Home Energy and Environment Higher “Gas” Prices Cause Massive Outbreak of Pandering, Silliness, Bad Policy Ideas

Higher “Gas” Prices Cause Massive Outbreak of Pandering, Silliness, Bad Policy Ideas

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Right now, with “gas” (in quotes because among almost all energy experts, such as my former colleagues at the U.S. Energy Information Administration, “gas” actually means “natural gas,” while “gasoline” or “motor gasoline” is the stuff you pump into your tank at the “gas station”) at $4 per gallon in the United States, we’re seeing a massive outbreak of political pandering and downright silliness (or foolishness, or worse) in the media, and also among the general public. Almost every day, I read or hear something so factually incorrect, so wildly wrong, that it makes me despair for any hope of ever having an intelligent discussion on this subject. And, if we can’t even get our facts straight or have an intelligent discussion about energy, then I’d say there’s basically ZERO chance we’ll get the policy choices right. And that’s in an ideal world, where the oil, natural gas, and coal companies don’t completely distort the debate with their massive disinformation campaigns (e.g., Chevron’s Orwellian “Human Energy” campaign, the American Petroleum Institute’s Big Lie “Energy Tomorrow” effort, the reams of crap coming out of think tanks funded by ExxonMobil and the Koch brothers).

Anyway, with that mini-rant out of the way, let me list a few examples of the pandering and silliness (other words that could apply include idiocy, ignorance, denial, delusionial thinking, etc.).

1. “Gas” prices are high because of “price gouging” or “manipulation,” and that we need to investigate and “crack down” on this insidious practice. Just one problem: as Stephen Stromberg correctly explains in this morning’s Washington Post, this chestnut is dug up every time gasoline prices spike, but with the same results: “Not only did the FTC conclude that there was no widespread price gouging, it had a tough time even finding credible complaints of price manipulation.” That’s always been the case, and almost certainly will be the case going forward.  As the Richmond Times Dispatch adds this morning, “Time after time, the FTC has found no evidence to support the conspiracy theories: It found “no evidence that the price increases were a result of conspiracy or any other antitrust violation.”  That’s exactly correct. This “theory” is pure pandering, silliness, hogwash, etc. But it’s useful politically to focus people’s anger towards the Big Bad Oil Companies (of which, let me be clear, I am no fan to put it mildly!). That’s all there is to this one.

2. “Gas” prices are high because of something or other to do with Big Bad OPEC. Again, let me just be very clear that I am no fan of OPEC, to put it mildly. Basically, I see OPEC as the “drug dealer” of oil to the people who are addicted to that oil — you and me, basically. And yes, OPEC’s a cartel. But right now, from everything I’ve seen – and this has been the case for years now – OPEC’s pretty much pumping all the oil it can. In fact, according to EIA, the only OPEC country right now with significant spare production capacity is Saudi Arabia, and that’s only about 3 million barrels per day (out of a world oil market of nearly 90 million barrels per day), mostly of low-quality heavy/sour crude that isn’t particularly desirable. Other than that, OPEC countries are basically producing all the oil they possibly can, in large part to take advantage of $100 per barrel prices, and also in part to make up for the relatively small oil supply disruption from Libya. So much for that theory.

3. “Gas” prices are high because oil production in the United States has been kept off limits by the radical environmentalists and their Democratic allies, and therefore has been falling. Uh, no. First of all, according to EIA statistics, U.S. crude oil  production in 2010 (5.51 million bbl/d) was actually the highest it’s been since 2003, having increased  nearly 600,000 bbl/d since 2008. In contrast, during the Reagan/Bush years (1981-1993), U.S. crude oil production fell sharply, from 8.6 million bbl/d to 6.8 million bbl/d. Was that the “fault” of Reagan and Bush keeping U.S. oil production off limits? Actually, no. In fact, U.S. oil production fell as world oil prices collapsed (following the enormous runups of the 1970s), and as oil and gas drilling rigs fell from about 4,000 in 1981 to about 700-800 in the early 1990s. Was that because of the policies of those far-left wingers, Reagan and Bush? Nope, don’t think so. Instead, it was the market adjusting to far lower prices, exactly as one would expect would happen.

