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Oh those Econ 101 deniers
Michael Swickard
Last week’s column mentioned political energy policy as one of five major issues Americans need to keep their eyes on this election and not be distracted by hundreds of other lesser political issues. When I mentioned drilling to lower gas-pump prices, my e-mail filled up with Econ 101 deniers who said supply and demand does not work in the oil patch because oil is global. That answer is simple, quick and wrong.
Econ 101 deniers say all nations drink from only one bucket (a very large one) so the price of oil in India is exactly the same price as it is in Indiana. It is not. There are many reasons why crude oil price is different by nation, not the least of which is the actual purity of the oil.
Further, we use oil products regionally; therefore regional influences adjust the prices. It is important to count the major ways our government is a factor in the pump price of fuel.
You do not use crude oil to get to work; rather, refined oil products subject to government regulations. The North American regional price for West Texas Intermediate crude as it is turned into gasoline and diesel fuel reacts to three major influences. Each has political components.
First, there is the total available oil supply, because it has the major effect upon price. However, almost as important are the refining issues including capacity and regulation. Finally, there are the distribution issues which can influence the pump price leading to differences between regions of the United States.
Political energy policy
While there are other issues, these as the big three influences on your pump price. They are dynamic with political energy policy. Example: For political reasons the United States has not built new refineries to keep up with increases of the amount of fuel needed and the various required blends of gasoline, of which there are 45 or so. Because of specific blends, some refineries operate at less than 100 percent at times as the blends they are set up to produce reach capacity. The overall pump supply drops because there are not enough refineries and they are busy with such a wide variation of blends to satisfy political entities.
More refining capacity does lower the price of fuel. But it is politically difficult to get new refineries approved. This is felt at the pump as increased price.
A few years ago the Phoenix area had gasoline suddenly shoot above $5 a gallon because the pipeline that carried their very specific blend of fuel from El Paso ruptured and Phoenix city law would not allow any other blend into the city. Stations started raising their prices. Econ 101 says in America we ration everything by price which is dependent on supply and demand. So fuel cost lots of money and people only bought what they absolutely needed.
After a citizen outcry about the lack of fuel and the high prices, the city council reversed the blend specific requirement. The price went back to nearly normal while the pipeline was being repaired since other gasoline blends were trucked in. The pipeline is about 10 times cheaper to move fuel so there was still an increase but it was acceptable.
When government policies push fuel distribution to motor tankers, as opposed to pipelines, we see that this form of distribution is much more expensive than pipelines. The more we as a nation use pipelines, the lower the pump price goes. If 40 years ago we connected the Alaskan Pipeline to the lower 48 states by pipeline, our pump price would have reflected that savings and there would have never been the Exxon Valdez spill. Politics stopped the pipeline to the refineries and Americans paid at the pump,
Each of these three areas is dynamic and can cause price fluctuations. The president and everyone else who are carrying the political water for him are wrong that energy policy will not lower the price of gas at the pump. But do this: Ask the poor slub standing at the pump watching most of his/her discretionary funds being sucked out of their wallet; ask that person if there will be a change in their voting this fall.
Swickard is co-host of the radio talk show News New Mexico, which airs from 6 to 9 a.m. Monday through Friday on a number of New Mexico radio stations and through streaming. His e-mail address is michael@swickard.com.
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Dr J writes: “”"Meanwhile those wonderful alternative energy projects subsidized by taxpayers and approved by Obama and Chu (such experienced investors and energy experts) and the darlings of so many left wingers (who deny Econ 101 in that area too) keep going bankrupt and taking billions of our tax dollars with them: ”
We have spent trillions trying to secure oil supplies for oil companies around the world. The latest being Iraq under the totally bogus claim of… you know the story. Yet, when we lose half a billion trying to jump start alternative energy sources it’s a disaster of epic proportions. I laugh every time I read the attempts to hammer the Obama administration over the “speck in the eye” of these failures from the same folks who have a “log in the eye” regarding the imperial actions of the U.S. in the mid east in the blatant effort to secure oil for our major oil companies. How many thousands of American lives were lost in the Solyndra failure compared to the Iraq failure? Both were attempts to secure energy supplies. If the right folks had interests in alternative energy as opposed to their interests being in oil companies we would be seeing LPG filling stations, solar farms, wind farms and algae farms blooming like Mexican Poppies over night. It isn’t a matter of viability. It’s a matter of who’s interests are being served. The old money of oil and coal have tentacles so deep in our political system it will be many generations before we see adequate support for modern forms of energy. And folks who aren’t quite up to speed on the geopolitics of oil and coal will blindly support the “death for oil” forays of America believing it is a more intelligent course as long as we have plenty of young lives to put in the meatgrinder. Is this a great country or what?
