Friday, April 28, 2006

Gas Attacks.

With gas prices soaring, blame for the rising prices and what to do about it is all over the news. Most of the serious proposals floating around out there are, for the most part, incapable of working even in principle. Jacob Weisberg has a good article in Slate explaining why.

Here's something that most people don't seem to understand (nor did I until somewhat recently) about how the price of oil is determined: It's not determined by some marketing agency on Madison Avenue, nor by collusion by the big oil companies, nor even by some secret cabal of Jewish bankers who fix the price of everything else. Oil prices are determined by worldwide market of buyers and sellers. That may sound obvious, but when you realize that the price is the same everywhere, minus transportation costs, the sheer inability of the American government to do anything about it becomes clear. Armed with this knowledge, nearly all of the proposals being bandied about are downright silly. There are in fact a lot of fallacies based on this misconception, and below I'll list some of my favorites.

1. We can end our dependence on Middle Eastern oil by importing the oil from elsewhere. I saw the President or some other douchebag make this argument on the news today. The idea was that we should be getting all chummy with some country or another because doing so will allow us to get oil from them rather than from the mid-East or Russia, both of which are notoriously chaotic. Sure, those places suck, but the idea that we can avoid this issue by buying from elsewhere is just plain wrong. It doesn't matter how much oil we get directly from the mid-East because mid-East supplies account for a large fraction of worldwide supply. And the price of oil is determined by worldwide supply and demand. The actual physical location we import our oil from is irrelevant. The second mid-East supplies get disrupted, or look like they might get disrupted thanks to a bit of instability caused by, oh let say, a war, then our prices go up. This holds true even if we don't import a single drop from the mid-East. It holds true even if we don't import at all..

2. Most of our imported oil doesn't come from the mid-East, so therefore our meddling in that part of the world couldn't possibly be motivated by a desire for oil. This argument comes from those conservatives who enjoy going to war in the mid-East, but have just enough shame to admit that stealing another country's' resources is wrong. Of course, I don't think the war in Iraq was simply about oil, especially since both rising and falling prices help and hurt equally interested parties. But it would be naive to think that the undue attention we give that part of the world has nothing to do with its strategic importance as the world's oil reserve. At any rate, whether you think the war was about oil or not, the above argument is wrong for the exact same reason the first one was: The prices we pay, and the profits our domestic oil producers can reap, are directly related to what goes on in the mid-East, irrespective of how much or how little we import from that area. We could buy 100% of our oil from Canada, and if mid-East supplies get disrupted, Canadian oil prices go up. Why? Because the Canadian companies are free to sell to the highest bidder, and they'll have lots more bidders if half of the world's supply gets disrupted.

3. Don't buy gas from Exxon-Mobil, BP, Fat Joe's Truck Stop, or whatever Evil Company deserves a boycott. This one is a popular email spam. You may have had well-meaning but clueless friends actually forward it to you.
Snopes has a pretty thorough explanation of what's wrong with this claim, but if you're following along, it should be obvious by now. Gasoline, like the oil it comes from, is pretty much the same everywhere (what economists call "fungible"). And since you can buy it everywhere, the price is determined almost exclusively by aggregate supply and demand. (Yes, some stations charge a few pennies extra because they have the phat location, but notice how when the price spikes, it does so for every station at the same time? This is not because of massive collusion.) Boycotting company X doesn't actually make company X's gas worth less. And unless you're willing to quit driving altogether, it certainly doesn't make all gasoline worth less. Company X, afterall, can simply sell their gas to company Y. And then company Y sells it to you. As long as you're buying from someone, company X will do just fine.

4. Don't buy gas on May 15th or whatever other day. That'll stick it to them! Same as above, but even stupider. Again, this one circulates in email so much that Snopes has a page on it. Unless everyone agrees not to drive on that day, it can't possibly affect the demand for gas, because you'll just fill up on some other day in order to make up for your lack of fill-up on the first day. Now if everyone actually did decide not to drive on that day, it would be admirable as an exercise in learning how not to depend on the automobile as a way of life. As for gasoline consumption, by my careful calculations, it would reduce yearly demand by approximately 1/365th. Yeah, that'll show 'em.

5. Drilling in the Arctic National Wildlife Refuge will reduce prices. This one is at least on the right track, in that it acknowledges that if you want to lower prices, you either need to decrease demand, or in this case, increase supply. The problem being, ANWR has a mean estimate of 7.7 billion barrels of oil. The world consumes about 27.7 billion barrels per year,
and this is growing by about 2% yearly. The oil in ANWR won't come out all at once of course, but will rather take decades to extract. Assuming it comes out in equal portions over a 20 year period (a low estimate), and ignoring any increase in demand, ANWR will supply about 1.4% of the world's oil. This simply not enough to have a significant impact on prices. The fallacy here is that people often pretend as if it's only American consumption that a new field has to satisfy; but prices are determined by the whole world's consumption, not just America's. The oil in ANWR is certainly worth a lot of money, and there may be good reasons for drilling it, and those reasons may well outweigh the reasons not to drill it. But the reasons most often given for drilling -- that it will lower prices at the pump and it will make the United States energy independent -- are bogus.

All that having been said, what should we do about oil prices? Putting aside the fact that the current spike is almost certainly temporary, here's a wild idea: Let the damn prices rise. As
Weisberg points out, rising prices will reduce demand, and given the large externalized costs associated with burning oil, this is a good thing. People will buy more fuel efficient vehicles and will invest more in alternative energy; there will be less smog and less greenhouse gas emssions; fewer people will die in auto accidents, and people will be less inclined to live in distant suburbs rather than around city centers with a vibrant civic life. These are all things that people who bitch about the evils of oil consumption (like me) think are good things. Yet for some reason, the easiest way to achieve them -- raising gas prices -- is something that needs to be fought against. Go figure.