Saturday, January 1, 2011

Regulation of oil prices


Today's Dawn ran a story about the price of oil in Pakistan. What caught my eye was the language of the headline

Petrol prices raised by 9pc Ogra’s New Year gift to nation

Hidden in this sarcastic comment is the reflection of a nation's way of thought. People in Pakistan have succumbed to the illusion that government is supposed to keep prices in check. This is one among a number of myths about governments that have entered deep into the minds of the Pakistani people (and indeed the minds of the world's people in general).

What people don't realize is that government is not supposed to fix prices, or build houses, or make jobs. These claims are motivated only by political posturing, and are used by politicians to gain campaign success. They have nothing to do with reality.

The fact of the matter is that oil prices are going higher throughout the world! All oil producing nations are raising the price of oil and are predicting even higher rates. There seems to be no lowering of oil rates in the foreseeable future. Look at the history of oil prices. Do you see them getting lower? Yes there's a spike in 2008 when the US financial crisis hit, but that's about it. In fact, predictions are hot that oil might pull a $150 in the near future, possibly next year. And this time it will be a sustained price increase!



Here's a simple logical argument that anyone would be able to follow. Let's say even though the government of Pakistan purchases oil from Arab nations at an increasing cost, it does not raise domestic rates for oil and keeps them low. The domestic consumer is happy and thinks the government is the best they've ever had and would probably vote for them again. But look a little deeper. The government has to make up the cost. It is selling oil to the citizens at a lesser price than it costs the government to purchase it. So where does the extra money come from? The government does not make money because it doesnt produce anything!

Taxes! The money the government uses to bring up the shortfall in the petrol prices comes from taxes. That is, the money the government takes from you, the ordinary citizen by force! Sales tax, income tax, Withholding tax, RGST... you name it, they'll tax it.

In effect the citizen pays for the rising price of oil! There is no difference in price of oil between the international market and the local market. Because the difference is being made up by stolen money in the form of taxes. We are merely duped into believing that we are paying less for oil, while in reality we are paying exactly what we should be paying. In effect, price fixing has no effect whatsoever.

This is not to say that the increasing oil prices are a good thing. Of course not. This will definitely lead to a crisis! Think about it. Once the price of oil increases, the price of food increase, because oil is used to fill up the trucks that bring food from interior Sindh and Punjab to your city. Doesn't matter about gas prices because diesel trucks don't run on gas. Neither do freight ships (which are used to cover up shortfalls in crop production). Not only this, but increasingly we are dependent on oil derived products like plastics, asphalt and tar for roads, wax, lubricants and the list goes on. Here's a complete list by the way.

Expensive petroleum is bad bad news. For everyone.

But so is thinking that government can keep a lid on prices. It can't. It merely acts as if it can. Its an illusion. A smoke and mirrors show. Wake up and smell the putrid industrial effluent folks, you're being conned!

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