Wednesday, April 26, 2006
The key to our conversation (with Energy Secretary Bodman) was that pricing is out of the hands of the oil companies, and has been for some time.
That kind of misunderstanding creates problems: The market process doesn't put "pricing" in the hands of any person or group. From David Boaz' libertarianism primer:
Businesses try to find out what you want and offer it to you. People who are trying to make money by selling groceries, or cars, or computers, or machines that make cars and computers, need to know what consumers want and how much they would be willing to pay. Where do they get the information? It's not in a massive book. ...
This vitally important information about other people's wants is embodied in prices. Prices don't just tell us how much something costs at the store. The price system pulls together all the information available in the economy about what each person wants, how much he values it, and how it can best be produced. Prices make that information usable to producer and consumer. Each price contains within it information about consumer demands and about costs of production, ranging from the amount of labor needed to produce the item to the cost of labor to the bad weather on the other side of the world that is raising the price of the raw materials needed to produce the good. Rather than having to know all the details, one is presented with a simple number: the price.
Notice each price. Each trade generates in its execution a by-product which is the rate at which goods exchanged. Each trade involves both a buyer and a seller, expressing alternately a willingness to pay to the seller and a willingness to produce and deliver to the buyer. Pricing is in the hands of the oil companies at the time they have something to produce and deliver (converting crude to gas and piping or trucking it to a distributor.) But it isn't either, because there's no price without a trade, and there are millions of trades. When the market closes at a price of $71.85 as it did today, all you know is the rate of exchange of the last trade of dollars for oil.
What is great about the market economy is how informative that by-product is.