Meanwhile those wonderful alternative energy projects subsidized by taxpayers and approved by Obama and Chu (such experienced investors and energy experts) and the darlings of so many left wingers (who deny Econ 101 in that area too) keep going bankrupt and taking billions of our tax dollars with them:
http://www.reuters.com/article/2012/04/02/us-solartrust-bankruptcy-idUSBRE8310ZV20120402
Dr. Swickard is mostly correct in his analysis. Current prices are a function of “quantity supplied.” There are differing amounts of oil and gas delivered at different prices. So, as prices rise, this represents a moove along the supply curve. The higher the price, you see a greater supply of the product. There has been an increase in the number of drilling rigs going after oil…and fewer rigs drilling for natural gas…This seems only logical since, oil prices are rising and natural gas going down. Regulation does cause supply and demand constraints. So do political risks. In free markets, a commodity goes to the highers bid. So, there have been may complaints about exports of gas to parties outside the USA, from refineries here. Well, it is a game where who ever pays a higher price, that is where the commodity gets sold to. If we want the price of oil to decline, we will have to undertake two options. Alllow for access to USA reserves, improve our transportation (midstream infrastructure, and change policies on refinery use of ethanol. The reason why refineries are not active now is due to both seasonal issues as well as concerns in carrying large stocks in an environment where any further price hikes could cause economic hardships. That could cause prices of oil to decline..and the refineries would loose money if not properly hedged.
As for speculation, it is a good thing. The greater the open interest in markets, the better they operate. If we followed the Obama Administration logic, this open interest would decline leading to more volitility.
Hey if hamburger prices go up should we go after Mc Donalds? Looks like Apple is doing very well? Ya think they are making too much money for taking the risk to develop great products?
To me it looks like the Federal Government has been living a bit too well….Perhaps they should go on a bit of a fiscal diet…Rein it in a little…How about a $trillion or so…
Comments?
there is a grand illusion occurring right now. any minute now the stock market will be worthless, the dollar will collapse to the level of the yuan, possibly the mexican peso, and hyperinflation will flash through the economy. fuel could well be confiscated under martial law; and everything will come to an abrupt halt.
And I saw the seven angels which stood before God; and to them were given seven trumpets.
And I heard a great voice out of the temple saying to the seven angels, Go your ways, and pour out the vials of the wrath of God upon the earth.
And it’s coming Last Year!!
http://www.thecomingdepression.net/main-street/bankruptcy-main-street/respected-economist-predicts-us-hyperinflation-for-2011/
No, it’s coming within 12 months of March, 2009!!
http://www.fgmr.com/on-the-cusp-of-hyperinflation.html
No, it’s coming by April 1, 2012: “I predict that hyperinflation’s tipping point will be no later than the first quarter of 2012.”
http://usactionnews.com/2010/10/hyperinflation-forecast/ (prediction made October 1, 2010)
Of course, sooner or later the prediction will turn out to be true, even though we may have to wait 500 years for it to happen.
He has points, but they only take you so far.
You think so? Maybe you can explain this to me, because I can’t imagine any world in which it makes any kind of sense:
Lesson, don’t use political solutions for energy problems.
Politics is how we decide questions such as: what level of air pollution will we accept? do we care about killing the eastern forests with acid rain? how many roads will we build? where will we build roads? do we want to decrease demand for gasoline by requiring all car manufacturers to increase their CAFE numbers? what will we pay for in the way of public transportation and other alternatives to driving? Will we subsidize drivers by requiring developers to build parking lots with their buildings? will we require detached single family homes (which use more heating energy and gasoline) or will we allow apartment buildings (which require less)? What level of risk of explosions will we accept for pipelines, such as the one that exploded and killed a bunch of people at a campground in southern NM a few years ago)?
All these things will affect energy prices.
How can we possibly avoid political solutions to energy problems?
there is a grand illusion occurring right now. any minute now the stock market will be worthless, the dollar will collapse to the level of the yuan, possibly the mexican peso, and hyperinflation will flash through the economy. fuel could well be confiscated under martial law; and everything will come to an abrupt halt.
