Just a few months ago, you couldn’t open a newspaper or turn on the television without being bombarded with angry denouncements of the greed of oil company executives.

Gasoline prices have risen to $3 a gallon and more, from a low of just above $2 last November. Consumers were feeling the pinch in their pocketbooks, and politicians were smelling blood in the water and a potent political issue for this fall’s campaign.

Democrats jumped on the issue, proposing everything from new taxes on oil company profits to a Manhattan-project style initiative to reduce the nation’s dependence on oil. Not to be outdone, Republicans jumped on the alternative fuel bandwagon, and President Bush himself declared America “addicted to oil.”

Politicians on both sides of the aisle took aim at the oil companies themselves: Democrat Senator Barbara Boxer talked of “shared sacrifices in tough times versus Oil Company greed,” and Republican Senator Trent Lott proposed voluntary—or even mandatory—profit controls on oil companies.

The thread that held together all this nonsense was based on a couple of obvious falsehoods: first, that our use of or dependence upon oil in this economy is something unnatural or created, an “addiction” that needs to be treated by massive government intervention in the economics of energy; and second, that the run-up in the price of oil was driven by the avarice of oil company executives who discovered that addiction and exploited it to their benefit.

Both of those assumptions are silly, and based upon a fundamental misunderstanding of basic economics.

Consider the first misunderstanding, that America is “addicted” to oil. It is as correct to say that America is addicted to oil as it is to say that America is addicted to corn and soybeans. Oil happens to be, on balance, an extremely economical and flexible way to generate and transport energy. It is, or at least has been, relatively cheap to use compared to other energy sources, and it is pretty much unsurpassed as a motor fuel.

In other words, Americans use so much oil simply because it is relatively cheap, abundant, and convenient to use. Pretty much the same could be said of our use of corn and soybeans. We grow so much and use so much of them because they serve our purposes well and economically.

Now of course, as the price of these commodities rise, for whatever reason, our tendency to use them changes. If oil becomes less cheap and abundant, or less convenient to use, our behavior changes. People begin to travel less, buy more efficient cars, and energy efficiency rises as a concern for more Americans. Over time, our consumption of oil will level off or drop; in fact, ever since the oil price shocks of the 70’s, the relative dependence of the US economy on oil has been dropping. On average, according to the Department of Energy, Americans are using less and less energy to produce a dollar of GDP over time.

Now consider the second misunderstanding, that oil prices rose so quickly due to the greed of oil companies bent on exploiting “oil-addicted” Americans. This assertion is even sillier than the first. While I have no doubt that oil company executives have their share of greed and avarice in their hearts, I can’t for the life of me explain why these executives were less greedy last November when gas prices averaged $2.10 than they were September 5th, when they topped out at $3.03, or today, when gas is back down to about $2.60 a gallon or less. I just bought some gas at $2.27 a gallon at my local station. Continued...