Tuesday, April 25, 2006

Rocket Surgery

So yeah, before I tell you was I was going to say, Michelle Malkin emailed and said, "Wassup, Robo?" and I'm all, "Hey baby... how you doin'?" And she's all, "Dude, I've got a videoblog now, it's totally the wave of the future." And I'm like, "That's cool." So I've got my first videoblog in my sidebar: Hot Air. That was a good idea.

Now for something completely different...

For the record, I started this post right after St. Patrick's Day, wanting to get this frustration about lack of truth in the nature of economics with respect to oil and gasoline prices out of my system. And now I feel like Harry Morgan in the Twilight Zone episode, "The Curious Case of Edgar Witherspoon", where Morgan's character must collect junk and arrange it precariously in his basement apartment in order to keep the world in balance. But I digress.

So I didn't blog about Sparky's abyssmal, yet completely and consistently liberal, idea about mucking with the gas price and now things are getting out of hand. As I resist the urge to point out the obvious biases in the Reuters lead, I force myself to stick to the issue at hand and point out that President Bush "called for an end to tax breaks for Big Oil and suspended putting oil into the U.S. emergency stockpile." Through gritted teeth, I calmly point out that continued demonizing of oil companies may make the average nasal-spelunking voter feel better, but does nothing to solve the problem. Not that the government's concerned about solving problems.

The President also gave the Environmental Protection Agency authority to suspend federal clean-burning gasoline rules this summer that are forcing consumers to buy expensive new gasoline blends. Which, I suppose, if it tells us anything, tells us the impact of excessive restrictions on oil refining and gasoline usage have on the marketplace. And that the government knows it, but does it anyway. Your tax dollars at work.

Back in March, my good pal Sparky told me he thought (and would write in a paper for an economics class) that the solution to all this high gas price nonsense is even higher gas prices. Ballsy. Stupid, but ballsy. His solution would be to artificially hike gas prices to the point where an alternative must be found, or something like an oil crash happens and the world ends. How's that for brinksmanship? Wasn't I just pining for my post-apocalyptic nightmare society? Be careful what you ask for, I guess.

I've discussed the way oil prices work in general before, so I intend to carry on that discussion in these interesting times. I refer to that post with respect this malarkey about investigating the oil companies for making obscene profits. The one really raking it in is Uncle Sam (Hannity and Paul W. Smith were talking about this particular fact today, too). Oh, and these two. Share and enjoy.

Anyway, Sparky believes, without any proof that I know of (please, Sparky, if you're reading let me know whether I'm misrepresenting your ideas and correct me), that at some some price, the demand for oil will fall to zero and people will use alternative fuels, pollute less, drive their SUV's less and create a shiny, happy, liberal utopia where all of your income goes to the government so that it can provide everything you need. Or something like that.

Reality is liberalism's (nay! Communism's) best antidote. Oil is one of those funny products whose demand is inelastic. Now, this can certainly change over time, but due to the lack of acceptible substitutes, demand for oil in America remains pretty much the same regardless of price. Once the automobile really caught on, the country was built up around the fact that folks liked to drive. We are even more dependent upon the automobile now because of the way infrastructure has been built. So demand = inelastic. Pay attention, this will be on the test.

Interestingly, due to excessive government interference in the industry, oil supply is also inelastic. Oil companies have built no new refineries and are not allowed to explore for new oil in our own Exclusive Economic Zone, resulting in Communist uptopias taking advantage of the evil U.S.'s crippling bureaucracy. So, though there is plenty of oil, it is extremely difficult to extract it due to the lies the environmental lobby and your government tell you. Additionally, even without these restrictions, the barriers to entry in the oil industry are mind-boggling, mostly due to the huge investment in fixed assets required to get it out of the ground.

This inelasticity of supply is the reason gas prices go berserk when hurricanes hit or when Iran starts sabre-rattling - any interruption in supply that is so precariously balanced with demand will seriously disrupt the market.

So, with inelastic supply and inelastic demand, you have a basic supply-demand curve that looks something like this one. I would even suggest that the curves are more vertical (inelastic) than I have them represented here. Pe is your equillibrium price. Natural shifts in supply and demand curves occur as the market reacts to external pressures. The factors that can change demand, for example (according to "Economics", Roger A. Arnold, 6th ed.) are income, preferences, prices of related goods, number of buyers and expectations of future price.

As America has become more and more prosperous, our incomes have increased, most people prefer to drive cars (and own more than one) and more people live in America and drive than in the past and demand of oil has increased. People expect the price of oil to continue rising and buy it now, hence increasing current demand for it; which is why the President wants to stop filling the strategic reserves. However, since these are long-term changes in demand, short-term Band-Aids will not fix the problem.

So the demand curve shifts over time. Notice that since the curves are inelastic, quantity demanded doesn't significantly change as price increases. Therefore any increases in price will go to the oil companies who will reinvest and profit (since they make a percentage), and to your old Uncle Sam (who takes more off the top than the oil companies get and that's just at the pump, never mind every step of the supply chain).