He has points, but they only take you so far. Worldwide prices will ultimately control the comodity markets, but if we could produce most of our own consumption, through increased production and/or decreased demand, our prices would be world market less transportation. Naturail gas is almost free, much more environmentally friendly, and we’re swimming in it. So whatever happended to that conversation? It’s not like we don’t have preferable and viable alternatives to oil price exposure through foreign demand, speculation, global instability or whatever.
I did it again. Please forgive the spurious formatting text in my recent post.
While Dr. Swickard works on resubmitting his ECON 101 paper I will be studying text editors.
As ever, Michael J. Flynn
Dr. Swickard,
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I give you a C, or at best, a B-, on your ECON 101 paper.
You are correct in identifying the significance of local market segments for gasoline, but you over emphasize the effects of government regulation and environmentalism on the current price. Hasn’t the market already factored those two items into the current business model?
Please resubmit your paper and include analysis on the following three topics:
1. Examine whether or not refineries operate in a competitive market, using the ECON 101 definition of competition: (a) numerous buyers and sellers, (b) individual outputs or inputs must be homogeneous so that nonprice competition is not feasible, (c) each buyer and seller must be small relative to the size of the market.
See, for example, Economics by Byrns & Stone (my ECON 101 text from early 80’s).
2. Discuss whether or not oil refineries are participants in cartels, beneficiaries of cartels, or victims of cartels.
3. Discuss the current surpluses in both natural gas and gasoline and speculate on whether this would be a good time or a not so good time to open a new refinery in the Northeast. Include remarks about the future of heating oil in this market.
And please, when you resubmit you paper, avoid emotional appeals and other nonfactual arguments in your analysis.
As always, Michael J. Flynn
oil prices are rising because of… devaluation of the us dollar.
Devaluation against what currency??
The dollar hasn’t been devalued against the euro. A year ago a euro cost roughly $1.43, today a euro is roughly $1.33. That’s a devaluation of the euro. The euro did hit a low of about $1.26 for two weeks in January, but generally the dollar has been strong against the euro. http://www.bloomberg.com/quote/EURUSD:CUR
The dollar has also been gaining strength against the Japanese Yen http://www.bloomberg.com/quote/USDJPY:CUR
The dollar has been steady against the Renminbi since the new year, although the dollar has weakened by about 3% over the last year. http://www.bloomberg.com/quote/USDCNY:CUR
You think a 3% decline against the Renminbi is what’s causing gas prices to go up??
Econ 101: the media always runs cover for the establishment. oil prices are rising because of treat of war and because of devaluation of the us dollar.
I think it’s a little odd that DR Swickard didn’t even mention speculation until a poster brought it up but now seems to embrace it as the “major mechanism” affecting prices. Why wouldn’t the “major mechanism” rate even a mention in the original article??? Speculation is a huge factor, but I guess it’s more fun to rail against environmentalists, regulators, deniers, pointy-headed liberals, etc. as the cause of price spikes and general mayhem. Could this be because complaints about those meddling bureaucrats/do-gooders pushes an agenda? I think so.
Seems it’s much more uncomplicated fun to rag about this on this on the radio, where thinking individuals have a hard time responding cogently and completely and bringing up troublesome issues like the real causes of price spikes. We can agree that there are local issues that temporarily affect prices, but the trend (nationally and internationally) is clear and not particularly attached to any local or regional laws or regulations. The fact is, oil is a world commodity (normally priced in dollars) and priced at a world price. To deny or mock this simple fact is to be the actual “Denier” in this debate, and to suggest that anyone has actually said that oil or oil product prices are ”exactly the same in India as in Indiana” is another talk radio tactic that works in that venue but looks and IS silly in print. The Straw Man arguement is a great ally of talk radio hosts, but in this forum it’s hardly effective.
Refineries, or refining capacity, definitely has an effect on price. So why would the industry be closing existing refineries? No explanation from the Dr., but the oft-expressed reason is: they’re not making money. The refineries in the East probably are in the wrong spot to cash in on the distillate export bonanza the oil refiners are riding to record profits, so I guess they go away while the mouthpieces are lamenting a lack of refining capacity. But nobody is closing refineries that are in the path of the eventually-to-be-built pipeline from Canadian oil sand deposits to the Gulf…..they see profit currently, and far more on the horizon once they can convert Canadian oil sand into diesel fuel for export to India (instead of Indiana) and other fuel hungry markets. This is fine with me…but the disgusting part is the wailing about how this pipeline is for American security and lower gas prices. It’s about profit and POLITICS, plain and simple, and those who wrap themselves in MY flag to in a cynical attempt to defend their profit-seeking make me want to puke.
