Thursday, September 22, 2005

Doesn't anyone learn Economics these days?

I've learned recently, much to my surprise, that it's possible--even probable--to get a college degree without ever taking a basic economics course. No macro. No micro. Nothing. Mention the equillibrium of supply and demand, and blank looks all around. I guess that explains some of the recent public reaction to oil prices:

#1: Price gouging. This how people who didn't take an economics class complain about the market functioning to ration supplies in the face of unanticipated events. If you don't like paying a lot for gas, then your alternative is going to the pumps and not being able to get any gas. It's like bread lines in the Soviet Union. I remember looking at the bare shelves in Moscow in 1989...I'll take price gouging, thank you. Note: not to be confused with price fixing under monopolistic conditions.

#2: Tax on Windfall Profits: When decreasing supplies meet up with highly inelastic demand, prices rise, just like what is happening to oil now (discounting speculative impact, which is minimal over the medium to long-term). When oil companies have a fixed cost of production, and the price of a barrel of crude doubles, they make a lot more money. There is a popular movement afoot to create a special tax for these windfall profits. Bad idea. If that happens, there will be a greatly decreased incentive for wildcat operations and other forms of exploration that will find and exploit new oil supplies. In the face of peak oil, if market signals (high prices) can't maximize exploration, then the impact of peaking supplies will be very, very harsh.

#3: Refinery shortage is driving up crude prices. Not over the mid to long-term it isn't. You can't arbitrage crude and refined products without spare refinery capacity. If refinery capacity is tight, or damaged by a hurricane, this means that there is LESS demand for crude because the refiners don't want to take delivery and pay for inventory that they can't refine and sell. Less demand for crude, given the roughly constant supply, would give us lower prices. In fact, the demand for crude, as demonstrated by refinery intakes, has been quite steady over the short term, and is growing at a very predictable rate over the long term. This means that our rising prices are caused by supply issues.

#4: I saved this one for the unquestioning believers in the free-market. Peak Oil is NOT a fallacy of economics 101. In a pristine academic environment, rising price of a resource will create a greater incentive to go find more of that resource and sell it. So economists of the "Chicago School" tell us that Peak Oil is bunk: as prices rise, we will have more incentive to find more, and so we'll find more and then prices will return to equillibrium. Which works great as long as there's a geologically unlimited supply. Aaaah, there's the rub. So, when confronted with that, Chicago School economists say "sure, but then high prices will just cause us to convert to alternatives, keeping demand constantly in equillibrium with supply." I agree with that statement 100%. I just have a bit more imagination when it comes to what these "alternatives" are. For example, letting people in the "Green Revolution" countries starve to death for lack of petroleum-based fertilizer is an alternative that keeps us driving our Hummers. Collapse of civilizational complexity to, say, neo-feudalism, is another alternative to our fuel-hungry globalized economy. Peak Oil is very real, the only unknowns are exactly when and exactly what the impact will be.

So, if the vagaries of fortune got you through college without an econ course, go buy Henry Hazlit's "Economics in One Lesson", and then remind yourself that "opportunity cost" can refer to human die-off, and that people who stand to profit from a broken window don't care about Bastiat's fallacy. You'll have saved yourself 3 credit hours and be better off for it.

6 comments:

M. Simon said...

Thomas Gold thought oil was abiotic. i.e. it was accreted during planetary formation.

He estimates the oil available at 100X current proven reserves. So far tests of his theory have been positive.

In addition between Canada and America we have 2 1/2 Saudis worth of oil sands and oil shale.

M. Simon said...

Plenty of coal.

America is the Saudi Arabia of wind.

M. Simon said...

Die offs are not caused by market prices. They are caused by governments.

Mugabe is a prime example.

The evil whiteys who ran most of the farms and produced an agricultural surplus have been driven out of the country. Starvation stalks the land.

Supply and demand you can adapt to. What you cannot adapt to is theft.

Read DeSoto "Capitalism" (not the full title. Secure property rights are the underpinning of wealth creation.

Starvation is caused by bad government.

Jeff Vail said...

Abiotic oil theory is just another conspiracy theory: what tests have ever shown it to be viable? There are lots of wild estimates out there about 50 billion barrels of oil off Greenland, etc. Where's the beef?

Sure, there's lots of energy in coal, oil shale, wind, etc. Problem is that it is lower surplus, lower EROEI than the cheap Saudi Crude that we have become dependent on. See "Logic of Collapse", but peak oil is not the argument that we're going to run out of oil, but rather the argument that the easy oil is gone, and it will get increasingly more and more difficult to access energy--as the increased difficulty and decreased return of coal, oil shale, oil sands, heavy-crude, etc. all illustrate. So the presence (or possible presence) of these other things doesn't undermine the argument at all.

While governments can certainly cause a die-off, that doesn't mean at all that markets can't cause die off. Our current population level is dependent on oil, both for transportation, farm machinery, fertilizers and pesticides. As our supply of energy decreases, our population still has some minimum life-sustaining energy requirement. As energy gets more and more expensive after peak, the cost (due to Markets, not Governments) of meeting the minimum energy required to live increases, and at some point it is no longer affordable to many people. If petroleum scarcity doubles the cost of fertilizer, more people in India will die of starvation, period. That isn't a case of "Mugabe" but a case of markets allocating scarce resources. As the title of the post suggests, it's Econ 101.

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