So yesterday, a dialogue of sorts opened up between Tim Worstall of Forbes as well as the Adam Smith Institute and myself. Forbes published a piece of work by Worstall in which Worstall makes these claims about gasoline prices in America:

  • "Futures speculation doesn't change the price of gasoline one whit"
  • Americans do not set the price of gasoline in the USA
  • The global balance of supply sets the price of gasoline in the USA 
  • Futures trading does not affect the price of physical commodities
  • David Ricardo rendered an Iron Law of One Price 
Worstall addressed me and said this bit of foolery,

"[A]t the more general level gasoline prices are set by the international price of crude oil. If this were not true then gas prices would not move in lock step with that price of international crude. Given that they do therefore they must be so influenced...There are significant gasoline exports from the US: so the market is so integrated."

Worstall's beliefs are quite absurd. Worstall believes that crude oil prices set the price of gasoline. Worstall tries to defend the false belief that input prices set output prices. In so doing, Worstall expresses the fallacy that costs set price.

It was Worstall's beloved David Ricardo who is well-known for having started that fallacy. It is Karl Marx who is well-known for perpetuating that fallacy in is his foolish “Labor Theory of Value”.

If it were true that crude set gasoline, that is, if the fallacy of costs set price were true, then why do refiners go out of business? Why do retailers go out of business?  Why wouldn’t businessmen merely charge costs to avoid bankruptcy? Why wouldn’t businessmen merely raise prices at will to cover increasing costs to avoid bankruptcy?

Crude oil prices do not set gasoline prices, ever. Gasoline prices for gasoline bought by retailers are set by futures markets players. To believe anything else is to reveal profound confusion on the matter.

Futures speculation sets prices of refined gasoline purchased by retailers. At the delivery date of a futures contract, someone must take physical delivery of that refined gasoline at the settlement price of the contract.

The entire purpose of futures speculation is to set prices of commodities. In so doing, futures markets players keep the flow of gasoline to retailers both in times of glut and in times of shortage.

Speculation into graded contracts creates a steady, active market for property of all kinds without respect to on-the-spot winning bids for what is on offer at any moment. The purpose of organized futures speculation is to give rise to consistent profit from transmuting property as capital into property as wealth under efficiency.

Gasoline retailers are price takers of the gasoline price set by futures markets players. Oil refined into gasoline is the product they sell at retail. Gasoline retailers are retailers the same as supermarket operators who sell milk, eggs, bread, meat.

All prices adhere to the one and only true law that governs all of commerce — the Law of Prices. The Law of Prices holds the winning bids of purchase and sale in the face of what is on offer sets the price.

It is drivers alone who buy gasoline who set the retail price from their winning bids.  Once futures players set the price of gasoline for retailers, retailers try to make a go of it by accepting prices set by drivers who buy gasoline.

The whole trick of business is producing so that one can adhere to the Axiom of Profit on given prices set by winning bidders. The Axiom of Profit holds the sum of sales on prices set by winning bidders must at least equal the cost of production, otherwise the seller goes to ruin.

If drivers drive less, buying many thousands fewer gallons of gasoline, retailers shall be forced to accept lower winning bids for what they have on offer.  For some, owing to inefficiency, they shall sell at a loss and get forced into bankruptcy. That is the great Axiom of Profit in action.

In 1994, there were 202,800 retail sites for the sales of gasoline. In 2012, that number had fallen to 156,065. The total number of sites has fallen -29.9% falling at a rate of -1.4% a year.

Thus, it can be seen that between 1994 and 2012, many retailers could not make a go of it profitably on extant prices for gasoline set by futures speculators. Therefore, these unprofitable retailers exited the field.

Worstall is quite wrong about all of it, as usual from my experiences reading his work. Perhaps Worstall should find another occupation as he seems to be wrong, consistently on all matters of commerce.

Reality thoroughly contradicts Worstall. As to prices of gasoline, the EIA reports prices in the USA differ by region. As well, Bloomberg reports prices for gasoline differ by country. Thus, it can be seen there is no fictitious global balance of supply and demand that sets the price of gasoline in the USA as Worstall so wrongly believes.

Further, imports of refined gasoline can come into the USA profitably only if outlays to refine elsewhere are low enough such that when combined with transport outlays, foreign producers can at least break even on prices set here in various regions of the USA. As can be seen here by PADD (Petroleum Administrative Defense Districts) region, most foreign exporters of crude to Americans do not also export gasoline likely because it is not profitable to do so.

David Ricardo never wrote about an “iron law of one price.” Germans academicians stuck Ricardo with the phrase, “the Iron Law” and they did so because Ricardo had written something about wages only and not other prices.

Specifically, Ricardo claimed there is a tendency for population to rise as soon as wages would rise above bare necessaries to sustain living thus. This thought became known as the "Iron Law of Wages."

Worstall tries to make an appeal to authority by mentioning Bank of Sweden laureate, Paul Krugman. According to Worstall, Krugman claims futures trading doesn’t affect the price of commodities.

Krugman is an expert in academic economics. However, Krugman appears not to know anything about commerce.  Like Worstall, Krugman is a shop-talker and not a man who deals in profit and loss from selling stuff. Krugman works at think tanks and he teaches.