuring that they sell out of their product.

Unlike differentiated products (such as premium sports cars) it is very difficult to "gouge" a commodity market. Just about the only effective way that anyone has to discover to date is to form a cartel. That's all well and good, but it is very difficult to keep a cartel from leaking. The reason behind this once again is just basic supply and demand.

On an open market the the price is set by the number of buyers and sellers. If there are more buyers, the price gets bid up until all of the units are sold. If there are more sellers, the prices are discounted down until all units are sold. When prices go up, more supply is brought on-line to take advantage higher price.

Whenever a cartel succeeds in limiting supply (thus driving the price up) and leaving some product unsold in the cartel's inventory, other (non-cartel, or cheating cartel members) discover that if they quietly undercut the cartel's price thus allowing them to sell all of their inventory (and making the largest profit) and leave the cartel holding the bag. The cartel can retaliate by selling some of their inventory below the competitors price -- thus starting a bidding war. Eventually the price settles back to a market equilibrium. At the same time, the buyer who can't afford the high prices will find alternatives. I'm seeing this in gold today where in the semiconductor market IC companies are replacing gold wires with copper wires wholesale. This will cut the demand which will put more pressure on sellers to lower their prices.

This is not one-sided. Buyers can set-up cartels too -- for example when Massachusetts set-up Romney-care and defined limits of how much buyers can pay for insurance. The problem with this is that when this is done, the sellers will take supply off-line because their margins won't be high enough. The result winds up being a shortage of supply. A classic example of this was in the USSR where bread prices were set artificially low (equivalent to about $0.05/loaf in the US). Sure, everyone could afford bread, but no one was selling it. The result was that there were lines around the block at bread stores, which had no inventory of $0.05 loafs.

To be honest, if the government really wanted get us off of oil, they would find a way to set artificially low prices. When faced with the uncompetitive selling price many produces would shut down their wells voluntarily. The result -- a reducing amount of oil sold. It sounds good, but the result would also be a thriving black market in oil, just like the USSR used to have a thriving black market in bread.

In the long run, the market will always win.