Discover more from Oleg Dulin
Please don’t subsidize high gas prices
The government should do nothing and let the markets decide
Today’s gas prices have nothing to do with Ukraine. They also have nothing to do with oil prices. Today’s gas prices have everything to do with consumer demand and investor speculation.
Consider the following chart of UGA (US Gasoline ETF):
For years, we have steady trading volume of this ETF. Coming out of COVID lockdowns, however, we see orders of magnitude higher trading volume. What drives trading volume? Investor speculation and consumer demand.
Left alone, gas prices will find a level that is palatable to both consumers and investors. As of right now, they are not there yet. Consumers may find it inconvenient to pay more for gasoline, but the reality is they are not adjusting their behavior.
Let’s dig in a bit more.
I added USO (US Oil ETF, black line) as a comparison to the UGA chart. Up until April 2020, oil and gasoline prices fluctuated together. In 2020 we see decoupling. Oil is the cheapest it’s been in years, but gasoline is the most expensive it’s been ever. In fact, this decoupling has been going on since long before the Russian invasion of Ukraine and has nothing to do with the war.
The reason we see this decoupling is because, during COVID lockdowns, the demand for gasoline dropped precipitously. Oil refiners reduced production. Since then, the consumer demand has grown back to pre-pandemic levels, the trader speculation has skyrocketed, but the refining capacity has not met the demands.
This is why ideas such as giving New Jersey consumers $500 to compensate for high gas prices will only make the problem much worse.
So what should the government do to help consumers? Please, for the love of God, do nothing. Don’t release oil from strategic reserves, clearly, oil prices aren’t the issue. Don’t send checks to consumers, that will only cause inflation. Do absolutely nothing. Let gasoline prices find a balance between consumer behavior, refiner profitability, and trading speculation.
I have exciting news to share: You can now read Oleg from East Brunswick in the new Substack app for iPhone.
With the app, you’ll have a dedicated Inbox for my Substack and any others you subscribe to. New posts will never get lost in your email filters, or stuck in spam. Longer posts will never cut-off by your email app. Comments and rich media will all work seamlessly. Overall, it’s a big upgrade to the reading experience.
The Substack app is currently available for iOS. If you don’t have an Apple device, you can join the Android waitlist here.