Why Are Gas Prices So High?

By Tommy Leung on 07/02/2008 in Politics

I live in New York City so I don’t really have to drive anywhere if I didn’t want to but, I do have a car: Nissan Altima with a decent MPG. My frequency of driving has gone quite far down since prices have started spiraling out of control. The last time I filled up the tank, regular unleaded was at about $4.15 a gallon. I saw prices at almost $4.40 the other day. These high and ever-increasing prices are incredibly irritating. Even those who do not drive are affected by it because the prices of everything else will also go up as long as gas is used in the transportation or manufacturing of the product. While politicians are trying to come up with bad new policies to try and lower the price of gas, we should be asking: why are gas prices so high?

As a student of Austrian Economics, the recent increase in prices of everything did not come as a surprise. Austrian economists have been talking about the problem of inflation and bad monetary policy for years. Most people hate economics. It probably has something to do with schools generally teaching Keynesian Economics. Did you know how to pronounce that? Probably not. The Keynesian teachings are generally flooded with lots of charts, graphs, and math. I’d imagine most people get turned off by that–I certainly do. Austrian writings are a lot easier to understand and don’t turn economics into physics with a multitude of formulas, equations, and symbols.

The simple reason for the high price of gas is inflation. Gas prices are not the cause of inflation but a result of inflation. News reports on the major news networks and syndicated across the Associated Press define inflation as an increase in prices and then go on to blame the high price of oil for inflation. This is a misunderstanding of the monetary system and the concept of inflation. Inflation is the increase in the supply of money which in turn drives up the price of goods and services.

Most people have a good understanding of supply and demand. If you had ever collected anything, you know that the more rare an item is, the more money it will be worth. In the case of money, it is the reverse. The more rare dollars are, the lower the price of goods; the less rare dollars are, the higher the price of goods. What we have today is an enormous amount of dollars in the economy thanks to the Federal Reserve and big government.

Inflation has been with us for a long time now. Alan Greenspan had inflated furiously after the Tech Bubble. The result of his inflation was the increase in the price of homes. This made everyone who owned a home feel richer and led to a boom in housing like we have never seen before. All that is currently imploding on itself with things like the sub-prime crisis and “credit-crunch”.

The only way to truly reverse this trend in oil prices is to stop the Federal Reserve from inflating and reduce the size of government. Drilling for more oil will help but, a low supply oil is not the major factor. The near future is going to hurt the wallets of a lot of Americans. I have no immediate solutions as to how one can get gas for significantly cheaper–I will likely just drive less as I can afford to do so. What we need to do is to educate ourselves and the people around us to the root cause of our current economic problems: Federal Reserve and big government. Until that happens, we will continue to be victims of these cyclic economic disasters.

By Tommy Leung