in which i pretend to know things about the economy

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posted by tom / May 18, 2004 /

The proposed solution to the high gas prices is to pull some oil out of the strategic petroleum reserve, a 650 million barrel buffer created after the embargo that could keep the country running at normal levels of oil consumption for about 30 days. This seems like a bad idea to me:

• Having to pay an extra fifty cents a gallon right around vacation season is not a national emergency. Paying an extra fifty cents a gallon for heating oil in the dead of winter might be, though. A less likely but even more serious possibility is a massively destabilizing event in the middle east or a domestic occurrence that requires our borders to be temporarily closed -- a bioterrorism event, for example. The administration is saying the SPR is for emergencies, and this ain't one. I think they're right.
• The proposal being put forward by Democratic senators is to release 60 million barrels. The US uses about 20 million barrels per day. You can let that oil trickle into the economy at whatever pace you want, but 60 million barrels can only go so far. Assuming perfect elasticity in the market (which there wouldn't be) and a 1:1 correlation between the price of crude and the price of refined gas (which is also not a valid assumption), that's a 10% discount in gas prices for about month, or $1.80/gallon gas for the month of June. Stretch that discount out to the whole summer and we aren't even saving a dime a gallon. So not only shouldn't the SPR be used to manipulate gas prices, it probably can't in any meaningful way.
• Besides guys, we're Democrats -- we want higher gas prices. We just can't admit it. But deep down, we kind of suspect that Americans drive more than they should, and we know that they do it in cars that aren't as efficient as they ought to be. Public transportation is ignored, the environment is degraded, even our cities are twisted into unlivable configurations because of the availability of cheap personal transportation. Occasionally someone like Al Gore will try to do something about this by proposing a BTU tax or an environmental surcharge on gasoline, but unless their constituency is Californian these ideas will eventually be thrown back in their faces via campaign ads years later. So the political system can't fix this, and scolding certainly isn't going to either. Market forces are the only way. We need oil to be expensive.
• Luckily for us, it's going to be. Demand from Asia is exploding, and there are plenty of developing regions in line behind them. New reserves are not being discovered as quickly as we'd like, and those that are being found -- sources like undersea clathrates and Canada's tar sands -- are technically difficult to leverage and therefore likely to be more expensive. We're going to have to get used to expensive gas.
• Economically, I'm not sure what to think. Obviously high energy costs inhibit the economy. On the other hand, we're at the end of a jobless recovery that was made possible by incredible productivity gains. A large reason why that was possible is the American worker's seemingly bottomless instinct for workplace masochism (probably motivated by our lousy social safety net, but let's not get off topic). The other obvious reason for increased productivity is automation. Maybe I'm crazy, but wouldn't higher energy costs make the cost of hiring someone lower relative to the cost of buying a machine to do the job? I know, this would probably be bad for the economy as a whole, as measured in the ways that economists measure things. But couldn't it mean more jobs -- help for the middle class? Maybe I'm crazy. I'd like to hear what people who know about these things have to say on this.
• Finally, the political angle. This is some JV bullshit on the part of the Democrats. As I said, I think oil is going to be more expensive in the long run and we need to get used to it. On the other hand, it's going to get cheaper -- at least for a little while -- at the end of the summer. People stop driving as much, there's an all-too-brief window when you don't need AC or the furnace, and engines run a little more efficiently in the cooler, oxygen-rich air. Demand falls, and so do prices. Kerry is complaining about gas prices in order to get some press through which he can implicitly say "Hey! You're paying a lot for gas! Blame somebody!" Problem is, gas isn't going to stay expensive until election day. This kind of political capital intuitively seems useless -- maybe it helps the polls right now, but it's hard to imagine the effect lasting. Besides, Bob Woodward has already handed you guys a perfect angle of attack. With all the business about Prince Bandar, you can actually blame the president when gas prices inevitably drop around election time. With any luck Michael Moore's new film's conspiracy theories will be trickling into the popular consciousness around then. Who knows, the secret Arab conspiracy stuff might actually work. It's better than complaining now and then biting your tongue in October as Americans happily refill their SUVs for $1.75 a gallon.