Friday, May 05, 2006
Don't be fooled...let the free market decide
There's been a lot of talk lately about price collusion among the oil companies, about a windfall profits tax, about price controls...just about anything politicians of both parties can dream up to trick the American people into thinking that high gas prices are the result of something other than simple economics. The truth is that the politicians are counting on Americans being ignorant about the simple laws of supply and demand. It's politically beneficial to demagogue the evil, rich, boogie-man, big oil company executives and accuse them of "sticking it" to the little guy. To explain that the global supply and demand structure of the world's oil industry, over which the US has scant little influence, is why prices are rising, buys them few votes. Americans have been conditioned to look first to government to solve their every-day problems. As dependent, whining voters, we are easily led to believe that gas prices are high due to some criminal actions by evil corporations. Once we believe that lie, we don't see anything wrong when Congress delivers us by punishing the greedy capitalists who are gouging us at the pump.
Politicians, both Democrats and Republicans, are in the business of getting reelected, and that's all they care about...retaining political power. They know that most Americans are ignorant of simple economic principles. They insured that this is the case by dramatically dumbing down the curricula in public schools with bi-lingual education, self esteem exercises, touchy-feely enviro-curricula, and promoting to students pretty much anything that advances the anti-American, Socialist agenda of the teacher's unions. Like I've said in prior writings, a stupid, ignorant, dependent populace is an easily swayed, controllable populace who will vote for the politician who promises to take care of them best. It's no coincidence that our public schools are churning out some of the most witless, mentally malleable, ignoramuses in the world. Our politicians and their co-conspirators at leadership levels in the teacher's unions benefit from it being that way.
Having made that point, the politicians who are pushing for investigations into price fixing, and windfall profits taxes on the oil companies are counting on you not taking the time to understand simple economics. If you attended a public school you were probably being taught that America is the root of all evil in the modern world when you should have been studying basic economics, so here's the short and sweet:
When the available supply of a product remains fixed but the demand for that product increases, the price naturally and necessarily goes up. If the price remains the same (perhaps because the government instituted price controls), all the product gets purchased and there are shortages. The natural increase in price insures that only the purchasers who very badly need or want that product buy it...the rest either do without, find alternatives, or make adjustments to use less of it. The free market always, always makes appropriate corrections to supply, demand, and price without the meddling of government do-gooders.
My wife, a rare successful product of government schooling, used this analogy to describe the current crude oil/gasoline situation in the US (it's her analogy but I fleshed it out a bit for re-telling): Let's say that you live in a land, we'll call it Goreland, in which egg consumption plays a vitally important role in the livelihood of it's residents. Let's also say you have a company, HEN-HOUSE LLC, which produces eggs on one side of a pond and you have to use a Styrofoam carton to float them to the other side of the pond to the market. Over time, because the economy is growing in your village and others as well, the demand for eggs in the market goes up. In response, you breed your chickens and expand your houses so you can sell more eggs and make more money. (After all, no company in the history of the world, ever, was begun for any reason except to make as much money as possible for the owners) The only problem is that there is only one carton. No matter how many eggs you produce on your side of the pond you can still only deliver 12 eggs to the market at a time. The supply of eggs in the market remains fixed but more and more egg-eaters are demanding your eggs. They bid up the price so that the egg-eater who is willing to pay the highest price gets the eggs. As the owner of the egg-supply business, you want to take advantage of the high prices by supplying more eggs. The obvious solution as the egg-producer is to build more cartons. The obvious solution as an egg-consumer in order to avoid the high egg prices is to find a suitable egg-substitute or eat fewer eggs. There are a couple of problems however, the leaders of Goreland decided 30 years ago that it was not friendly to the environment to build even one new egg carton and that the best egg-substitute (Nuclear Eggs) is also not enviro-friendly. Apparently the government of Goreland, in which you live and produce eggs, eggs which literally every single resident uses daily, reasoned that preserving the pond-side habitat of the rare, three-eyed, yellow-throated, speckled newt is more important than preserving the affordable price of eggs for it's citizens, even though it would have been simple to build more cartons and/or allow production of a favorable egg-substitute. As if that weren't bad enough, the leaders of Goreland demagogue you as an evil capitalist who benefits too much from the high price of eggs. They tell the helpless, simpleton villagers, who are happy that someone is rescuing them from prices that are higher than they would like, that you are a bad person and will be investigated for price gouging. They accuse you of benefiting from a windfall profit ( a profit that you did nothing to deserve and therefore shouldn't get) and the witless, government-schooled villagers of Goreland are relieved when it's announced that you will be taxed punitively for taking unfair advantage of the high price of eggs. Why, you wonder...why are the witless villagers happy that I'm being taxed when they won't be the ones receiving the money. It'll go to the government officials of Goreland to pay for pork projects back home in their districts to aid in their re-elections. Moreover, you know from your basic economics class in private school, that you will pass the tax increase on to the egg-market operator who will pass it on to the witless egg-eaters who will again whine to the leaders of Goreland that the price of eggs is still too high. As graduates of government schools, they'll be oblivious to the fact that, in reality, they are paying the taxes levied against you the egg producer. The officials of Goreland will smile contentedly knowing that they have pulled another one over on the village idiots who think that you, the egg producer, have been justly punished, that corporations are evil greedmongers who make money off the backs of the poor, that government is good and caring and responsive to the needs of it's citizens, and finally that their lives are better off when government takes control of markets.
