Tuesday, May 22, 2007

Just When You Thought it Couldn't Happen

Just when you thought it couldn't possibly happen, gas prices took another big jump around here today -- it's now 3.63 a gallon. It jumped a few days ago to 3.48, but had begun to back off a bit -- it went down to 3.38 (Can you believe that is DOWN?), and I thought I'd get some this evening. But at lunch time one of my co-workers came back with news of the price jump. Where will it end? The price of gas is driving up the price of food and other items. People will soon have to decide between gas and food, between spending the money for vacations or staying close to home. I think it makes a lot more sense if "supply" is the problem, to lower the price and impose rationing or to find some combination of price breaks and rationing. It's also important for people to think before they just jump in the car and head out. And these big SUVs have got to go -- There must be other ways to compensate for under endowment. I sure don't have all the answers, but we all need to brainstorm to find a way out of this dilemma. Otherwise prices will continue to rise to the point of causing revolution. Share your thoughts and ideas. Maybe someone out there has the answer. Is is you?


PSUdain said...

The answer is (to some degree) the high prices. As price goes up the commoditiy naturally rations itself. Nixon's and Carter's policies of price ceilings in the end only discouraged domestic production by constraining the profitability thereof. This in turn ended up causing prices to rise internationally, by the dampening of American production.

Don't forget that increased prices also can mean more American jobs. In my area, for example, they only pump when prices are high enough to make it worth it (they have to use advanced extraction techniques), and that means jobs for locals. (Thereby, I might note, making them more capable of buying gas and other commodities.)

Also, America still has the largest amount of oil in the ground in the world. We have over a trillion barrels of oil in oil shale out west. It just costs a little more to extract, so higher prices will open up that possibility to profitability. Then, after the initial investment is made and the production comes on line, the supply will increase, thereby putting a downward pressure on prices. It's the same thing (basically) that happened with North Sea production in the '70s. Oil got more expensive, and thus opened the possibility of investing in ocean platforms. (It got a lot more expensive, almost a sixfold increase, in the case of the Arab oil embargo of '73, and in a very short time.) This increased production, and in combination with Reagan's removal of price controls (which encouraged domestic production through profitability) put a lot more oil on the market and had the end effect of reducing prices to the very low levels of the 90s.

On the demand end one may note several things. Firstly, it is apparent that Americans have not yet reached the point where the collective demand curve exhibits a strong price dependency. We are still willing to pay for it. Secondly the International Oil Companies (IOCs) have relatively little control of oil prices, with about 70% of currently accessible reserves (i.e. our shale oil doesn't count) are held by state owned companies. IOCs have moved from their role of producers in the first half of the 20th century to the role of buyers and resellers in the second half and onward. They are (almost) as much at the whim of international demand as any other buyer. Thirdly, we cannot have an impact on the strong growth in demand in China and India. And with a 90 million member waiting list for automobiles in China, it's not going to stop growing anytime soon.

So where does that leave us? I've already answered part of this. There is still a lot of oil in the U.S. it's just been too expensive to get at, so higher prices will help bring that onto the market (which in turn helps to lower prices). High oil prices also fuel the alternative energy industry. As oil goes up, alternatives look more and more attractive as their cost (relative to that of petrolium) goes down. Higher oil prices mean more investment in alternatives.

One potential policy to increase domestic production would be a cut in the taxes imposed on domestic oil and American oil companies. You often hear the number $39.5 billion thrown about for Exxon's profits. That's a real figure. But what you don't often hear as much is the U.S. government's take: $100.7 billion in taxes. And as we are all taught in even basic econ courses, a tax is never really paid by the company. Taxes are always burdened upon the consumers, no matter at what level they are imposed. A decrease in federal take allows lower prices by shifting the supply curve, due to lower production costs.

Wow...that was longer than I thought it would go...sorry.

Anonymous said...

I don't have any easy answers.
I try to drive a car with high mpg.
I watch the # of drives.
I eliminated a few trips to 'stay home'.
I don't spend as much on certain items.
Perhaps if all of us did so, the economy would be threatened enough to have someone do something useful, like develop alternatives to gasoline.
Urspo of SpoReflections