Deinonychus antirrhopus

The Gasoline Situation

Cross posted from Outside the Beltway.

Again, most of this comes from the Oil Drum. First is the picture of where the price of gasoline comes from,

Source: EIA

As can be seen the biggest component to gasoline prices is the price of oil. One thing that I'd like to know is, for every $1 increase in the price of oil, what is the increase in the price of gasoline (all else held constant).

The other two pictures deal with gasoline stocks and production (respectively).

So what do we see, both gasoline stocks are low, and production are low. Why are these things low? In part because of the switch over to ethanol from MTBE.

As Heading Out (the author of the Oil Drum post) notes, the current discourse about investigating the oil industry, windfall profit taxes, and so forth are all pretty much nonsense and will do damn little to help the situation. In fact, I'd argue that things like the windfall profits tax would make it worse.

Walter Williams gave an example of the problem here. The example in a nutshell is as follows:

1. There is a disaster in Pittsburgh.
2. Prof. Williams loads up a U-haul with bottled water bought at $2/bottle.
3. He drives to Pittsburgh and sells the water for $20/bottle.

Now politicians who deplore Prof. Williams profitting off of the misery of others invoke a windfall profits law taking $18/bottle from Prof. Williams.

Now suppose there is a disaster in Baltimore the following year. Would Prof. Williams load up his truck with water again? Nope. Would the people in Baltimore get the water they need? Probably not since it would be up to FEMA and local emergency response agencies and we all know what kind of job those guys do. So people go thirsty in Baltimore because Prof. Williams would rationally expect to have profits he earns taken from him by the government.

If we do the same thing with oil, say charging a 100% tax on every barrel for the difference of the price less $40 what would happen? Well oil companies would have no incentive to increase production or perhaps they'd send it overseas and sell it in another market. In short, such a tax would if anything reduce production here in the U.S. or at least prevent it from rising. Higher prices tend to increase the supply. This is why supply curves in economics have an upwards slope with respect to price. The higher the price, the more supplied. Artificial take away some of that price and you get less.

Investigating the oil industry wont likely have a downward impact on prices if the problems really and truly are the reduce oil production here in the U.S., Nigeria, etc. and increased world demand in places like China and India, and transportation/distribution issues stemming from the switch from MTBE to ethanol. Further, it will divert our attention away from the real problems and looking for solutions that might actually help in the longer term. For example, more refineries and competition there might help. Coming up with a uniform nationwide blend for gasoline could also help. Investing in oil pruduction as well could help. Right now we seem to be approaching our limit in terms of producing oil. And of course, looking for alternative fuels. The high price of oil and gasoline make alternatives relatively more attractive. If we think oil prices are going to remain high for the foreseeable future then research and development into such alternatives also becomes more attractive.

Now I disagree with the implication by Heading Out that something other than the market place is needed for alternative sources of energy.

I learned in the last Energy Crisis that to expect energy companies to invest in new ideas when they are getting buried in money using the old ones is not really fruitful.

I agree that ExxonMobil right now has little incentive to look for an alternative to oil/gasoline. However, ExxonMobil is not the begining and end of market. There are other firms out there that can look for alternatives. In fact, the huge profits that the oil industry are currently enjoying are the incentive. Come up with something that is at least as costly as gasoline is now with the potential to be cheaper (or even hold costs at a constant level) in the future and you could find yourself taking away some of those profits from ExxonMobil.

The bottom line, in my view, is that many in this country are heading in the wrong direction about who is to blame for high gasoline prices and what to do about it.

Posted by Steve at May 8, 2006 09:27 PM | TrackBack