The thing about government officials is that they can always be counted on to do only that which is politically beneficial to them, and little else. As gas prices go, look at what we have failed to do that would have alleviated some of the high prices we're seeing now: 1. We've not built a single new refinery since 1976. Current refineries are vulnerably located in the Gulf region were hurricanes routinely blow. And West Coast and East Coast residents are too good to gaze upon the ugliness of petroleum refining, so oil must be transported long distances to reach markets. 2. ANWR doesn't represent that much oil globally but it would produce over 1 million barrels a day for America which would certainly increase our supply and reduce our dependence, 3. All other industrialized countries are busily constructing nuclear power plants, safely and efficiently, but not the US. Thanks to people like Al Gore and Ted Kennedy, we think it's too dangerous and enviro-threatening. Never mind that we currently have 31 active nuclear plants operating safely already. Never mind that more people have died at Chappaquidick than have died from radiation exposure as a result of accidents at nuclear plants. 4. We impose harsh import tariffs on alcohol fuel in order to preserve the price of corn for our farmers but that makes alcohol too expensive to market in quantity in this country, so we remain stuck with petroleum consumption without affordable alternatives. Funny how the Democrats are the biggest critics of the oil companies and high prices but it's the Democrat Party who has stood in the way, over and over, of higher crude production, more refineries, drilling in Alaska and off the coasts of California and Florida, impose tariffs on fuel alternatives, seize one fifth of every dollar spent on gasoline, refuse to consider nuclear energy, refuse to allow the construction of windmill farms if they might spoil the view from their million dollar vacation bungalows in Hyannisport.
There are some good things that come from high gas prices such as: petroleum companies increase their research and development efforts to find more oil to refine in order to take advantage of the market. Consumers change their habits and conserve...this reduces demand which in turn increases relative supply thus decreasing price. The oil company investors get rewarded for their capital risk and are encouraged to invest further...the positive ripple effect of investment should be clear to even the most half-witted, government-school graduate.
A secondary positive result of higher prices is that it provides an economic incentive for others to get in the market. The more competition there is selling a product, the lower the price for that product will tend to be because they are competing for your business the only way they can...by lowering their price below the competition. That's good for consumers.
I know it's painful for gas to be this expensive but if the global supply and demand dynamics remain as they are, then this price level is the right one. People will be forced to make adjustments in their driving habits, and change their car purchasing habits to more efficient vehicles. As prices continue to increase, at some point, profit motive will encourage an entrepreneur or inventor to develop a new efficient, cheap fuel, or a more efficient internal combustion engine or something else that makes petroleum less critical to every day life. Somebody always finds a way to innovate when there's money to be made...that's the beauty of free market capitalism. It's why America dominates the world's economy and Socialist or Communist countries like in Europe and South America are in economic decline...there's no driving economic force motivating individuals to invent, develop, or innovate.
Every decision you make to carpool, to combine driving trips, to ride a bike or walk instead, to purchase an efficient car, to use alternative fuels, results in a micro-adjustment in the global petroleum supply/demand dynamic. Consumers around the world making billions of decisions daily have a profound and immediate effect on markets... in part, that's why you see the price of gas change daily at the pump.
I'm not advocating extreme conservation measures unless as a consumer that's what you want to do. If you want to continue to spend lots of money on gas, that's fine too. The point is that the open market where consumers make choices and suppliers react to those choices, free from government meddling, will always find the right levels for supply, demand and prices.