Friday, May 05, 2006

The phony "oil crisis"

I'm not an oil/energy expert (although I'm interested in global political-economic apsects of the issue; and I do own a not-a-red-sport car). But Jerry Taylor of the Cato Institute makes a lot of sense when it comes this topic and that is why I quote him in the following commentary (online access to the Business Times is restricted; so I'm pasting the entire piece here):

Business Times - 05 May 2006
Ending US 'oil crisis': consumers hold the key
LET us get one thing straight: the United States is not going through an 'oil crisis'. But that certainly is the impression you will get watching American television and listening to yet another speech by a US lawmaker urging Washington to 'take action' to punish the greedy ExxonMobil executives and come to the help of the struggling American energy consumer filling the gasoline tank of his oversized SUVs.
(And notice that the owner of the SUV is not complaining that the price of the house he owns is soaring to the stratosphere).
Unfortunately, the American public and some of its leading media pundits - not to mention the demagogues on Capitol Hill - are just exhibiting another case of economic illiteracy.
Indeed, motorists around the US are facing more than US$3-a-gallon gasoline even before the summer traveling season and the war with Iran started. And this has already generated its share of conspiracy theories that feature oil business executives working together with the President George W Bush-Vice-President Dick Cheney cabal and Arab sheikhs to manipulate the energy market to gouge American consumers.
The surging gasoline price also sparked the expected call on the government to 'do something' and as soon as possible, with the award for the most pathetic proposal coming out of Washington going to a Congressional plan to mail US$100 rebate to car owners to offset higher gas prices.
Instead, the Americans would be better off if they listened to what energy analysts Jerry Taylor and Peter Van Doren of the Cato Institute are saying: 'Gasoline prices are high because consumers have decided that it's still a good deal, given the alternative. Until that changes - or until new supplies are offered - prices will remain high indefinitely.'
They explain that in gasoline markets, prices are established by auction which occurs in various regional spot markets. Oil companies sell gasoline to their franchised service stations at the spot price plus transportation and various business-related costs.
'Service station owners then post whatever price they like, but given competition, they can rarely charge much beyond their acquisition costs,' they note. Hence the prices the Americans are seeing at the pump are not the result of corporate collusion or price-fixing.
It is a simple case of supply-and-demand reflecting a variety of trends in the energy markets, including the bidding up of the price of crude oil by speculators on expectation of rising prices as a result of growing instability in the Persian Gulf (war with Iran) and rising energy demand in East Asia (particularly by China).
The other side of the coin is that high energy prices create incentives for producers to increase supply and for consumers to conserve, which is exactly what happened after the oil embargoes of the 1970s and 1980s.
And that is exactly what consumers should do at this stage if they want to push oil prices down: they should consume less energy. How about replacing that gigantic 'Hummer' with a fuel-efficient car? It should not be regarded as a major personal sacrifice.
Unfortunately, just plain common sense is becoming a scarce commodity in Washington, DC, where anxious lawmakers and crusading commentators are promoting this or that energy policy to deal with the non-existent 'energy crisis' that would supposedly lead to cuts in gasoline prices and reduce US dependence on foreign oil.
Among the ideas being circulated in Washington - in addition to the crackdown on the 'gouging' by oil companies - include higher fuel-economy standards for cars and incentives to purchase fuel-efficient cars.
The problem with these and other plans is that they would raise costs for manufacturers (to make more efficient cars), to consumers (to whom higher costs of manufacturing these cars will be passed) and even to the taxpayers who do not own cars (since it would cost for the government to enforce the new rules).
Similarly, the idea of 'punishing' oil companies by taxing their windfall profits would mean that the same companies will raise the price of oil and we will be back at square one: higher gas prices at the pump.
Any of the energy plans being considered would lead to rising gas prices. Moreover, these could have devastating effects on a large segment of the middle class of the Americans who have moved to the 'exurbs' - the large rings of prosperous rural communities around cities that have expanded in recent years thanks to new high-speed limited-access highways and affordable gas prices.
And before we forget: the majority of the voters in these exurbs voted for Mr Bush and the Republicans in the last election.
Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.

Let me just add two more points which I make in my book, Sandstorm: Policy Failure in the Middle East:
1. The U.S. economy is not "dependent" on "MiddleEasternn oil." In fact, the U.S. gets less than 20 percent of its energy supply from the Middle East and is more "dependent" on "Latin American oil." It's the Western European and Japanese economies that receive most of their oil supplies from the Middle East. By securing the access to the oil resources in the Persian Gulf we allow them to be "free riders."
2. The price that you -- the American consumer -- pay for the gas in the pump is actually higher than the price displayed today in your gas station. You'll have to add to that number the costs of maintaining our security commitments in the Middle East since, say, the first Gulf War though 9/11 to the current mess in Iraq to factor all of that into the price of gas and you discover then that it's not socheapp and affordable.

And apropos oil, this is funny:

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