What I’m about to tell you flies smack in the face what you’ve probably already heard. Gas prices are not going up because of “corporate greed,” as the Occupy Wall Street movement and Congressman Bernie Sanders want you to believe. Instead, political instability in the Middle East (a failed Obama administration policy with Iran), the growing demand for oil in developing nations, and a pinch in the petroleum-to-gas supply chain (we haven’t built new refineries in decades, and there are less than 20 in the nation) are all leading to higher prices at the pump. But while I could talk for days about the real causes of this most recent price spike, I want to devote this article to demolishing a fake one.
The idea that “corporate greed” is responsible for an increase in prices in a market is wrong. Why? If one company gets greedy and raises prices, clients flee to their competitors, they lose business, and may even shut down. Thus, an arbitrary increase in prices is usually suicidal, and businesses that attempt it don’t last long.
Exception: In a monopoly (or sometimes, an oligopoly – a collection of 2-4 businesses), it is possible to raise prices almost at will. But few markets today are truly monopolies or oligopolies. The market for crude includes too many businesses to be considered a pure oligopoly, but high barriers to entry keep it from being perfectly competitive. To see a real drop in prices, Americans should try to make the oil market more competitive by reducing these barriers. Some barriers, like high capital costs, come with the territory. But others, like restrictive and unnecessary regulation, really hamstring the market at little gain, keeping potential competitors on the sideline (for a complete understanding of how a “prisoner’s dilemma,” rather than “corporate greed” forces companies in an oligopoly to keep prices high, I recommend you read The Art of Strategy by Dixit and Nalebluff, or Principles of Economics by Mankiw)
Now, I agree that regulations regarding safety are important and should be kept in place. But laws that restrict access to the US’s rich oil reserves only serve to tilt the balance in favor of the current oil companies. To encourage new firms to enter the market, pointless bans on safe drilling practices and other meritless regulations should be dropped, opening up the market for more competition and innovation… and lowering gas prices in the process.