Nate Oman Response: Why Gas Prices Are High

Actually, gas prices are high because global oil prices are high. Unlike the oil hike of the late 1970s, however, today's oil prices are a demand rather than a supply phenomena. What is driving up the price is increased global consumption. The surge here, however, is not from the United States but rather from India and especially China. These are two nations's whose populations dwarf the United States. As their economies grow they demand more energy and buy more oil, which drives up prices. China in particular is absolutely exploding economically, which is what is costing American's more at the pump. We have high prices because of supply and demand rather than Bush's and the Congress's refusal to institute what are essentially price controls.

The good news about the growth of the Chinese economy is that it is largely export driven, which leaves the Chinese with a huge amount of dollars. They are mainly using these to buy government securities, which is why Bush et all have been able to run huge deficits without an interest rate spike. In other words, high gas prices suck, but the Asian economic growth that is driving them is at least allowing American's to get cheap home mortgages. Of course, lower interest rates end up getting reflected in home prices, so it is not clear you get much gain out of that either...Real economics is much more complicated that dumb sound bites, isn't it?

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