FLCC> Is the NY State Senate nuts?

[Bill Goffe]

Several thoughts on this topic (yeah, turns out I'm an economist).

Mike said:

>    Do you really think that anything resembling a free market applies to
>    the handling of gasoline or oil in our economy?

Well, yes. Domestically, it's a much less concentrated market than many:
airlines, computer software, soft drinks, fast food, movie rentals,
grocery stores are some more concentrated ones that come to mind (i.e. a
smaller number of firms dominate these markets than the domestic oil and
gas market). Also, gas prices are the most visible in the economy -- I
counted about 10 gas price signs on the way to work a while back. Profits
are often less; as a fraction of sales, Exxon's profits are about 10%;
Google and Microsoft are well above 20% the last time I checked (the 10%
is fairly close to average for U.S. corporations). This is also as good as
it gets for Exxon and their kin. Yes, they have record profits, but so do
just about every firm as the economy grows and prices rise. Their profits
are indeed billions, but then again Exxon's sales are nearly $.5T a year.
It isn't like they keep their profits either -- many on this listserv
receive them in the mutual funds.  I might add that there have been
multiple government investigations of the oil industry and collusion
hasn't been found. Prices are fairly uniform due to competitive forces.

Internationally it's more complicated, of course. At times, OPEC restricts
output to the benefits of its members, but they're not doing that now.
Perhaps surprisingly, the world's biggest oil companies aren't Shell, BP,
and Exxon, but state-owned or affiliated firms like Saudi Aramco, Gazprom,
Pemex, and Petroleos de Venezuela. Of the 20 largest oil firms in the
world, only 6 or so are publicly owned corporations. These state-owned
companies have other goals than profits -- they are often run partly to
give benefits to their country's coffers and not invest in new production.
If they were corporations, we'd likely be seeing lower prices now. See the
mess with Pemex, and how its ownership by the Mexican government hiders it:
http://www.iht.com/articles/ap/2008/04/16/business/LA-FIN-Mexico-Pemex.php .
Venezuela's production has fallen in half as Chavez siphons funds to
public to keep himself in power.

The thing that assists prices on their upward trajectory is the
"inelasticity" of gas and oil demand. That is, when prices rise, demand
falls by a relatively small amount (at least in the short run). Coupled
with supply problems (Russia, Nigeria, Mexico, and Indonesia have been in
the news in the last few days) and rapidly growing demand in Asia
(particularly China), you'll see, and we are seeing, dramatic increases in
oil prices.

Wade (I believe) said:

>  I do not know how old any of you are, but this has been a forgotten
>  issue in Wash. since the gas crisis during Carter's time in office. All
>  they are doing is putting out the fire and not dealing with the problem
>  and or cause of what is going on. The average person will be hurt no
>  matter what is done for the average wage earned does not rise as fast
>  as everything else. We are not looking at a recession folks, but a
>  depression. The *&%$* has hit the fan and we are getting it right in
>  the face.

I'm not sure you'll find many economists who'd agree that there is a need
for much if any government intervention here (and the typical economist is
a moderate Democrat). Rising prices, of course, provide a huge incentive
to look for alternatives -- billions are going into venture capital firms
for this very purpose. Want to be the next Bill Gates or Warren Buffet?
Find a cheaper source of energy. People are buying smaller cars. I wished
I kept a neat description of what the worries last time we came close to
running out of a key energy source (whale oil). The commentary sounds much
like today, yet the higher price of whale oil lead to people to look for
alternatives, and petroleum was discovered.

We're far, FAR from a depression over this. The percentage increase in the
price of oil is about what we saw in the 1970s, but we're roughly twice as
rich today, and excepting transportation, much more energy efficient.
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=OILPRICE&s[1][transformation]=log#
shows the price of oil in a "log" graph so that vertical increases show up
as equal percentages. 

Andrejs said:

>  Well, first off, I don't mean it as a solution, much less long-term. I
>  only mean that increased cost of gas, once it gets high enough, will in
>  fact probably result in less gas used. 