4. This whole situation is temporary, or recent, or has something specific to do with this particular crop of politicians. False. In fact, we’ve been in essentially the same situation – addicted to oil, doing nothing to transition to a 21st century energy economy, complete political failure when it comes to energy – since at least the early 1970s. Actually, I’d go back further than that, when we made the fundamental decisions in this country to structure our entire economy (energy intensive industries, tremendous waste) and way of life (e.g., suburban/exurban sprawl forever!) around three absurd assumptions: a) that there was a bottomless well of oil out there; b) that oil would always remain cheap; and c) that there were no serious repercussions – national security, economic, environmental – to our wild and crazed consumption of “the devil’s excrement,” as oil has been aptly called. Wrong, wrong, wrong.

5. “Gas” prices in the United States are absurdly high. True, gasoline prices are higher than they were last year, but looking at this chart of inflation-adjusted gasoline prices, you can see that they’re actually not particularly out of whack with U.S. historic norms. Also, as you can see from this table, U.S. gasoline prices have consistently been the lowest (by far) among the advanced, industrialized countries. For instance, in 2009, premium gasoline cost $2.61 per gallon in the U.S., compared to $5.87 per gallon in the U.K. and $6.47 per gallon in Italy. Why? Because most other OECD countries tax petroleum products at far higher rates than we do in the United States.  Here in Virginia, for instance, we haven’t raised our miniscule gasoline tax (17.5 cents per gallon) in 25 years.

6. This is mostly about Libya. Not really. Protests started in Libya around February 15-16, 2011. According to EIA, gasoline prices had already risen from by about 60 cents per gallon — $1.86 per gallon on 8/27/10 to $2.47 per gallon on 1/14/11 — before the Libya unrest started. Since mid-February, gasoline prices have risen another 70 cents per gallon or so. In other words, about half the price rise occurred pre-Libya, about half post-Libya. However, we also have to consider the fact that Libya isn’t the only thing going on the world. For instance, there’s been unrest throughout the Middle East, including in Syria, Iraq, Iran, Bahrain, Yemen, Egypt, Tunisia, pretty much everywhere. What oii markets are worried about, and what they’re building in a “risk premium” over, is the fear that all this unrest might spread to the oil-rich Persian Gulf, particularly Saudi Arabia, and cause a massive oil supply disruption. In turn, that’s being factored into the price of oil for delivery in a month, 3 months, 6 months, a year, etc.

7. This is all, or even mostly, a supply issue. Definitely not “all,” and mostly not “mostly.” 🙂 In fact, oil producers are pumping just about full-out at this point, and have been for years, with world spare production capacity averaging around 2.8 million barrels per day from 2000 to 2010, a small fraction of the 80+-million-bbl/d world oil market. Instead, what’s been pushing up oil prices, overwhelmingly, has been rapidly growing oil demand. That’s grown inexorably (and enormously), from 66.5 million bbl/d in 1980 to 85.3 million bbl/d in 2010. During that period, China alone saw its oil consumption skyrocket from 2.3 million bbl/d to 8.4 million bbl/d. U.S. oil consumption grew during that period, although not as rapidly, from 17.0 million bbl/d to 19.1 million bbl/d in 2010. And that oil demand growth isn’t expected to stop anytime soon, with EIA forecasting world oil consumption of 92 million bbl/d in 2020, 104 million bbl/d in 2030, and 111 million bbl/d in 2035. That’s most of the story, right there; on the supply side, the only real question is when world oil production will plateau and start to fall (some believe it already has).

