Sound logic on gas prices

[Brucelee]

More logic on gas prices!

An oil 'crisis'?
Thomas Sowell (archive)


August 23, 2005 | Print | Recommend to a friend


With oil prices passing the record-breaking $60 a barrel level and heading even higher, the word "crisis" is now being used and all sorts of political "solutions" are being proposed. Is there really a crisis?

One of the dictionary definitions of a crisis is "the point in the course of a serious disease at which a decisive change occurs, leading either to recovery or to death." Is that where we are when it comes to oil? Are we either going to solve the problem of oil or see it destroy us economically?

Political and media definitions of "crisis" are much looser than the dictionary's definition. In political semantics, the word "crisis" has come to mean any situation that someone wants to use to justify doing something that will be called a "solution." Crises are a dime a dozen by political and media definitions.

Almost as common as crises are conspiracy theories. Whenever the price of gasoline shoots up, California's Senator Barbara Boxer can be depended on to demand an investigation of the oil companies. The fact that previous investigations have found no conspiracies is no deterrent.

Why, then, are oil prices so high?

There is no esoteric reason. It is plain old supply and demand. With the economies of huge nations like China and India developing more rapidly, now that they have freed their markets from many stifling government controls, more oil is being demanded in the world market and there are few new sources of supply.

What should our government do?

We will be lucky if they do nothing. But, with Congressional elections coming up next year, that is very unlikely. Candidates for Congress next year, and politicians hoping to run for President in 2008, are virtually guaranteed to come up with all sorts of "solutions."

These "solutions" will be packaged as brilliant new ideas, courageous and far-seeing. But most will be retreads of old ideas that remain untested or which have been tested in the past and found wanting.

Price controls, arbitrary new higher gas mileage standards for cars, "alternative energy sources," and other nostrums are sure to surface once again.

The last time we had price controls on gasoline, we had long lines of cars at filling stations, these lines sometimes stretching around the block, with motorists sitting in those lines for hours.

That nonsense ended almost overnight when President Ronald Reagan, ignoring the cries of liberal politicians and the liberal media, got rid of price controls with a stroke of the pen.

What happened is what usually happens when government restrictions are ended: There was more production of oil. In fact the 1980s became known as the era of an "oil glut" and gasoline prices declined.
Today production is being held back, not by price controls, but by political hysteria whenever anyone suggests actually producing more oil ourselves. Organized nature cults go ballistic at the thought that we might drill for oil in some remote part of Alaska that 99 percent of Americans will never see, including 99 percent of the nature cultists.
People used to ask whether there is any sound if a tree falls in an empty forest. Today, there are deafening political sounds over oil-drilling in an empty wilderness.

Nor can we drill for oil offshore, or in many places on land, again for political reasons. Nor can we build enough refineries or even build hydroelectric dams as alternative sources of power.

Many of the same people who cry "No blood for oil!" also want higher gas mileage standards for cars. But higher mileage standards have meant lighter and more flimsy cars, leading to more injuries and deaths in accidents -- in other words, trading blood for oil.

Apparently the only things we can do are the things in vogue among nature cultists and the politicians that cater to them, such as windmills and electric cars. That is why we would be better off if the government did nothing and let people adjust their own energy consumption individually in their own ways as the prices of gasoline and fuel oil rise. But that is also politically unlikely.


Soaring oil prices have revived the old bogeyman that the world is running out of oil. Economics is a great field for nostalgia buffs because the same old fallacies keep coming back, like golden oldies in music.

Back in 1960, a best-selling book titled "The Waste Makers" by Vance Packard showed that the known reserves of petroleum in the United States were only enough to last another 13 years at the current rate of usage. Yet, 13 years later, the United States had larger known reserves of petroleum than in 1960.

This has been a worldwide phenomenon. At the end of the 20th century, the known reserves of petroleum in the world were more than ten times what they were in the middle of the 20th century -- despite an ever-growing use of oil.
There is of course some finite amount of oil and of other natural resources. The big leap is in going from saying that there is a finite amount to saying that we are running out.

When John Stuart Mill was a young man, he worried that we were running out of music, since there were only 8 notes and therefore there was only a finite amount of music possible. At that point Brahms and Tchaikovsky had not yet been born nor jazz created.

No matter how many centuries' supply of oil there is on the planet, the high cost of oil exploration ensures that only the most minute fraction of that oil will be known at any given time. Thus there have long been recurring false predictions that we were running out of petroleum, as well as other natural resources.

The high cost of extracting and processing oil ensures that not even half of the oil in a known pool of oil will be brought to the surface and sent off to the refineries.

A generation ago, only about a quarter of the oil in a pool was likely to be brought to the surface. That is because the cost of extracting and processing oil from a given pool tends to increase as you drain from deeper into that pool.

