Why gas prices are so high

From The New York Times:

Gas prices are spiking again — to an average of $3.22 a gallon, and close to $4 a gallon in many areas.

And some oil executives are now warning that the current shortages of fuel could become a long-term problem, leading to stubbornly higher prices at the pump.

They point to a surprising culprit: uncertainty created by the government’s push to increase the supply of biofuels like ethanol in coming years.

That has forced many oil companies to reconsider or scale back their plans for constructing new refinery capacity.

In hearings before Congress last year, oil executives outlined plans to increase fuel production by expanding existing refineries. Those plans would add capacity of 1.6 million to 1.8 million barrels a day over the next five years, for an increase of 10 percent, according to the National Petrochemical and Refiners Association.

But those plans have since been scaled back to more than one million barrels a day, according to the Energy Information Administration, an arm of the federal government.

“If the national policy of the country is to push for dramatic increases in the biofuels industry, this is a disincentive for those making investment decisions on expanding capacity in oil products and refining,” said John D. Hofmeister, the president of the Shell Oil Company. “Industrywide, this will have an impact.”

The concerns were echoed in a recent report by Barclays Capital, which said the uncertainty about the ethanol growth “will do little to accelerate desperately needed investment in complex United States refining units.”

“Indeed, it is likely to deter and further delay investment, if not rule out many refinery investments completely.”

I suppose that it shouldn't be surprising that the NYT would find this to be some kind of revelation. After all their go-to guy for economics is Paul Krugman (dean of the John Maynard Keynes School of the Terminally Wrong).

If "biofuel" was a better way to provide motor fuel for the public the oil companies would have already been making it. You see the oil companies exist to make a profit for their shareholders (the owners of the company). If they pass on a way to better provide for the public's needs (which would increase their share of business and therefore their profits) they are actually subject to legal action from their shareholders. Not to mention the loss of profits because a good idea rejected by one company will be snapped up by another.

The fact is that biofuel like ethanol is not a good idea. The only way that oil companies will use it is if the government forces them to. That coercion by the state creates a distortion of the market as producers are forced to accommodate legal demands that make them less efficient and consumers are forced to pay for things that they really do not want.

What we call "the market" in a capitalist country is the largest and most efficient mechanism for information exchange ever devised. The decisions made by every consumer to spend his money one way instead of another (or not spend it at all) together form the information pool which tells suppliers what to manufacture and in what quantities and at what price.

It is because of the market that you can walk into a supermarket and find fresh apples in January but not Wild Root Hair Oil at any time of the year. The market tells grocery store operators that people want fresh fruit in winter and the market long ago told Wild Root's manufacturer that it had become a niche product which it was pointless to attempt to mass market.

Any attempt by the government to step in and change the market calculus by legislative action has the same effect that wiring a random capacitor or resistor into the circuitry of your television set would have on your picture quality. It might not be very noticeable depending on where the anomalous component was inserted, but under no circumstances would it be an improvement.

I would love to believe that the government would learn a lesson in unintended consequences from this, but I very much doubt it. Politicians are addicted to their power the way a gutter junkie is addicted to his needle and cannot resist the urge to play at "doing good".