8. Last but not least, there’s the hoary old myth that it’s all “speculation”. True, speculation can play a role in oil prices, both on the upside and the downside. However, speculators don’t create the underlying supply/demand/”risk” fundamentals that underpin oil prices. I’m also not a believe in conspiracy theories, especially until all the “Occam’s Razor”-type explanations have been exhausted (in the case of oil prices, Occam’s Razor is doing just fine!). Finally, it’s important to note that much of what is popularly called “speculation” is really just markets dealing with uncertainty and risk, such as worries about Middle East unrest spreading to Persian Gulf oil fields in coming months. There’s nothing insidious or irrational, per se, about that.

In the end, what’s the answer to high prices at the pump? Clearly, the United States needs to break its oil addiction. Do that, and the problem is mostly solved. How to accomplish that? It’s also clear that, by far, the biggest “bang for the buck” by far is on the demand side, in terms of energy efficiency (e.g., upgrading our fleet fuel economy from the 20s to, oh, the 40s or 50s mpg?). Also, switching from gasoline-powered to electric-powered vehicles would certainly get us off of oil, although in order to avoid an environmental disaster, we’ll need to produce that electricity using wind, solar, and other non-carbon-emitting sources of energy (nuclear’s a possibility; fuel cells almost certainly are NOT the answer, as it take a great deal of energy to strip out hydrogen from fossil fuel feedstocks). Will we do any of this, given our almost complete political dysfunction and the utter foolishness/ignorance we see every day when it comes to energy? I strongly doubt it. Which means: get used to the ups (mainly) and downs (less and less frequently) of oil and gasoline prices in coming years; move closer to where you work, if at all possible; buy the most fuel-efficient car you can; bike and walk everywhere you can; take public transportation; settle in for the long haul on this one; don’t look for quick or easy policy fixes, because there aren’t any that are actually achievable in our political system. Feel better? Nope, me either.

  • Jim B

    The price increases happened over a relatively short time and it seemed while there is no total agreement that speculators caused the problem they jumped into the fray when they smelled blood.

    I guess the only good thing about high gas prices is it will start people to look at more fuel efficient autos.

  • There is a lot of cash floating around out there in the global economy.  Singapore, for instance, it likely sitting on a pile of it, as are many US corporations and some (astonishingly) wealthy individuals.  Right now, there isn’t a whole lot of the places to put that cash that have short term gains that are relatively safe, and I think that at least some of that is going into oil.  Of course, this is often what can drive a bubble, so we’ll see if that has anything to do with it, but it’s unlikely that we’ll see that in an immediate short term.

  • Hugo Estrada

    pretty much saying the same thing. On this issue no one can accuse you of partisanship. 🙂

  • Elaine in Roanoke

    Part of this must also be because of the decline in the dollar relative to other world currencies, since the price of oil is denominated in dollars. Still, the bulk of the run-up has to be caused by the increased demand as the world economy recovers. (There might be a “bubble” developing. I guess we’ll see…)

  • Cato the Elder

    something we could do short term that I guarantee would bring down crude prices.

    Don’t raise the debt ceiling. Crude would collapse to 80/bbl almost overnight and the dollar would skyrocket. Of course, this is akin to blowing off your hand with a shotgun because you have fingernail fungus.

    Still though, it would be entertaining to watch the speculators at the vampire squid have the screws put to them. Optimally this would be a back and forth battle with an uncertain outcome over the course of two or so weeks to shake out people speculating in both directions.  

  • kindler

    Great post.

    Granted, there is no such thing as a “free market” because there are always so many factors distorting supply, demand, prices, etc., but what we’re talking about here is basically commodity pricing.

    Commodities float, with their prices sometimes jerking wildly up and down. We haven’t felt it so much with oil because politicians across the spectrum have focused so hard on (non-free- market) policies to keep it cheap.

    So while telling us endlessly on the one hand that we must worship the “free market”, they’ve been undercutting capitalism to guarantee cheap oil on the other. This is another area where we need pols to level with the public and just stop indulging our fantasies of a perfect world.