Even at $60 a barrel, most of the oil that is known to exist is too costly to extract. How much will be extracted depends on how much higher the price of oil goes -- and how much new technology can recover more oil at lower costs.
What if the government did nothing about oil prices? Rising prices would lead people to reduce their use of oil and lead producers to drain some of the more costly oil out of the ground.

Many people in politics and in the media seem to be alarmed about the rising cost of gasoline and of the petroleum from which it is made. But they only seem to be. What they are really alarmed about are the prices -- and prices and costs are very different things.

Prices are what pay for costs. The government can impose price controls on gasoline or petroleum tomorrow but that will not have the slightest effect on the cost of oil exploration or the cost of extracting and processing the oil that is found.

When the costs are no longer being fully covered by prices, production is likely to be cut back, whether it is the production of oil or anything else. This is not speculation. This is what has been happening for literally thousands of years, going back to price controls in ancient Rome and Babylon.

Yet price controls have always been popular politically, despite being counterproductive economically. After all, how many votes do economists have and how many voters know economics?
Some people love to believe that prices should be kept down to a "reasonable" level, something that everyone can "afford." Yet the notion of "reasonable" prices is itself unreasonable. The costs of producing oil don't depend on what we can afford or consider "reasonable." Nor does the cost of anything else.
Someone can always invoke the image of an elderly person on a fixed pension being unable to buy enough fuel oil to keep warm in the winter. Taking care of such isolated situations would not make a dent in the massive government budget. But the real goal of such anecdotes is to justify imposing government controls on all of us.

Make no mistake about it, there are many people out there just itching to tell us what to do -- and make us do it. That is why the word "crisis" gets used so much, and not just about oil, in order to soften us up for their taking over our lives. That is a bigger problem than the so-called "oil crisis."

[Perfectlap]

seems to me people want to drive big SUV and gas hungry sportscars and
not pay allot for gas like the rest of the world.

I guess we'll just have to wait for all that Oil the pro-Iraq war people were promising Bush. It's coming soon right??

funny story I recently met a girl who lives an hour away. At
$30 for 1/2 tank, I'm having second thoughts.

[Brucelee]

Your last point is amusing and EXACTLY what happens when the price of a good is increasing. Each consumer makes decisions about the use of that resource/service and then acts. Some folks won't date the girl, some will, some will ask her to meet at the motel half way.

Others will use their motorcycle for a romantic outing.

Re: the Iraq oil, the oil is flowing. In and of itself, it won't make a large dent in price, simply not enough there.

I think the interesting issue is that we are willing to fight a war around the world to ensure oil is pumping (among other things) but we will not confront the greens in the US on getting at more of our own oil or in building Nuclear PPs here in the US.

"let the good times roll!"

Originally Posted by Perfectlap

seems to me people want to drive big SUV and gas hungry sportscars and
not pay allot for gas like the rest of the world.

I guess we'll just have to wait for all that Oil the pro-Iraq war people were promising Bush. It's coming soon right??

funny story I recently met a girl who lives an hour away. At
$30 for 1/2 tank, I'm having second thoughts.

[Perfectlap]

I was just kidding about the Iraq oil. Yet I'm not so sure that it wasn't floated as a justification for a premptive (read NOT an iminent threat) in Washington. Did our oil intelligence fail as well?

We can drill every hole in the world and our fixation with cars and travel will rise with it. Ever go for a drive on the highway and count the number of SUV's, Luxury gas guzzlers, PORSCHES, and pick ups? and once in a blue moon you'll seen one of those hybrid cars.
This country doesn't take well to being told "do you really need a 4 ton automobile?"
Its easier to feed the beast than to get it on a diet. A diet that would make our dollars go longer and perhaps give our children some clean air to breathe.
Humans have been on this planet for Millions of years yet we've done more harm to this little blue planet in the last 100 years than the previous 1000.

[Brucelee]

Well, I not sure where your points are headed?

Humans love being in motion, there is no question about that. From the horse to horsepower, this has cativated our attention for centuries.

Yes, I see no end to our love affair with mobility. In the long run, that love will drive us beyond petroleum products and to who knows what.

While I might think an SUV is a dumb thing, the great thing is that I do not have to buy one. I am free to spend my money on other things. Shoot, I can eschew driving altogether if I want. I love not having anyone else tell me how I should move around or if I should move around.

The key point here is that price IS the mechanism that makes supply and demand intersect. Mess with that mechanism and you are head for trouble. Just ask Jimmy Carter!

Specific to your comments on clean air, I suggest that you look at the modern auto in the US. For example, my wife's Subaru is so clean that the air coming out of the tailpipe is cleaner than the air coming into the intake (if you are driving in LA). IIt actually functions as an air cleaner.

The rap on autos and pollution is outdated at best.

