Jens 'n' Frens
Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

"A strong conviction that something must be done is the parent of many bad measures."
  -- Daniel Webster

Tuesday, April 25, 2006 :::

I'm not sure what it says about me that I noticed that spot-oil was at record highs (yes, yes, only in dollar terms) but didn't really notice that the price of gasoline was up, too.

According to the radio news, Democrats In Congress (some subset of them, I guess) are proposing that the gas tax be cut and that subsidies to energy companies be cut as well. I like this idea — move the government out of the energy market in a way that doesn't have a huge effect on prices in the long run (with the tax cuts reducing the price to the consumer and the subsidy cuts increasing the prices to the consumer). Are the Democrats the party of small government now? It would be nice to see somebody take up that role.

Meanwhile, I just heard Hugh Hewitt disagree with a caller and both of them get it wrong (at least a little). Hewitt has been asking whom people "blame" for the high gasoline prices. The caller blames oil companies, who are reaping windfall profits. Hewitt says any profits are being invested back into exploration, and therefore aren't real. Well, the windfall profits are real — if oil companies expected prices to go back to $35 next quarter, they wouldn't be exploring; on the other hand, if oil pumped today were worth $30/barrel (instead of 75), but oil companies expected to be able to sell 2010 oil for $70/barrel, they'd be able to find financing for a lot of the exploration they're doing now. Liquidity isn't perfect, but not every dollar made goes out into the field just because the companies can't think of anything else to do with it. I should also mention that not every dollar increase in the price of oil goes to the oil companies, as they tend to sell a large minority of their production via forward contracts. But what they haven't already sold is theirs, and if they can sell it for more money, that money is also theirs.

So the caller is right that people who own oil profit when its price goes up. But that doesn't mean they caused it to go up, as the word "blame" implies. I don't mean to suggest that Exxon-Mobil executives are crying in their cocktails — political pressure notwithstanding, I'm sure they enjoy the high prices. But I doubt they've been holding back supply, which is really the only way they could drive prices up (and I doubt any non-state-owned oil company could affect the market a great deal anyway). Prices are high because demand is high, and supply isn't keeping pace. Blame China.

UPDATE: Glenn Reynolds quotes Ron Bailey:
Still oil prices have tripled in the past four years, but the economy nevertheless chugs along. . . . the price of oil would need to double from today's $70 per barrel to have the same impact on the U.S. and world economy that prices had during the 1970s oil crisis.
Or the government could institute price controls. That would throw a wrench in the economy, too.

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Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

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