It Is NOT Price Gouging

Too many of you whining individuals do not understand enough about economics. If you have never heard of the commodity futures' markets, you need to sit down for a crash course in how the world works.

Hurricane Katrina's path into New Orleans was determined several days before the September 2005 commodity futures' contracts expired.

Our economy works on a system of "supply and demand". When the demand for a product exceeds the availability of the product, that manufacturer can afford to charge a higher price for that product. Why is that? Because someone is bound to pay the higher price. IE: There is only 1 jelly-filled doughnut left at the auction. There are 7 "people" standing around waiting to buy the doughnut. That doughnut will probably be sold for more than $4.00. It wouldn't surprise me if it sold for more than $10.00. The $10 price will be paid because there is a limited supply with a greater demand. Likewise, if there were 20 doughnuts left with only 2 people there, the doughnuts will probably sell for cents each. Not the greatest of examples, but it is one that works. Another example would be ticket "scalpers". Apply tickets to the already-typed example.

Back to the futures' markets. Contracts traded months in advance before the contract matures or "expires". When a contract expires, whoever is holding it at that time will take delivery of said contract (lumber, gold, cattle, natural gas, etc). Using General Mills as an example, they don't only make money when you buy their cereal. They also (attempt to) make money before they ever receive the grain and wheat that they will be using to make the cereal. This is done on the commodity markets. Prices fluctuate on the futures' markets as do the prices on the stock market. General Mills will try to buy or sell contracts in order to make money on the movement of the day, week, or even several months.

As I stated earlier, the September contracts on unleaded gas were to expire days after the strike of the hurricane, which was, September 01, 2005. The speculators saw that the supply of unleaded fuel would be affected. They, therefore, began to buy contracts of unleaded gas. When people begin to buy, the price always goes up. What day did we notice the price of gas go up at the pumps? In my area, on 31 AUG the price of gas went up significantly. 01 SEP we see the price of gas even higher. A factor that people are failing to connect is that the US failed to produce and provide several million or even billion barrels of oil, due to the storm*. This has created an even larger shortage of fuel. (Thank you OPEC.) Now, with shipping having been interrupted (New Orleans is a major port), fuel deliveries are either being delayed or diverted to other ports. As anyone who is in business knows, every day additional day that a product is not available to a consumer is lost money. This is the first new cost the company must overcome. The second new cost the company will need to overcome is the additional cost of moving the product to the alternate delivery site. The third cost incurred will be the added transportation cost after the product has been delivered to the mainland. For example, if fuel is normally brought to New Orleans and is then diverted to Tampa Bay, FL, the driving of the fuel from Florida to the Louisiana distribution points will be another incurred cost.

As you can see, these costs continue to build on top of each other. Do you expect the companies to simply swallow the loss of revenue? As always, the consumer will be the one to pay the balance.

If you would like to watch the futures' markets, see this site. Walter E. Williams also wrote an excellent article on this subject as well.


Crispy


*The US is the third largest oil producing country in the world. Saudi Arabia and Russia are first and second.