Usage has already fallen in the U.S., I believe. I'm sure that if it stay
here for some time, or even years, you'll see further adjustments.
Americans make many more trips by car then they did a generation ago and I
suspect that higher prices will force us back to the old ways if they
stick around long enough.

>  I.e., the issue was whether "market forces" would do any good in this
>  very limited case, defined in absurdly simple-minded terms.

Well, market forces have a huge impact in just about every factor of life.
I wouldn't be a college professor if it wasn't for the huge premium that
the college educated have over those with just a high school degree --
there wouldn't be enough demand for what I now do. Most new bikes wouldn't
be made out of carbon if the price hadn't dropped like it has. All the
products we buy on-line wouldn't be there if they weren't cheaper. Market
force are really underrated.

>  But neither do I agree with your analysis. Sure, it will hit everyone,
>  including the poor, everywhere they pay for anything -- since
>  transportation costs are part of everything we buy. But, even there,
>  high enough costs of fuel would eventually result in a rationalization
>  of the distribution system -- producing stuff locally, promoting
>  seasonally, reviving cheaper transport systems like marine and rail,
>  etc. etc.  Again, in the end, a saner use of resources could result,           
>  having screwed the poor in the process -- so what else is new?                

I'm not at all convinced that localization is a good thing. First off,
with food production, it isn't at all clear that distance automatically
equates to increased energy usage. I saw one back of the envelope
calculation that it was more energy efficient for the British to import New
Zealand food than for the Brits to grow their own (apparently, the Brits
needed a lot of fertilizer, which takes a lot of energy to produce; at the
same time, some transportation is quite energy efficient). Hauling food
long distances helps avoid famine (there would be a lot of very hungry
Australians now given the droughts there) and it gives us a much greater
variety of food. I'm fond of fruit year rounds -- how much would we have
here in the winter if it wasn't hauled in? Greenhouses would surely be
more energy intensive.

The beauty of prices is that these calculations are part of the price of
goods. If indeed transportation costs go up sufficiently, we will see more
locally grown food. If people want to pay a premium for locally grown food
(as the do for organic), you'll see it too.

More generally, with hauling goods long distances we get very specialized
and thus very useful goods. Look at how bike components come from around
the world -- would we have near the selection and features if they were
made locally? Extend that example to most everything we purchase:
computers, cars, food, clothes, and so on.
http://www.wired.com/culture/design/news/2007/03/100milesuit0330 is a
great example of what clothes would look like if we didn't specialize and
ship goods long distances.

>  I think it's stupid to rely on the cost of fuel to effect these changes;
>  they should be pursued by carefully considered social policy. But, how                                
>  we get to enjoy a govt capable of enlightened policies is an entirely
>  different question.

Well, besides price changes, there are few real incentives to change
people's behavior. Prices dominate choices that firms and individuals make
when deciding what to buy or produce. Here's part of press release for a
Nobel Prize on this very subject (awarded to Friedrich von Hayek in 1974):

    He presented new ideas with regard to basic difficulties in
    "socialistic calculating", and investigated the possibilities of
    achieving effective results by decentralized "market socialism" in
    various forms. His guiding principle when comparing various systems is
    to study how efficiently all the knowledge and all the information
    dispersed among individuals and enterprises is utilized. His
    conclusion is that only by far-reaching decentralization in a market
    system with competition and free price-fixing is it possible to make
    full use of knowledge and information.

There aren't that many examples of "carefully considered social policy."
Look at mileage standards and the role that Detroit and their minions play
in setting them (they also take years to have an effect, unlike increases
in the price of gas). Look at how much more we spend on care for the elderly
than the poor or young because seniors vote more often. Look at states
with their HOPE programs for paying for educating middle class kids while
ignoring those from failing schools. 

In short, rising oil prices show that oil is becoming relatively scarcer.
As a result, firms are looking for alternatives and consumers have a
serious reason to use less. The oil market is working as it should.

         - Bill

-- 
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         | Bill Goffe                 goffe at oswego.edu          |
         | Department of Economics    voice: (315) 312-3444     |
         | SUNY Oswego                fax:   (315) 312-5444     |
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