So over time, the demand curve shift rightward increases prices, but the increase doesn't discourage people from buying oil. What about supply? The supply curve will shift based on prices of relevant resources (refining costs?), technology(refining, new fuels), number of sellers (there's those pesky barriers to entry I was talking about), expectations of future price (may cause hoarding, or increased production, depending on expectations), taxes and subsidies (generally, we get more of what we subsidize and less of what we tax) and government restrictions.

Pop quiz: Panic and investigation and stopping oil buying and oh my god! What do you suppose will happen to supply? It is clear the President or someone in the Administration has a basic understanding of economics, even if the Administration's actions come far too late, are far too temporary and far too likely to cause marketplace panic or at least shortness of breath. Legisaltiors must have similar knowledge; all I had to do was crack open an undergrad economics textbook to refresh my memory. So what the hell are these people thinking?

Oh, right. They're thinking about elections.

How about Sparky's idea of imposing a price ceiling? Well, a price ceiling imposes a surplus upon suppliers. Envision a shift to P1 without associated changes in supply or demand. Suppliers will want to decrease price to sell their inventory, but can't because of government controls. as a result, they'll be forced to cut back on production. Sounds great, eh? Less oil to sell means less oil to use and forced seeking of alternative sources. Oh, and destruction of the economy. I guess you have to give a little to get a little.

Additionally, Sparky suggests that the increased tax revenue be used to develop alternatives and fund super-wham-a-dyne social programs and the like. Problem #1: decrease buying = decreased tax revenue. Problem #2: That idea presupposes goverment is financially disciplined and has only your best interests at heart.

*snork*

Ahem.

Stick that in your pipe and smoke it.

Additional rants:
Democrats in Congress promptly introduced an "energy bill" that would put an additional 25-cent-a-gallon tax on gasoline to stop "global warming," an atmospheric phenomenon supposedly aggravated by frivolous human activities such as commerce, travel and food production.
Previous:
The Real Gouge
Unquestioning Belief In Works Of Fiction
Obscene Profits

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6 Comments:

Blogger Crazy Politico bloody well said...

The other problem with the tax idea is that government becomes used to the income. If we did quit driving, they'd have to find a new source for the revenue.

Sin taxes are a prime example. As we smoke less the tax on it goes up, and up and up, because the local and state governments that use that money don't want to look elsewhere to replace it, or (god forbid) reduce spending as the income from the tax goes down.

26 April, 2006 04:42  
Blogger Robosquirrel bloody well said...

Yeah, I did a whole term project on that.

Well, it was about e-commerce and restricted [read: highly regulated] items like alcohol, cigarettes, prescription drugs, contact lenses, coffins, etc. I've been meaning to post bit of it here.

Anyway, it ended up being a rant about sin taxes. In 2003, Rhode Island's third largest source of income was cigarette taxes. And they expect us to believe that they're doing it for our own good, so people quit somking? What will the state do without that income? Oil is the same way; it's government by racketeering. They know not everyone will quit smoking and those hard core addicts will pay a premium to the U.S. and state governments.

I wouldn't even mind it so much if the 16th Amendment was repealed. Huzzah! No income tax! Sure, tax me on what I spend, that's OK by me! Of course, then incomes go up and demand will probably increase, so that could be a snag. But getting me coming AND going is downright criminal.

26 April, 2006 08:47  
Blogger Nicki bloody well said...

Did you read that some Congressleeches are trying to add a rider onto the supplemental spending bill that would penalize oil companies for high gas prices and then offer a "refund" to Americans?

Holy mother of calf!!! What the hell are they thinking? A government that makes over 18 cents on every gallon of gas purchased will penalize the oil companies who make a little over 7 cents on every gallon of gas purchased and "refund" that money to Americans, regardless of how much they drive or whether they consume gas at all.

What, exactly do they think will happen? Will the gas companies not raise prices to make up for their profits? Will they not pass those increases back to the consumer? And won't most of us who actually consume gas wind up paying more, while those who don't will wind up with a nice little "refund" check from the government??

BTW - this is a bipartisan effort - it's not just liberals trying to push this crap!

Just shoot me! Please!!!!

27 April, 2006 08:25  
Blogger JasonSpalding bloody well said...

Have you ever looked at a map of gas prices in the United Stated based on county? Have you compared it to the results shown on a map showing the winning presidential candidate by county?

27 April, 2006 20:16  
Blogger Robosquirrel bloody well said...

Jason:
No, have you?
Care to direct me toward the resource, or are you going to make me work for it? Sounds interesting, I suppose.

27 April, 2006 20:32  
Blogger Robosquirrel bloody well said...

apparently, you have...

Sorry if I sound irritable today, because I am. Thanks for stopping by!

27 April, 2006 20:42  

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