Despite his lamenting politics in energy policy, Dr Swickard can’t seem to see anything to complain about in this instance. Jeez, what a surprise lol !
The good Doctor and I can probably also find common ground on nuclear energy. There are some very good reasons (stopping the use of coal for power generation first among them) for advocating use of nuclear power.
But…… Nuke in the USA has been, largely, a disaster. Each plant is different, thus far more expensive, safety issues are sacrificed on the altar of profit, and the public has -rightly so- little or no confidence in the industry. Up until the recent earthquake/tsunami, nuke boosters in the US were holding up Japan as a model of safety and efficiency….I haven’t heard that lately! I’m sure the operators of the melted nuke plant in Japan saved millions by locating their backup power source where they did, but the results (earthquake in Japan…who woulda thunk it!) were catastrophic and extremely costly. Not only for the people and country, but for the nuclear power industry worldwide.
France (or surrender-monkeys as the US right wing calls them) probably have a better handle on this. After all, they were smart enough to refuse invading Iraq on bogus evidence, so maybe they’ve also managed to figure out how to keep their nuke plants from poisoning the earth for hundreds of square miles around.
Confidence in nuclear power is so low that a high-tech nation like Germany is currently planning on eliminating nuclear as a power source. I think that’s a shame, but the blame rests squarely on the nuclear industry, NOT on skeptics, nuke nay-sayers, and government regulation. The industry, as it exists, has demonstrably failed to make it safe or convince the public that it can be so. Without the actual or near catastrophes people would be all for it, don’t you think? Probably time to stop blaming The China Syndrome movie and environmentalists for their own failure to deliver a safe and reliable product.
In any case, injecting nuke power into the subject of oil on this thread just looks like changing the subject when one is losing the argument. Another talk radio standby tactic, like Straw Man, that doesn’t adapt well to the written word.
the story of macho
macho is a white and tan, blue tick heeler. whatever. this dog is the happiest dog you have ever seen. he’s 40 lbs or less…and is constantly shaking his little nub of a tail. a couple of days ago i was at a dinner party..and his owner, an older lesbian cowgal, told this story about how macho went missing one day…and while she was looking for him, she spotted what looked like a shaved poodle about a 1/4 mile from the ranch house on her property. when she investigated further she found that the poodle was in fact macho with a chicken waterer on his head. she figures that he’d been bumping blindly around the property for 18 hours before she found him. imagine having a near air-tight chicken waterer over your head for 18 hours before somebody found you and cut it off. and covered in cactus thorns.
this, of course, made perfect sense to all of us…so now, we understand why macho is so incredibly happy every day of his life…because he doesn’t have a suffocating bucket over his head…hahahahah…how simple is that?
I agree the major mechanism for oil price change up and down is speculation, as it is for all commodities. But we must ask, “What drives the speculation?” One component is public policy and the results of those polices. Much of it is Econ 101.
My column was about all of the influences upon the price at the pump, including different components in the oil. West Texas Sweet versus more sulfurized oil which is worth in some cases 85% of the Sweet price. Some oil from Venezuela often can only be used for pavement because of composition. Then the other distribution factors like pipe versus truck, tanker versus truck, etc. gives you an insight into differences between communities. The lowest price fuel in New Mexico is Albuquerque, for two reasons: first, it gets to Albuquerque via a large pipe, second, so much more competition that drives prices down.
Refineries do affect price. What stopped refineries from being built? Resistance by government officials and environmental watchdogs. Do we agree? I never said anything about closed refineries, read the column please.
Let me add one last thought: we should be generating all of our electric power by nuclear as does France. We should use their model of the same design so someone trained on one can operate any of them. Only we should use the newest designs. Two new nuclear plants were approved yesterday with a much more modern design… New Mexico should embrace three of them for about a total twelve billion dollars which would provide regional power, then since they run best at 100 percent desalinate water and make hydrogen fuel. The cost running 80% and 100% is not any different like it is with other system. But we do not embrace nuclear for political rather than energy reasons. That would free natural gas to be used for manufacturing and heating which is what it excels at doing, not generating electricity. Oil and gas cannot match prices with nuclear as France knows. Who hates nuclear more than the anti-nuclear folks? The coal industry. Want to get rid of coal, go nuclear.