Lastly, if you want to see environmental devastation, I suggest you research the history of floods, earthquakes, typhoons, forest fires, glaciers, ice ages, etc. I think our "fragile" plant has plenty of destruction "built in" and it has survived just fine. The doom and gloom of the 1970s forecasted our end by 1999 but here we are, just doing fine!

Now, if we can only survive the world that the "greens" have in store for us. We would all be riding bikes and wearing Birkenstocks!

IMHO!

Originally Posted by Perfectlap

I was just kidding about the Iraq oil. Yet I'm not so sure that it wasn't floated as a justification for a premptive (read NOT an iminent threat) in Washington. Did our oil intelligence fail as well?

We can drill every hole in the world and our fixation with cars and travel will rise with it. Ever go for a drive on the highway and count the number of SUV's, Luxury gas guzzlers, PORSCHES, and pick ups? and once in a blue moon you'll seen one of those hybrid cars.
This country doesn't take well to being told "do you really need a 4 ton automobile?"
Its easier to feed the beast than to get it on a diet. A diet that would make our dollars go longer and perhaps give our children some clean air to breathe.
Humans have been on this planet for Millions of years yet we've done more harm to this little blue planet in the last 100 years than the previous 1000.

[Perfectlap]

The rap on autos and pollution outdated?

There are a Billion Chinese who are buying cars at an alarming rate. And those cars are not beholden to the strict pollution standards that we impose.
A single mainland province of China has more people in it than all of the USA.
Add to that their commercial trucks, factories and their heavy reliance on coal for home heating and you have a giant hole in the ozone. Not to mention India and other highly populated countries and their outdated autos. We're not the only country with cars.


and THe rest of the USA isn't California. our environmental standards are much much less. Just travel to Texas which has some of the most polluted cities in the country.
ANd here in New Jersey we have more cars than people. Anyone who thinks that doesn't have an effect on air standards needs to read up on some of the recent EPA findings that forced the previous comissioner(and former NJ governor) to resign from the Bush Adminstration.
Even if our autos run at lower levels of pollution, people are driving more, walking less and more people own cars than at any point since the car was invented. All that consumption ads to gloabl warming. If you believe in that or as the current administration refers to it "gloabl climate change".

[JackG]

Originally Posted by Perfectlap

There are a Billion Chinese who are buying cars at an alarming rate. Add to that their commercial trucks, factories and their heavy reliance on coal for home heating and you have a giant hole in the ozone.

and THe rest of the USA isn't California. our environmental standards are much much less. Just travel to Texas which has some of the most polluted cities in the country.

There are a billion Chinese, but there are not "a billion Chinese who are buying cars". There are, however, many more Chinese now able to afford cars, and you can thank everyone who walks into Walmart for that. They now have jobs, and more expendable income due to those jobs. Two distinct reasons for that...

1. Our labor unions have priced the American worker right out of their jobs.

2. Americans want clean air, water, and soil, but are unwilling to pay for goods manufactured under those restrictions.

And maybe you haven't been to LA recently, but I've spent significant time there and in the DFW area recently, and LA seemed hands-down much more polluted than DFW. If California didn't have tougher pollution standard there would no longer be any freeway shootings there... because you wouldn't be able to see the car next to you!

[Brucelee]

All that and the air quality in the USA is markedly cleaner than it was in the 1970s.

China and India will deal with their air quality issues also.

Next disaster in the making?

Of course, we COULD have less air pollution if we want. We simply need to incur the costs. Drive less (a cost) mandate fuel economy standards that are higher (a cost) make the engines even cleaner (a cost) etc. etc.

Which cost would you incur and for how much cleaner air?

All of us are FOR things like cleaner air (even if we can't define that) esp if it seems to cost others vs our selves. If we had to pay for additional air pollution devices on our cars voluntarily, how many of us would (I wouldn't).

Re: global warming, give me a break!

The recent data suggests the polar ice caps are getting THICKER!

BTW- why is it bad that the Chinese are buying cars but it is OK if Americans are.

Originally Posted by Perfectlap

The rap on autos and pollution outdated?

There are a Billion Chinese who are buying cars at an alarming rate. And those cars are not beholden to the strict pollution standards that we impose.
A single mainland province of China has more people in it than all of the USA.
Add to that their commercial trucks, factories and their heavy reliance on coal for home heating and you have a giant hole in the ozone. Not to mention India and other highly populated countries and their outdated autos. We're not the only country with cars.


and THe rest of the USA isn't California. our environmental standards are much much less. Just travel to Texas which has some of the most polluted cities in the country.
ANd here in New Jersey we have more cars than people. Anyone who thinks that doesn't have an effect on air standards needs to read up on some of the recent EPA findings that forced the previous comissioner(and former NJ governor) to resign from the Bush Adminstration.
Even if our autos run at lower levels of pollution, people are driving more, walking less and more people own cars than at any point since the car was invented. All that consumption ads to gloabl warming. If you believe in that or as the current administration refers to it "gloabl climate change".