New Mexico uses at any one time about 2500 MW of power. Much of the coal fired four corners and San Juan is coal. Take that 1800 MW out of our grid and the stuff in your freezer would melt. Oh, the 5MW solar plants of which there are several and the 15 MW wind plants… too little generation to matter. Remember that solar and wind are rated at their top but by industry standards produce about 20% of rated at any one time.
Lesson, don’t use political solutions for energy problems.
Senator Bingaman held a hearing yesterday to explore this very question, coincidentally. Among the panel appearing before the committee was Dan Yergin. He won some piece of fluff years ago called a Pulitzer for writing on this subject. He and a number of others all, every last one, agreed that speculation was a major factor in the price of oil. One of the discussions that caught my attention was the closing of refineries on the east coast. Not one of the panelists mentioned “political reasons” as Mr. Swickard has as a reason for there not being more refineries built. Nor did they blame it on regulations as Mr. Swickard implies. The reason these folks gave for refineries closing was that the price of oil brought from overseas was simply to expensive for the refineries to be profitable. I’m sure you can view the entire hearing on CSPAN 2. It is certainly worth one’s time to listen to expert testimony given by critical thinkers and research leaders on this subject.
Another way to see how world markets rule petroleum prices is the handy chart shown in this blog post. One might be skeptical of the blog source, but you can easily replicate the chart shown by simply going to gasbuddy.com and inputting the info yourself. Input 4 year chart, USA average and Canada average and Presto! Even if you do an 8 year chart the results are the same.
http://www.GasBuddy.com/gb_retail_price_chart.aspx?city1=USA Average&city2=Canada Average&city3=&crude=y&tme=48&units=us
While Canada produces far more oil than it consumes, the price structure follows crude prices and US prices up and down. If very abundant domestic supply doesn’t affect Canada, why would we expect it would affect US prices? Petroleum producers and refiners are free to sell their products wherever in the world they chose, and the shipping industry has made exporting anywhere easy and relatively cheap.
The blog post also points out the fairly astonishing lie being used by Republicans that Obama policy is responsible for high gas prices. They use a price figure from the depths of the Bush economic crash for comparison, but if you look at prices pre-crash they’re even higher than they are now. Was that oil man Dubya’s fault?
http://www.good.is/post/chart-even-more-proof-we-can-t-drill-our-way-to-lower-gas-prices/
While there certainly are “local” reasons why fuel prices vary in different parts of the US, the fact remains that the USA is a NET EXPORTER of oil products, and oil companies are CLOSING refineries, not working on building new ones. Most reports indicate declining domestic consumption and high crude prices are major reasons some domestic refineries are unprofitable and thus closing down.
Liberal mouthpiece NASDAQ.com says in a recent post that domestic refiners are producing more distillate (in this case diesel fuel) for export at the expense of gasoline production, thus the price rise in gas in the USA. It also appears we’re currently exporting a million barrels of petroleum products a day , as opposed to 2007 (with an oil man in office) when we imported 2 million barrels a day. (I’d think Republicans would cheer a turnaround like that, wouldn’t you? Instead we get Obama hates oil campaign rhetoric.) This looks a lot like the “Econ 101 deniers” one-bucket world market, doesn’t it?
http://community.nasdaq.com/News/2012-03/gas-prices-rising-2012-diesel-exports-may-drive-them-higher.aspx?storyid=130727
Little doubt why refiners on the Gulf want access to that Canadian tar sands oil….and it’s not so America can have lower gas prices or more “energy security”….it’s because they’re making a lot more money refining petroleum products and exporting them to offshore markets.
I have no problem with businesses making money, it’s the American way, and I’ve been a self employed businessman since I was in high school. What I DO have a problem with is paid and unpaid oil industry mouthpieces whizzing on my shoes and telling me it’s raining.
Actually Dr. Swickard, I think this diagram pretty much explains about the deniers of Econ 101 and the complex brain activity involved there:
http://blog.chron.com/sciguy/files/2012/03/aa-liberal-brain-humorous.jpg
Mr. Swickard is using his political hammer to try and drive an economic nail. It’s like listening to a guy confidently explaining how a sail boat works…..and dismissing the wind as having any influence on the direction of the boat. Jeeze.
Obliviously Mr. Swickard does not know anything about the speculative commodity contracts that are driving up prices. I guess his Econ 101 class did not mention the possibility of gas speculators.